Upstart (NASDAQ: UPST) is an artificial intelligence (AI) company that makes lending decisions. It uses machine learning technologies to assist lenders with borrowers who would be most suitable for a lender’s personal loan products. The company is based in San Mateo, California and headed by Upstart’s co-founder and CEO Dave Girouard. Girouard was previously president of Google Enterprise and a product manager at Apple. Upstart argues that its method of applying AI to lending decisions gives access to loans at lower rates without any added risk. It gives borrowers the opportunity to have assistance with paying off their debt in a more manageable way.
The need for debt assistance is vast. A 2020 market research report by First Research indicated that global household debt exceeded $47 trillion in 2020 — much higher than in the run-up to the 2008 financial crisis. It’s obvious that people are in need of help managing their debt and finances, and Upstart provides that service. The company experienced a 30% increase in the number of loans it facilitated in the first nine months of 2020 compared to the first nine months of 2019.
Traditional credit systems depend mostly on FICO scores, while Upstart’s AI is able to look at more than 1,600 variables within its model that include educational and employment history, cost of living, and bank-account transactions to link the borrower with the best-suited lender. In a letter included with the company’s prospectus, Girouard said, “As good as our AI platform is today, it only scratches the surface of the accuracy gains that are possible.”
Upstart had been considering going public, and the end-of-the-year enthusiasm for technology and the financial technology sector most likely solidified its decision to ride that wave of enthusiasm and go public before the year closed. Upstart had its IPO this month on Wednesday, December 16.
Its IPO underwriters included Goldman Sachs, Bank of America Securities, Citigroup, Jefferies, and Barclays. The company priced its IPO the night before at $20 a shar, the low end of its expected range of $20 to $22 a share. At that price, it was expected that Upstart would raise at least $180 million at an initial market capitalization of $1.45 billion.
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The company received about $162 million from its investors ahead of its market debut. Those investors included Rakuten and First Round Capital. The main source of the company’s revenue comes from charging referral fees, platform fees, and loan servicing fees. In Upstart’s recent financials, it appears that the company has managed to grow its top-line revenue. Revenue for the first nine months of 2020 increased to $146 million from $101 million it earned in the same period in the previous year. As of September 30, 2020, Upstart had $53 million in cash and $194 million in total liabilities.
Upstart’s IPO paperwork said:
We intend to use the net proceeds from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. Additionally, we may use a portion of the net proceeds to acquire or invest in businesses, products, services, or technologies. However, we do not have agreements or commitments for any material acquisitions or investments at this time.
It’s a good sign that Upwork is interested in using its IPO proceeds to lighten operating expenses and for acquisitions or expanding its businesses in other areas that would generate more revenue. Upstart brings fresh ideas to an outdated but very large industry. The financial industry has vast potential, and combining finance with AI has the potential to create a lot of value for Upstart and put it in a unique and dominant position — a position that would make it a strong future fintech opportunity. We need to look out for possible risks because of current economic conditions, and these big banks could learn something from Upstart by incorporating similar algorithms.
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Until next time, Monica Savaglia Monica Savaglia is Wealth Daily’s IPO specialist. With passion and knowledge, she wants to open up the world of IPOs and their long-term potential to everyday investors. She does this through her newsletter IPO Authority, a one-stop resource for everything IPO. She also contributes regularly to the Wealth Daily e-letter. To learn more about Monica, click here.
