While the world awaits the Airbnb IPO filing that could come as early as next week, Upstart dropped its own S-1 filing. The fintech startup facilitates loans between consumers and partner banks, an operation that attracted around $144 million in capital prior to its IPO.
First Round Capital, Khosla Ventures, Third Point Ventures, Rakuten and The Progressive Corporation led rounds in the startup, according to Crunchbase data.
There’s quite a lot to like in Upstart’s IPO filing, including rapidly advancing revenues and recent profitable period. However, the company’s revenue concentration could be a concern to some investors who recall what recently happened to Fastly shares after losing a large customer.
PitchBook data indicates that the company was last valued at $750 million thanks to its 2019 Series D worth $50 million. Can Upstart reach unicorn status with its IPO? Let’s peek at the numbers and try to answer the question.
Results, earnings
Upstart’s technology uses what it describes as artificial intelligence (AI) to approve consumer loans. It collects consumer demand for credit and connects that demand to bank partners who fund the loans. The company’s AI-powered credit tool can give consumers “higher approval rates [and] lower interest rates,” according to its S-1 filing, which offers banks “access to new customers, lower fraud and loss rates, and increased automation.”
If Upstart’s AI tool can, in fact, more intelligently determine consumer creditworthiness, everyone could come out a winner, with consumers paying less and banks adding to their loan books without taking on outsized risk.
The company in the middle does fine, too, as Upstart takes fees from bank partners for its work and holds effectively none of the resulting loans on its own books.
Upstart thinks its methods are well-tuned, saying that its AI credit service “approves 27% more borrowers than a high-quality traditional model, with a 16% lower average APR for approved loans.” Upstart claims that it can approve around 2.7x the number of borrowers as others, at the same loss rate, or level of bad debt.
You begin to wonder, given the numbers above, if Upstart has cracked some sort of code — or if the American credit system as it exists today is garbage.
Regardless, fees from Upstart are helping the firm scale nicely and make money at the same time.
After growing its total revenue from $57.3 million in 2017 to $99.3 million in 2018, Upstart exploded in 2019, managing to drive $164.2 million in total top line during the year. 2020 is on pace to be even bigger, with Upstart growing its Q1-Q3 revenue totals from $101.6 million in 2019 to $146.7 million in 2020.
Never very unprofitable, Upstart has also managed to slim its modest net losses from a maximum of $11.2 million in 2018 to a profit of $4.6 million during the first three quarters of 2020.
Driving that revenue is growing loan volume, with the company managing 136.5 million loan transactions in the first three quarters of 2019 and 177 million in the same period of 2020.
However, the company’s conversion rate on loans is rising, which Upstart defines as “the number of loans transacted in a period divided by the number of rate inquiries received.” So, the company is approving a growing percentage of asks from consumers, helping in part to drive its growth.
Recall that the company touted its ability to provide credit to more folks as a key result of its model, as we noted above, so seeing a rising approval rate is not necessarily a bad thing.
Another driver to generating more total loans, and therefore revenue for Upstart, is through offering lower rates. Upstart writes in its filing that its “internal data suggests that each 100 basis point reduction in interest rate offered to the consumer increases conversion by 15%.”
Upstart, then, will have to balance allowing its conversion rates to drift higher and offering lower rates to generate its future growth. There is a natural tension between the two, as banks would want higher rates from more risky customers, which we presume would come from a rising approval rate over time. Company bulls would argue, of course, that Upstart will not allow customer quality to deteriorate so far as to scare off partner banks with low-rate, high-risk customers.
This conversation brings us to the other risk that came to mind while perusing Upstart’s S-1 filing: Customer concentration. Here’s the company:
As of September 30, 2020, we had ten bank partners. In the nine months ended September 30, 2020, Cross River Bank originated 72% of the loans facilitated on our platform and fees received from Cross River Bank accounted for 65% of our total revenue. Our current agreement with Cross River Bank began on January 1, 2019 and has an initial four-year term, with a renewal term for an additional two years following the initial four year term.
A 65% customer is a customer that Upstart cannot afford to lose. So, a bet on Upstart’s IPO would either be a wager on that relationship staying strong over time, or on the ability of the company to pass consumer debt demand to a wider array of banks over time, allowing it to lessen its dependence on Cross River itself.
Issues aside, 44% growth in 2020 compared to the same three quarters of 2019 while generating net income is a great combination of metrics for investors to chew on.
And given its expected final-2020 revenue tally of something north of $200 million — provided that its Q4 is not smaller than its Q3 — Upstart would only need to secure a 5x trailing revenue multiple, loosely, to snag a $1 billion valuation in its debut.
More when we get an initial price range.