Upstart Raises $32.5 Million to Expand AI-Powered Lending Technology

Upstart Secures $32.5 Million to Expand AI-Powered Lending Technology

Upstart, a nearly five-year-old online lending company, has raised $32.5 million in fresh funding, bringing its total funding to date to around $85 million. The company leverages advanced data science and machine learning to assess loan risk, aiming to identify individuals less likely to default. This funding will fuel its growth trajectory and support its move towards profitability, with CEO Dave Girouard expecting the company to become profitable this year.

Expanding into SaaS and Licensing

Beyond its direct lending business, Upstart sees a significant opportunity in licensing its technology to banks, credit unions, and retailers. This Software-as-a-Service (SaaS) offering allows these institutions to provide low-risk, profitable loans to their own customers. Upstart charges a monthly fee along with a smaller per-loan fee for originating loans through its platform.

Core Business and Target Market

Upstart's direct lending business continues to grow, serving as a learning ground for its technology. The company's sweet spot remains young adults, with the average borrower being 28 years old. The most common use for their loans is consolidating credit card debt, though the personal loans can be used for any purpose.

Marketing and Customer Acquisition

The company primarily targets its demographic through digital channels, advertising on platforms like Facebook and Google. Upstart also boasts high marks on personal finance platforms like Credit Karma. While they still engage in some offline direct mail, their focus is predominantly online.

Performance and Risk Management

Upstart reports very low default rates, typically a couple of percent. Their machine-learning-based system is designed to approve more people by learning continuously while simultaneously reducing defaults. The application of machine learning and modern data science not only lowers default rates but also allows for lower interest rates for borrowers. On average, Upstart borrowers pay 12% APR, significantly lower than the 22% they typically pay on credit cards, with no early payoff penalties.

Funding and Growth

In its first two and a half years, Upstart originated about $650 million in loans and aims to originate $1 billion this year. Their funding comes from various sources, including self-funding, relationships with institutions like Goldman Sachs, and individual investors. The company is also preparing for securitization, a process of selling large pools of loans into the credit market to access broader funding.

Industry Perception and Challenges

Upstart acknowledges that the online lending industry faced perception challenges, particularly after issues with Lending Club in the past. These events raised questions about trustworthiness and the true differentiation of tech in the sector. However, Upstart's models have performed well, and the industry has since rebounded, with companies like Upstart on stronger footing.

Regulatory Environment

Regarding the U.S. administration, Upstart is in a "wait-and-see" mode but generally benefits from a pro-business environment. They do not necessarily require deregulation but seek clarification of the regulatory landscape.

Key Takeaways:

Funding: Upstart raised $32.5 million, bringing total funding to $85 million.
Technology: Leverages AI, machine learning, and data science for loan risk assessment.
Business Model: Operates direct lending and licenses its technology as SaaS to financial institutions and retailers.
Target Market: Primarily millennials and young adults, with an average borrower age of 28.
Performance: Low default rates (around 2%) and lower average APRs (12%) compared to credit cards (22%).
Growth: Aims to originate $1 billion in loans this year.
Future: Preparing for securitization and navigating the regulatory environment.

Pictured above, left to right, Upstart co-founders Paul Gu, Anna Counselman and Dave Girouard.

Topics: Fintech, online lending, Startups, Upstart