AI in Fintech: Scaling Products & Investor Trends

Upstart's Earnings Surge Signals Broader AI Investment Trend

The recently publicly traded company, Upstart, reported earnings this week that significantly exceeded Wall Street expectations. Following a closing price of approximately $61 per share on Wednesday, Upstart’s stock value soared to $115 per share by Thursday’s close.

This substantial increase suggests that predictions regarding the impact of artificial intelligence (AI), often discussed over the past decade, are beginning to materialize – particularly within specific applications and for certain businesses.

However, Upstart’s exceptionally positive guidance for 2021 represents only a portion of the larger narrative. The AI-powered fintech company anticipates a remarkably successful year, leading to a near doubling of its valuation yesterday.

Simultaneously, other promising developments are emerging within the broader AI landscape, capturing the attention of investors.

Venture Capital Investment in AI is Accelerating

Analysis of recent data reveals a significant influx of venture capital into AI startups, coinciding with record-breaking exit values.

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The combination of tangible financial results and robust venture capital activity, alongside the rapid integration of new technologies into the startup ecosystem, is fostering novel applications for AI and facilitating increased capital access.

This confluence of factors is generating considerable excitement within the industry.

Today’s discussion will center on Upstart and its latest quarterly performance. A conversation with CEO Dave Girouard provided valuable insights into the adoption rates of AI-driven technologies among traditionally conservative organizations.

We will also examine data from PitchBook concerning global fundraising initiatives focused on AI and the corresponding exit market trends.

Following this, we will begin compiling a directory of startups leveraging GPT-3, a technology that has become a particular area of interest, rivaling even the enjoyment of pastries.

While today’s focus may be less rigidly defined than usual, the excitement surrounding the AI world is undeniable, prompting a broader discussion of its potential.

Upstart Forecasts 114% Year-over-Year Growth for 2021

Following its initial earnings release as a publicly traded entity – detailed analysis of its IPO can be found in The Exchange’s reports here and here – Upstart announced Q4 2020 revenues of $86.7 million, representing a 39% increase compared to the same period last year. Total revenue for 2020 reached $233.4 million, a 42% year-over-year growth.

The reported quarter exceeded revenue expectations and demonstrated a positive outcome in adjusted profits. However, the company’s future projections are particularly noteworthy. The following statement comes from their Chief Financial Officer:

Market analysts had predicted approximately $102 million in revenue for Q1 and $453.5 million for the full year. Consequently, Upstart’s stock price increased, fueled by a successful quarter and optimistic forecasts for the coming year.

What accounts for Upstart’s substantial growth projection for 2021? Essentially, lending powered by artificial intelligence is experiencing rapid expansion, as the company’s models are “increasing in effectiveness,” according to Girouard. He also indicated that the pandemic has served as a “period of change” for the industry. He referenced Quicken Loans’ significant market share gains during the 2008 financial crisis, suggesting that the COVID-19 pandemic could present a comparable opportunity for Upstart to expand its market presence.

Upstart utilizes AI models to efficiently assess creditworthiness. Users request a credit rating, which is then provided, and the company receives a fee from banking partners who manage the subsequent loans. The company is reducing its practice of holding loans on its balance sheet, transitioning towards a pure software model with a pricing structure focused on usage. They are also developing a Software-as-a-Service (SaaS) product aimed at smaller banks.

If Upstart’s revenue growth projections for 2021 prove accurate, it anticipates not only a surge in consumer usage of its services but also an increase in banking partners either joining the platform or increasing their transaction volume. Or a combination of both.

Regarding new clients, Upstart is positioned between individuals seeking credit and banks with “substantial deposit levels,” as stated by Girouard. The key requirement is for large, financially stable banks to integrate its service. Conversely, these banks require credit volume to effectively utilize their deposits. Current market conditions may therefore provide a boost to the AI-powered service, contributing to its anticipated growth in 2021.

Another contributing factor is the growing acceptance of its technology. AI-driven credit decisions are relatively new to the banking sector, which is traditionally characterized by a cautious approach to risk. Should Upstart achieve its 2021 targets, it will indicate a broader adoption of AI within established financial institutions.

Beyond the inherent interest of these developments, it’s crucial to recognize that AI-based financial products are now operating at scale, moving beyond the experimental phase. Machine intelligence, when applied at scale, is demonstrably at least as effective as human assessment in determining credit risk for consumer borrowers, and Upstart confidently asserts its superiority over traditional methods.

Considering the success of the Upstart IPO and its impressive initial earnings report, the question arises: is this an isolated instance, or does it reflect a broader trend?

• Key Takeaway: Upstart projects significant growth driven by AI-powered lending and favorable market conditions.
• Business Model: Transitioning to a pure-play software model with a focus on usage-based pricing.
• Market Dynamics: Banks with large deposits are seeking credit volume, creating an opportunity for Upstart.

Further Considerations

The increasing comfort level with AI in financial decision-making is a significant factor. Wider adoption of these technologies could reshape the lending landscape.

The company’s success could signal a larger shift towards AI-driven solutions within the financial industry, moving beyond isolated experiments to widespread implementation.

Growth in Artificial Intelligence Investment

Following a commitment to clarity in reporting, the achievements of Upstart within the AI sector are demonstrably not accidental. Analysis of a PitchBook report detailing AI funding and product developments in 2020 illustrates this point effectively.

According to the data firm’s research, the final quarter of 2020 established a new high for quarterly venture capital funding in the fields of AI and ML, with approximately $15.6 billion invested globally.

In total, PitchBook recorded $52.1 billion in worldwide AI funding throughout 2021, also representing a record figure. The following chart visualizes venture capital activity:

While the number of deals may have decreased in 2020, the overall pattern indicates what can be described as stable market expansion. Venture capitalists continue to allocate increasing capital to AI startups in a consistent manner.

Trends in exits are even more pronounced. PitchBook data reveals that approximately 212 AI exits globally resulted in $49.6 billion in realized value. Comparatively, 2019 saw 204 exits valued at around $30 billion, based on their published data.

In 2018, a significantly smaller number of 108 deals were completed, generating approximately $12 billion in value.

Upstart’s success contributes to understanding the venture capital landscape, both by influencing the exit figures from 2020 and by bolstering confidence in the capabilities of other AI-driven companies. This suggests that claims regarding the performance of their models are increasingly credible.

The Growing Number of Startups Utilizing GPT-3

Recent activity has focused on the funding round for Copy.ai. Following this, exploration of the Headlime platform proved to be a positive experience.

However, these are not the only companies experimenting with the capabilities of GPT-3. ShortlyAI was also tested earlier today, and Anyword presents another interesting option, though it remains unexplored at this time.

Anyword, as described in a communication to TechCrunch, leverages GPT-3 to assist marketers in refining their messaging and content creation.

Furthermore, Pencil is among the other ventures currently utilizing this technology, with more potentially yet to be discovered.

Accessing the GPT-3 Playground

Efforts are underway to gain access to the GPT-3 playground itself. Further updates will be provided should access be granted and experimentation commence.

For now, we wish you a pleasant Friday. Expect another update in tomorrow morning’s email.

• GPT-3 is being integrated into a variety of new startups.
• Copy.ai recently secured funding.
• Headlime, ShortlyAI, Anyword, and Pencil are all exploring GPT-3 applications.

These companies are focused on using GPT-3 for tasks like content optimization and writing assistance.