Upstart IPO Filing: Inside the Fintech Startup's Details

As anticipation builds for the potential Airbnb initial public offering, possibly arriving within the next seven days, Upstart has submitted its own S-1 registration statement. This financial technology company connects individuals seeking loans with affiliated banking institutions, a business model that previously secured approximately $144 million in funding before its planned IPO.

Investment rounds in the company were spearheaded by First Round Capital, Khosla Ventures, Third Point Ventures, Rakuten, and The Progressive Corporation, as reported by Crunchbase.

Upstart’s IPO documentation presents several appealing aspects, notably its quickly increasing revenues and a recently achieved period of profitability. Nevertheless, the company’s reliance on a limited number of revenue sources may raise concerns for some investors, particularly in light of the recent performance of Fastly stock following the loss of a major client.

Data from PitchBook reveals the company’s most recent valuation of $750 million, stemming from a $50 million Series D funding round in 2019. Will Upstart achieve a valuation of $1 billion or more with its IPO? Let's examine the financial details to explore this possibility.

Results, earnings

Upstart utilizes what it characterizes as artificial intelligence (AI) technology to facilitate the approval of loans for consumers. The company gathers consumer credit requests and connects them with banking institutions that provide the funding for these loans. According to its S-1 filing, the company’s AI-driven credit assessment tool can provide consumers with “improved approval odds [and] reduced interest rates,” while also offering banks “access to a broader customer base, decreased instances of fraud and losses, and streamlined automation.”

If Upstart’s AI system can, in reality, more accurately assess a consumer’s ability to repay, it could benefit all parties involved, with borrowers securing more favorable terms and banks expanding their loan portfolios without significantly increasing risk.

The company positioned between borrowers and lenders also performs well, as Upstart receives fees from banking partners for its services and does not retain any of the loans on its balance sheet.

Upstart believes its methodologies are highly effective, stating that its AI credit service “approves 27% more applicants than a conventional, high-quality credit model, with an average APR that is 16% lower for approved loans.” The company asserts its capability to approve approximately 2.7 times the number of borrowers compared to others, while maintaining the same level of loss or bad debt.

Considering the figures presented, one might question whether Upstart has discovered a novel approach—or if the existing American credit system is fundamentally flawed.

In any case, the fees generated by Upstart are enabling the company to expand and achieve profitability.

The company increased its total revenue from $57.3 million in 2017 to $99.3 million in 2018, and then experienced substantial growth in 2019, reaching $164.2 million in total revenue for the year. 2020 is projected to be even more successful, with Upstart increasing its revenue from $101.6 million in the first three quarters of 2019 to $146.7 million in the same period of 2020.

Having historically remained profitable, Upstart has also successfully reduced its modest net losses, from a peak of $11.2 million in 2018 to a profit of $4.6 million during the first three quarters of 2020.

This revenue growth is driven by an increasing loan volume, with the company processing 136.5 million loan transactions in the first three quarters of 2019 and 177 million in the corresponding period of 2020.

Furthermore, the company’s conversion rate for loans is improving, which Upstart defines as “the ratio of loans completed in a given period to the number of rate requests received.” Consequently, the company is approving a growing proportion of applications from consumers, contributing to its overall expansion.

As previously mentioned, the company emphasized its ability to extend credit to a wider range of individuals as a key benefit of its model, so an increasing approval rate is generally a positive indicator.

Another factor contributing to increased loan volume, and therefore revenue for Upstart, is the offering of lower interest rates. Upstart notes in its filing that “its internal data indicates that a 100 basis point reduction in the interest rate offered to consumers results in a 15% increase in conversion.”

Upstart must therefore strike a balance between maintaining higher conversion rates and offering competitive rates to fuel future growth. There is an inherent conflict, as banks would naturally prefer higher rates from borrowers perceived as riskier, which would likely result from a rising approval rate over time. However, proponents of the company would argue that Upstart will prevent a decline in customer quality to the point where it deters partner banks with low-rate, high-risk loans.

This discussion leads to another risk identified while reviewing Upstart’s S-1 filing: customer concentration. The company states:

A customer generating 65% of revenue is one that Upstart cannot afford to lose. Therefore, an investment in Upstart’s IPO is contingent on the continued strength of this relationship, or the company’s ability to diversify consumer debt demand across a wider network of banks, reducing its reliance on Cross River Bank.

Despite these challenges, a 44% increase in growth in 2020 compared to the same three quarters of 2019, coupled with net income, represents a compelling set of metrics for investors.

Considering an anticipated final-2020 revenue figure exceeding $200 million—assuming Q4 performance is comparable to Q3—Upstart would require a trailing revenue multiple of approximately 5x to achieve a $1 billion valuation upon its public debut.

Further details will be available when the initial price range is announced.