Dave Girouard may have changed his business model at the right time. The company he co-founded in 2012, Upstart, became a new entry early this year in the rising field of online lending.
That field enjoyed a huge visibility boost in mid-December when San Francisco-based Lending Club (NYSE: [[ticker:LC]]) became the first online loan marketplace to go public, and saw its share price immediately soar. New York-based On Deck Capital (NYSE: [[ticker:ONDK]]), followed a few days later with its own IPO, and other lending companies, such as Prosper, are also expected to go public.
These companies opened up a new source of credit during the financial crisis, when established banks clamped down on loans. Individual investors provided capital for the online loan platforms, as they sought better returns than the low interest rates offered by bank savings accounts or other investments.
Palo Alto, CA-based Upstart has carved out its own niche as an online lender—it provides credit to 20-somethings who might be rejected by traditional banks, or stuck with high interest rates, because they lack an extensive credit history and employment record. Upstart uses mathematical models to pick out the best young loan applicants by looking at factors such as their academic records and early job experience.
Girouard, the former head of a $1 billion Google division that offered the business versions of apps like Gmail and Drive, didn’t begin Upstart to make loans online. Instead, he founded it to invest in promising young people in much the same way as angel investors back startups.
The company helped selected applicants—such as recent graduates of top universities—raise the money they needed to form a startup, or to reduce their school debt so they could take a risk on the job of their dreams. In return, they agreed to pay their investors back a share of their income—as much as 7 percent a year for 10 years—depending on the amount of money advanced to them.
But Upstart announced its shift to online lending in April. The algorithms it developed to cherry-pick top future earners under its old business plan are now being used to identify the most credit-worthy young borrowers. Since making its first loan in May, the company has made about 2,500 loans worth $35 million, Girouard (pictured above) says.
We spoke with Girouard recently about the opportunities created by Lending Club’s successful IPO, as well as the challenges faced by Upstart and other companies trying to compete as online credit marketplaces.
Q&A
Xconomy: I understand that Upstart is now facilitating loans for younger people who may not have much of a credit history or work history. One of the factors you consider is the ranking of the universities that granted their degrees. Does graduation from a top school qualify borrowers for lower interest rates?
Dave Girouard: It’s only one variable among many. But yes, the quality of the school can be predictive of the employability of the borrower. Graduates of top schools are more consistently employed. For recent graduates, we also look at their majors, academic performance, and test scores. They’re all signals.
But we also consider the applicant’s current income, expenses, and other debts. We want to be sure they have free cash flow to service the loan. That’s the most important thing.
Xconomy: Tell me more about your typical borrowers—how old are they, and what are the main reasons why they take out a loan?
Dave Girouard: Their average age is 28, which we estimate is about a decade lower than the average age of borrowers on other major online lending marketplaces.
Many of our borrowers have built up student debt and credit card debt. The most common use of a loan is to pay off their credit card balances. The interest on an Upstart loan may be 11 to 12 percent, while credit card interest rate is often around 18 percent. Occasionally our borrowers use the money to pay off high-interest student loans.
One of the other popular uses for our loans is to pay for tuition at one of the “coding schools,” which teach programming skills that are valued by many employers. We’ve become the go-to financial aid for coding schools, where the fees are about $10,000 to $12,000.
Xconomy: We see reports that in the wake of the financial crisis, the current generation of college graduates is having trouble getting their first professional jobs. If they’re taking lower-paid jobs in the meantime, will they be less able to qualify for loans, and less able to pay them off?
Dave Girouard: Our borrowers are typically
