a 15 percent internal rate of return. To simplify the math, Upstart recently changed that rule, capping returns at 5 times the amount raised. (For example, say that an upstart raises $70,000, at $10,000 per 1 percent of her income, and she later makes $10 million on the sale of her first company. She’d still owe no more than $350,000.)
While Girouard certainly hopes there will be some home runs like this among the upstarts, he says “we are a singles and doubles business.” For investors, Upstart is designed to have a return of roughly 8 or 9 percent—slightly below that of the U.S. equities market.
“A very small fraction of our people are going to make zero dollars. Most people are going to pay back reasonably well. And a few people are going to pay back really well,” Girouard sums up. “Our notion is that if you invest not in one person, but in a portfolio of people, you can generate a good return. And in our world you are not necessarily a passive investor, as if you were putting $1,000 into IBM and hoping for the best. You can actively participate and help the person do well.”
In fact, the funded participants I talked to said that the network to which they’ve been admitted as upstarts is at least as valuable as the money itself. Mor, of Ziibra, says his Upstart connections helped him get his startup into Boost, a San Mateo, CA-based incubator funded by the Draper family. “I needed the money, but you can get money anywhere,” Mor says. “You can’t find people to give you advice—that’s much harder.”
Brandon Chicotsky, an upstart educated at UT-Austin and NYU, is the founder of an “animate social marketing” business, BaldLogo.com, that offers advertisers the chance to emblazon their logos on the heads of bald men like himself. He’s using the $15,000 he raised on Upstart to wipe out half of his student debt, and says his backers have helped him review pitch decks and sent offers of future business partnerships.
“Backers are seeking energetic and bright workhorses in the startup environment,” Chicotsky says. “That’s what I am. I’m excited by the opportunities my new mentors have for me.” Which touches on another interesting point: If you’re an investor, there may be no earlier way to get an early look at tomorrow’s hot startup founders than to invest in them just as they’re leaving school.
But if you were able to subtract the network effects, would getting funded on Upstart still pencil out as a good deal for the upstarts? It’s hard to say. Chicotsky says that by paying off student debt, he has “basically traded one interest rate for a better one.” But he won’t know that for sure until 2022, since the total amount he ends up paying to his Upstart backers over the next decade will depend on the success of BaldLogo and his other future ventures.
In an interview, I put it to Girouard that a jaded observer might look at the Upstart model and think of a very old parallel: indentured servitude. If you remember your history, that was a system under which hundreds of thousands of young workers—mostly males under 21 from England and Germany, with dreams of starting their own farms or businesses—got free passage to the American colonies in return for several years of labor.
Girouard, naturally, bridled at this comparison, calling it “completely upside down in terms of the logic.”
“If you think about having a fixed-rate loan that requires you to have a job at all times so that you are capable of repaying, that is the definition of servitude,” Girouard says. “Ours is the opposite. You have the freedom to do what you want, and you merely share some of the upside or the downside with other parties.”
The fact remains that the upstarts are responsible to their backers—if not as servants, then as investment vehicles. But the same thing is true, roughly, of startup founders who sell equity to venture or angel investors. Which bears out Upstart’s tag line: “The startup is you.”
The leap Upstart is taking is smaller than it would have been if predecessors like Kickstarter, Lending Club, and Kiva hadn’t paved the way in the world of creative financing, Girouard says. Still, the idea is “very new and different, and it takes startups like us to prove the concept,” he says. “We don’t have a lot of track record. But the backers in our early stages believe in the model, and they have an interest in helping these young adults do awesome things.”
Here’s a video produced by Upstart.