Upstart’s plan to win back Wall Street

Upstart’s turnaround plan

After a revenue drop its CEO called “unacceptable,” Upstart is making a bet on the strength of its ability to underwrite loans with AI. The company is planning to leave some loans on its balance sheet, as concerns about the economy shift Wall Street away from backing riskier consumer debt. Rather than pull back on its lending in response, the company said it will hold some loans as it seeks longer-term capital partners.

Upstart has been on a roller coaster. Founded in 2012 by former Google executives, Upstart uses an algorithm to identify worthy borrowers overlooked by traditional creditors. As a marketplace lender, it gets most of its revenue from fees for matching financial institutions with borrowers.

• Business was good last year. Upstart originated nearly $12 billion in loans and its share price soared from $20 at its December 2020 IPO to around $400 in October.
• Those good times didn’t last. The firm’s share price has fallen nearly 80% this year as Wall Street in general has soured on fintech stocks.
• Upstart reported $228 million in second-quarter revenue, down 26% from the first three months of the year. That was in line with preliminary earnings the company published in July. But it projects further revenue declines in the third quarter, to $170 million. Those declines are "obviously disappointing and unacceptable to us," CEO Dave Girouard said on Upstart’s Aug. 8 earnings call.

Tech is the answer. "Historically, as soon as there is a whiff of macro risk, credit markets shut down altogether," CFO Sanjay Datta told Protocol. "Our holy grail has always been to convince markets that you can use technology to react more quickly and more precisely to macro risk.”

• Upstart is on a long list of fintechs working to answer the doubts of investors as consumer sentiment declines and the economy shifts from the low-interest, stimulus-boosted environment that proved fertile ground for the industry in 2021.
• But the company says it is not becoming a balance-sheet lender and has no plans to pursue a banking charter, as other lenders have: It is making a temporary change in response to the market.
• Wall Street is skeptical. Analysts reacted negatively when Upstart revealed it was holding some loans on its balance sheet at the start of the year, prompting the company to reverse course and sell off the loans. Holding loans introduces risks that investors in Upstart’s marketplace lending model did not previously have to worry about, said Andrew Boone, a managing director at investment firm JMP Securities.

Above all, Upstart wants to stay nimble. That means not seeking a banking charter, as other lenders have. It also meant unwinding a deal with the Consumer Financial Protection Bureau that gave some sanction to the fairness of its algorithms; continuing the arrangement as Upstart made changes would have required lengthy reviews. Girouard said the company still tested its algorithms for fairness and would keep working with the agency. It’s one more way that Upstart is leaving itself open to change.

— Ryan Deffenbaugh (email | twitter)

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