By Justin Reyes
Upstart platform allows people to raise money in exchange for a small share of their income over 5 or 10 years. Backers on the platform invest directly in the person, not in their idea or business. Upstart uses a special algorithm that looks at different data points (education, prior job offer, SAT scores, etc.) of an individual to make a funding offer and effectively lets people monetize their future potential.
While Upstart is creating a new financial instrument, the criteria people use to invest on the platform is not all that different from that of traditional Venture Capital firms. Anna (Mongayt) Counselman, co-founder of Upstart shares her view on how people make an investment decision. “Venture capitalists often say they invest in people, not their businesses. We’re the first company actually doing that.”
According to Anna, investors make decisions by evaluating 5 key factors: the person, the opportunity, social proof, deal structure, and that je ne sais quoi.
1) The person. “The first thing investors look at is the individual – what is their background, their credentials, where did they go to school and what did they study. What have they accomplished in their life prior to showing up on the platform?”
Anna mentions that prior accomplishment is a signal to future success and unsurprisingly investor preference is for top schools and STEM majors.
2) The opportunity. When evaluating an individual, backers ask themselves ‘is this endeavor/experience/education or business opportunity likely to have a positive impact on someone’s career?’ If so, it is likely to be a good investment.
“At Upstart, we have partnered with some of the top developer bootcamps to help their students pay for tuition. Learning to code is a valuable and highly sought- after skill so investing in someone acquiring this skill is likely to benefit from the graduate’s increased job prospects and future income.”
3) Social proof. “The first offer to get is often the hardest. People know that information is imperfect so they rely on social signals to make their investment.” Once an upstart receives their first offer, other investors come more readily.
4) The deal. Upstart does not determines their “quality of deal” on either ownership structure or the percent of ROI. They rely on the price per share of the individual’s expected income. Upstart has developed a proprietary algorithm that predicts an applicant’s future income by comparing that applicant to others. The model is built on a multivariable regressions using many independent data sets: 2 longitudinal federal studies, private data, and school provided data. The model produces a dollar amount per 1% of income that an upstart can raise.
5) Je ne sais quoi. The last factor comes down to investor preference. Is the upstart they are investing in someone they are excited about? In addition to money, backers on Upstart can affect their returns by contributing to an upstarts success by providing support, guidance or an introduction at just the right time. So they look for people who inspire them. Did this person attend their alma mater? Are they looking to pursue an exciting business idea? Are they setting out to do something we want to encourage young people to do?
“Some people like to invest in helping first generation college students get started on their careers, while others are looking for the next big idea using Google Glass technology” says Anna.
With the huge boost in women enrolling in software development programs or starting their own business, Upstart provides great financial support for them as well. Women on Upstart are pursuing a variety of fields from entering bootcamps, to starting ventures, pursuing creative endeavors, or earning advanced degrees. As the trend continues, Upstart and its backers are excited to continue mentoring and giving them the financial backing to change the ratio.
On February 26th, Femgineer & Upstart will be hosting a forum on “Finance for Femgineers” at Google Ventures. Visit our meetup page to RSVP.
Here’s are a couple examples of successfully Upstarters:
- A Leap of Faith with Upstart – By Andrew Galasetti
- Upstart Offers Venture Capital for Humans, Not Just the Companies They’ll Start – By Fast Company
