Exclusive Q&A with Upstart Founder and CEO, Dave Girouard
Upstart is a people-powered funding platform headed by ex-Googlers that vets potential borrowers by using big-data and untraditional metrics. We speak with David Girouard about opening up doors for consumers who can’t secure traditional loans, investing in people, and what separates them from traditional loan providers.
Kevin Xu: Let’s start with a breakdown of Upstart and the big idea idea behind it.
Dave Girouard: We’re a lending platform focused on “thin file” borrowers – people who have relatively little credit and work history. We’re a marketplace, in that accredited individuals and institutions can invest in Upstart loans directly. We launched at the end of April and have already originated more than $3 million in loans to several hundred borrowers. We expect to originate several thousand loans by end of year. So far, we’ve received 250 or so repayments and have zero delinquent payments.
Upstart sidesteps some of the traditional methods of evaluating creditworthiness. How so?
We go beyond FICO to better understand potential borrowers, in order to give them a loan they’ve earned. In addition to the credit score, credit report, and current income, we consider schools attended, major areas of study, and academic performance to better understand the employability and earning potential of applicants. Traditional lenders tend to throw all inexperienced borrowers into the same bucket – high risk. We go further to better understand the individual’s financial capacity and personal propensity to repay the loan. There’s some obvious ideas – that computer scientists usually earn a high wage. But there’s much more to it than that. For example, nurses are rarely unemployed, so they can commonly get very competitive loans on Upstart.
What are the qualifiers for borrowers? What are some of the red flags, risks?
Borrowers have to be at least 18 years old, US citizens or permanent residents, and graduated or soon to graduate from 4-year institutions in the US. They have to have FICO scores of at least 640, though it’s ok if they have no FICO score whatsoever (which is common if you haven’t used credit before). By evaluating an applicant’s income and statistically likely income over the term of the loan, compared with their existing debt obligations and other expenses, we build a model of their ability and likelihood to repay the loan. We take a very conservative view of debt to income as we want to avoid putting borrowers in tight financial situations.
What’s the business model (rates, fees)?
We charge borrowers an origination fee of 1 to 6% of the loan. This is the entirety of our revenue. Additionally, in order to align our interests with those of the investors in the loans, we’ve created a unique structure where we remit the origination fee to the investors on any loan that defaults. Put another way, we earn $0 on any loan that defaults.
In terms of compliance, are there any unique challenges you have faced? What are some of the regulatory hurdles?
Lending is a very highly regulated industry, so we have dozens of regulations that we need to comply with. Truth in Lending, Fairness in Lending are just a few examples. Furthermore, we also have many regulations we have to abide by on the investor side of the market, where the SEC is the most recognized regulator. There’s no sidestepping or short-changing efforts to comply with regulators – it’s 100% or nothing. The biggest challenge is to retain the agility and innovation of a startup, while still maintaining 100% adherence to relevant regulations. We think we’re pretty good at this, and it’s critical to succeeding in this industry.
Compared to some of your competitors, what do you do differently?
Our competitors use the same model of credit underwriting that was used by the bank branch on the street corner 40 years ago. It’s proven and safe – and effective, for at least a certain type of borrower. Our team comes from Google, and we naturally take a fresh look at the challenge of determining who is likely to repay a loan and who isn’t. We’re using enormous data sets (millions of borrowers) to better understand the likelihood of repayment from our borrowers, and this lets us give much better priced loans to those who have earned it. Paying off credit cards is the most popular use of Upstart loans, and the average borrower to date lowers their interest rate by more than 30%.
For investors, how do you get them on board and challenge their mindset regarding investing in people?
Smart investors recognize an opportunity to invest when it brings higher yield coupled with lower risk. That’s a huge challenge these days. Peer to peer lending has been an enormous success in the last few years – more than $6B originated in the major US consumer platforms alone. What we’ve done is recognized that there’s a huge market of “future prime” borrowers that other lenders can’t recognize.
In many ways, it’s analogous to the fracking techniques that have led to massive discoveries of oil and natural gas in the US – our “big data” approach to lending has unsurfaced tens of millions of qualified borrowers that others have bypassed. The quality of our borrowers and the returns on our platform are what will ultimately speak to investors.
Dave Girouard Founder & CEO Upstart Network, Inc.
Dave Girouard is founder and CEO of Upstart. Prior to that, he was President of Google Enterprise, where he built Google’s cloud apps business worldwide — including product development, sales, marketing, and customer support. Girouard was also a Product Manager at Apple; SVP of products & marketing at video search company Virage; an associate in Booz Allen’s Information Technology practice; and a software developer at Accenture.