After college, Shanaz Chowdhery, 22, hoped to explore her intellectual passion. Like many a student before her, she didn’t know if she could afford it. She'd graduated from Yale in 2013 with Bachelor's degree in sociology and had grown fascinated by the intersection of education and inequality. She hoped to teach for a few years before going on to law school. But she worried about starting adult life in a lower-income profession like teaching.
"Teaching is expensive in certain ways," she says. "I didn’t have a lot of money to graduate from college, start setting up my apartment, and go into the real world financially secure."
So she turned to a Palo Alto, California, startup she'd heard about on campus called Upstart. Founded in 2012, Upstart enables its clients to invest in people in exchange for a portion of their future earnings.
Students routinely finish college or graduate school with tens of thousands of dollars in debt. Upstart gives them access to another kind of cash advance—often in the five-figure range—at a crucial time. But "Upstarts," as recipients such as Chowdhery are called, aren't under the same repayment pressures as they are with typical student loans. They don't sacrifice any autonomy about career or life decisions or live under the threat of financial ruin, and they only repay their backers when they begin earn more than $20,000 a year. (If a student isn’t earning money during a two-year MBA program, for example, those deferred years get tacked on to the end of his or her term.)
Still, offering a direct investment in people who then work off their debt can sound a bit like indentured servitude. Upstart insists it is a gentle arrangement. It's designed to return 8% to backers, though the rate of return varies. The point of Upstart isn't actually to offer investors a chance get rich off of young innovators (in fact Upstart caps repayments at three to five times the amount of the initial investment so if an Upstart creates the next Instagram or Snapchat he or she won’t be on the hook for billions). At scale, Upstart wants to create something that's potentially even more controversial: an algorithm for predicting financial success.
Upstart applicants submit a raft of data, from their test scores to their salary histories. Based on its prediction of future earnings, an algorithm then determines a "funding rate" for each potential upstart. The amount of money an upstart wishes to raise then helps calculate how much of her annual income she will share.
Upstart CEO Dave Girouard, who left his job at president of enterprise at Google to start the company, said the Internet giant has a data intensive approach to assessing job candidates on factors like leadership potential and cognitive ability. He realized that "If you could build an algorithm to predict their success at Google, you could build an algorithm to predict their success in the overall economy."
Upstart has investment from heavy hitters like Google Chairman Eric Schmidt and Kleiner Perkins Caufield & Byers, but the business is scarcely past the gimmick stage. As of early this week, 311 backers had invested $2.8 million in 216 high-achieving upstarts. (They commonly receive funding from more than one backer.)
As the algorithm absorbs data on more Upstarts and tracks their earnings, that's when Upstart begins to look more like a big data play. Girouard anticipates that it will be able to predict, with increasing precision, questions about an individual’s future earnings potential. He gives examples like: How does being a varsity athlete affect future earnings or what’s the long-term difference between taking a job at a prestigious firm like Goldman Sachs and a job that pays the same at a more obscure company.
As the algorithm grows "smarter" Girouard says Upstart could license it to somebody who wanted to use it to make car loans or "other types of creditors or financial institutions." While Upstart sees its mission as increasing young people’s access to capital, Girouard acknowledged that other organizations could use its technology to restrict the same. The platform "certainly doesn't guarantee capital to all," he wrote in an email.
Initially Girouard thought of Upstart as a way to support young entrepreneurs. "They have something they want to do, that they’re passionate about, but end up going the safer route and taking a job."
But he came to understand that lack of access to capital is close to a universal issue for young adults in America. The current job market, however, forces people "to take advantage of opportunities as they present themselves," Girouard said. "We’re not saying that everyone should go out and start a business but everyone needs to have the flexibility to start a great career."
In 2012, a friend introduced Girouard to Paul Gu, now a cofounder of the company, who had been working on an algorithm to predict workers future salaries. Gu had left Yale to accept a Thiel Fellowship, a prestigious grant given to people under 20 who want to do something other than be in college.
"There’s no other organization that tracks all these variables," Gu said of Upstart.
To be successful, the company now has to convince millions of people to take part. Upstart receives a 3% fee from the upstart and an annual .5% fee from the backers. So, on a 10-year, $10,000 investment, the company takes in just $800. "People have this conception that Upstart is only for people with really stellar resumes doing really cool entrepreneurial things," Gu said. "We need to eliminate that conception of who Upstart is and what it is for."
It’s also appears to be shedding the initial novelty of investors investing in an individual, a process that Girouard said is difficult to scale. While the company offers the option to mentor upstarts, a decision that could be motivated by a very Silicon Valley mix of altruism and selfishness, as the company grows, more capital is likely to come from institutional investors more concerned with the financial return than in vetting candidates. Already the company has an investor-backed fund that triples the investments made by individual backers, Girouard said.
In the meantime, the company can provide young people with a financial cushion that wouldn’t ordinarily be available to them.
While some upstarts are entrepreneurs, others might use their newfound liquidity to pay off their student loans, to support them during an unpaid internship or a course that makes them more attractive to employers—Upstart has partnerships with several coding schools.
Peter Nelson, a senior at Harvard, said the $10,000 investment he received will help him smooth out the well-worn path to New York City where he has accepted a job at consulting firm Oliver Wyman. The money, among other things, would help with the security deposit for an apartment.
Based on his starting salary in the high five figures, and an income share of 2.27%, he’s calculated that he would end up making money from Upstart if he stayed at the consulting firm for the five-year length of his Upstart commitment. If after a few years he decided to change tracks and go to law school he’d expect to pay substantially more since a first-year associate at a corporate law firm makes perhaps $160,000 a year. He professed to be comfortable with the arrangement either way. "A dollar is worth more to me now than in five years," he said.
As for Chowdhery, the cash infusion she received from her Upstart backers—she declined to specify how much—provided her with the money she needed to pursue work as an educator. She's now teaching at a charter school in Washington, D.C. Without Upstart, she says, the decision would have felt more binding or too far outside her comfort zone.