Q&A: Upstart CEO Dave Girouard

Upstart's model includes a mix of crowd funding, a dash of Kickstarter meets peer-to-peer loan company Lending Club and algorithms that project future income and allow "someone to borrow from their future selves."
Written by Larry Dignan, Contributor

Dave Girouard has had quite the career change. He used to lead Google's enterprise efforts. Today, he's cooking up funding models and connecting college students with financial backers as CEO of Upstart.

Upstart's model includes a mix of crowd funding, a dash of Kickstarter meets peer-to-peer loan company Lending Club and algorithms that project future income and allow "someone to borrow from their future selves." Toss in investors who can also serve as mentors in a back-to-the-future apprenticeship style and you couldn't have a gig more different than Google Enterprise.


When I caught up with Girouard at CBS Interactive's New York office I wasn't quite sure what to expect. After a few minutes I realized that learning about Upstart combined my two nerd interests---technology and finance.

Girouard and I spent a lot of time talking about the future of funding and my hunch is that conditions are lining up for alternative investment companies like Upstart. My working theory is that the student loan market is just mortgage debacle 2.0. Student loans are going to blow up. That inevitable bubble burst could make alternative models like Upstart a decent way to fund college or businesses. Girouard noted that many people will be self employed.

For investors, services like Upstart could be interesting return vehicles because they bring the human element back to investing. To a large degree, algorithms have taken the fun out of finance.

Here's a recap of my conversation with Girouard:

How does Upstart work? Generally speaking, the service today is targeted at students looking to get funding to chase a dream---whether that's taking a coding class, trying out a business idea or building a business. "An investor receives some micro portion of income over 10 years and can offer to be a mentor or advisor if it's something he or she cares about," he said. "You're buying shares of future income and allowing someone to borrow from their future selves." Think Upstart as a Zillow for people.

What's Upstart's role? Upstart serves as a platform to connect investors and students looking for funding. The business model revolves around service fees. Upstart gets 3 percent of the money raised on the platform and takes a half percent of the money invested annually.

What's the typical investment look like? The sweet spot is $500 to $1,000 into four or five people. "If you care about returns you need to be diversified," he said. "We built a regression model that predicts an individual's income over 10 years." In many respects, Upstart's selection of individuals was influenced by how Google hired employees early in their career. Google tried to predict an individual's likely success at Google based on traits, grades and other signals in a person's history. In other words, if those signals were good enough for Google they probably would be fine to help the broader economy.

The disruption angle. Upstart's formation reflects that it doesn't take a whole lot of capital to start a business. Students are using Upstart to retire student loans and fund living expenses to get a business going. "We're upstream from the VC industry," he said. "We're monetizing future potential."

Upstart's operations. Given Girouard used to run Google's enterprise business, which revolved around the cloud, it's not surprising that his company doesn't own a server. Upstart is an 11-person company and every tool it uses is cloud-based. Upstart's IT tab is less than $1,000 a month for the entire company. Its site is built on Heroku. Google Apps and Zoho are the key systems for Upstart. The company also doesn't own computers or phones. Girouard's approach is heavy on bring your own. Each employee gets $2,500 to buy computer gear and $100 a month to pay for voice and data service. "We want to see how far we can push it with cloud services," said Girouard. "Virtual assistants, Mechanical Turk are part of a myriad of services you don't need people for."

What people are necessary? Girouard said that Upstart needs a general counsel because it is regulated by the Securities and Exchange Commission. There are people focused on outreach on both sides of the market. Upstart doesn't have marketing people yet, but does have its developers. Girouard's plan is to stay small because of the agility and ultimately create "a $1 billion business with 50 employees." "I appreciate smallness. We'll make major decisions that would take weeks or months in an hour," he added.

The demographics. Today, Upstart is focused on U.S. college students that have to be graduated by 2014 or be chasing a master's degree because "the pricing model is centered on academics." In the future, Upstart could expand to other demographics but would need different analytics and algorithms. For instance, projecting the potential income of an 18 year old is decidedly different than someone who is almost done college. The student approaching graduation has more of a track record, said Girouard. Funding a person making a mid-career switch could be more difficult because it's harder to project returns on someone in their 40s. Statistically speaking earnings and income for a Stanford engineering student is easier to predict. For someone older, work history becomes more of a signal for future success. "There are 17 million people in higher education every year so we're not in a terrible rush, but we'd like to find ways to target the Millennial and spread out in both directions," he said.

How does grit show up in the model? I asked this question because one of the factors for success is often character, grit and the ability to persevere after failure. A shiny GPA and a sheltered person who has never been allowed to fail may not succeed over time. Girouard argued that grit shows up in analytics models somewhere. For Upstart students, job offers and internships can show persistence or character. Excelling in college indicates good habits.

The narrative. People looking for funding on Upstart need to tell their stories, explained Girouard. A first person account, GPAs and autobiographies are the centerpiece of Upstart profiles. "The visual part matters a lot. You don't want a picture of you by the pool with an umbrella drink," he said.



What happens if Upstart goes away with an investment with a 10-year horizon? Girouard said Upstart is getting a backup processor so the investment can continue. Regarding payment, Upstart does the work of aggregating payments from funding recipients to investors. Recipients self report what they are earnings and Upstart does an annual reconciliation with tax returns. Those activities could be covered by a backup processor.

How do you invest? To invest in college students on Upstart you need to be an accredited investor under SEC rules. That means you need earn $200,000 a year for the last three years or have a net worth of $1 million. "You're really investing in wages and income, which are stable," said Girouard, who noted that the return target is 8 percent to 9 percent based on a pool of people investments.

Any surprises? Girouard said investors are picking things that interest them over similar schools. Girouard thought school would be the first vector for selection. In other words, Silicon Valley types would invest in tech projects from Stanford students. Instead, tech types would fund sculpture projects. "You find the world is more complicated," he said. Another investor said he would fund every female engineer on Upstart.

New features. Upstart, which launched in November, will add new functionality going forward. For instance, a community approach would highlight what happens to a person after receiving funding. Gamification to encourage mentorship could be deployed. Girouard just might wind up quantifying career karma for those who are good mentors.

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