Upstart CEO Dave Girouard — Revolutionizing Lending & Taking a Fintech Public!
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In today’s episode, I had the pleasure of sitting down with Dave Girouard, Founder & CEO of the recently IPO’d Fintech, Upstart. Upstart is an online lending marketplace that provides personal loans using 1,600+ non-traditional variables, such as education and employment, to predict creditworthiness.
If you listened to our episode the other week with Chi Chi Wu of the National Consumer Law Center, you know credit and lending is a major issue in America. Upstart is using artificial intelligence and rigorous machine learning to attack this problem, making it not only a great company, but a wonderful mission.
Dave is the former President of Google Enterprise, but left this role almost a decade ago to start a lending company. Why? And how does Upstart work? Read on below:
What is Upstart & Who do They Serve?
“Upstart is what we call an AI lending platform. We are applying artificial intelligence to the problem of consumer lending.”
At its core, lending is a risk-based industry. Traditional lenders (banks, etc.) often focus on just a handful of data points, with the most important being the credit score. However, Dave knew that consumers were much, much more than a 3-digit score and a couple of demographic bits.
Upstart uses AI and over 1,600+ data points to make significantly more accurate predictive models, which leads to lower loss rates, better matching, and therefore better lending rates. Dave emphasizes that by minimizing loans to people who would never pay them back, they can offer much better rates to good creditors.
Upstart is not a bank or lender themselves. They work with banks to power their lending efforts, and can send over consumers to help banks successfully & profitably originate. Upstart has never originated their own loans and has rarely funded their own loans (mostly for testing).
Their most typical end-user is a late-20s, college-educated person or a recent immigrant with limited US credit history.
“This was a demographic we saw as underserved…the [credit-score centric] process tends to reach a lot of people who are left out or underserved by the traditional system…that tends to be younger people, it tends to be recent immigrants.”
Why is This Still a Problem?
As mentioned, most loans are traditionally based on credit score and maybe a few other variables. The imperfections (and potential bias) of credit scores are well documented. FICO scores were introduced in 1989, and though they’ve been tweaked over time, they are still just a 3 digit number.
“A 3 digit number could never come close to modeling the complexity of the real world...it is something that humans can understand…but it’s been a crutch, and prevented us from thinking about more accurate and sophisticated models.”
Upstart is taking the more sophisticated, scalpel-type approach as opposed to the broad strokes that credit bureaus may take. Upstart’s model relies on more than 1,600 variables, and has had over 9 million repayment events that constantly retrain their model.
The big win here, as Dave points out, is really avoiding lending to people who will never repay. That screening then frees up margin to lend to more good borrowers and provide them lower rates (since you don’t need to eat many NPLs).
“The inefficiency in credit is huge…the opportunity to remove that and create an accurate system and serve people better is obvious. It’s not a 10–20 basis point improvement, it’s more like a 100% improvement”
Selling to Banks and Navigating the Regulatory Environment
Anyone in finance or fintech is well-aware: the regulatory environment is tricky, constantly evolving, and can be make-or-break for any business. And banks especially are so highly regulated, that partnering with them is different from working with any other industry. The adoption of new technology is slow and requires a lot of red tape to get cleared up. As Dave points out, lending “isn’t some peripheral thing like a chatbot on your website, lending is how they make money!”
So selling a new product to them was a high-stakes, sensitive decision. Dave saw that the top thing his clients needed was regulatory clarity — and that will probably never change.
“We understood from Day 1 this was not a move fast and break things business…it might have worked for Uber for a number of years, but it would never work in anything related to financial services”
So how did Dave get ahead of this problem? Their 5th employee at the company was a woman named Alison Nicoll who is their General Counsel (joined from PayPal) and has helped guide their process. Before Upstart ever launched, Dave and the team proactively met with the CFPB to maximize transparency, cooperation, and trust.
The results speak for themselves — Upstart received a “No-Action Letter” in 2017 and it was renewed in 2020. Though a No-Action Letter might sound daunting, it means that the CFPB has reviewed your situation and sees no action against you.
In the remainder of the episode, Dave goes deep into how COVID affected his business, including how it made his company stronger and how their models “performed as if COVID never happened” — proving the immense power of what they’ve built. Dave then jumps into the wild IPO process and “ringing the bell” from his spare bedroom, as well as why he’s wary of SPACs. I’ll tease one more quote from the episode, because it’s so poignant in today’s SPAC boom:
“It’s like you’re playing a video game. And you’re about to reach the top level of the video game and you hand the joystick to somebody else. And I just don’t know why you would want to hand the joystick to someone else… If I’m building a company for the public markets, my job is to make sure the management team and the board have everything we need to lead this company. ”
Dave then shares how difficult of a time his team had raising capital in the early days. In a VC ecosystem flush with cash and massive up-rounds, Upstart often didn’t raise as much as they wanted to, got just a lead term sheet or two for each round, and generally struggled to convince investors of their story. However, he believes it made the company much stronger and forced them to scale wisely. Clearly, it worked out.
At the end, Dave discusses his thoughts on leaving Google as a senior executive in his 40’s to become a fintech founder:
“For my own life, I think about a series of experiences…you only go through this thing once as far as we know…the key moment was talking to my wife, and we said you know what, even if upstart fails, we’ll be glad we did this. I’m 45 years old with a career in Silicon Valley and I’ve never started my own company. You know, that’s what you’re supposed to do! The experience was going to be worth it even if it failed.”
Dave was fantastic in today’s episode. Enjoy the show!
- 3:30 — What exactly is Upstart?
- 6:44 — The current state of credit scores and how Upstart is upending the traditional credit score
- 10:57 — What needed to be true for banks to trust Upstart and how he navigated the regulatory environment
- 15:39 — How COVID affected his business
- 18:40 — Why it was time to IPO, why he questions SPACs, and why raising private money was really, really hard
- 21:50 — How the IPO was different from private rounds and the importance of momentum
- 25:15 — His decision-making framework for leaving an amazing role at Google and founding Upstart
- 26:24 — A rapid-fire round including his thoughts on bitcoin, where he was when the IPO bell rang, his favorite dinner meal before a long work night, first post-covid vacation and more!
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Ryan Zauk
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Ryan Zauk is an MBA Candidate at The Wharton School, where he runs the Wharton FinTech Podcast. He currently works with the US International Development Finance Corp looking at technology impact investments in developing markets. He has a passion for music, media, and all things FinTech.
You can reach him at rzauk@wharton.upenn.edu or on Twitter.
