Upstart, a company that specializes in AI based creditworthiness, rose nearly 100% in a single day after it reported a blowout earnings report. They grew revenues 34% QoQ or 40% YoY, but what is special about that? The guidance! They guided for 75% YoY growth for Q1 and, for the full year 2021 they guided for 114% YoY growth.
They exploded out of their former growth cohort into something much better. But why? Why is growth going to be so much higher in 2021? Analysts were clearly confused about this - 3 different analysts basically all asked different variants of this same question.
Your first guess might be the acquisition of Prodigy for car loans. But management quickly shot that down - they stated, with regard to the Prodigy acquisition and their car loan business as a whole: “But we’re still really in the formative stages of establishing this product and refining it, so we don’t expect it to contribute materially in 2021.”
So what was driving such a surge in 2021 revenue growth then? Management had a few different takes they made at varying points throughout the call:
a) the “business catching up to where the technology has improved to over the past year”. My interpretation of this is that their underlying tech got better last year, but demand for loans was poor because of the pandemic, and they also had a shallow pool of lenders seeking new loans. So even though the tech got smarter, they didn’t have any business demand to use it on.
b) performance of marketing campaigns
c) The conditions of 2020 were ripe for Upstart to take market share because other lending models were stressed by the pandemic. Meanwhile, Upstart’s model claims to have “significant advantage in an environment where there’s elevated risk”.
Probably the worst part about this stock compared to other high growth names in my portfolio is that this business does not appear to have any sort of recurring revenue model. The business makes money by collecting a fee when a bank uses Upstart’s AI to evaluate credit worthiness of an individual and the bank then originates a loan.
**Another big minus for this stock is they are clearly benefitting from very favorable comps.**Check out their revenue numbers per quarter, starting at Q1 2019: 20, 33, 49, 62, 64, 17, 65, 87
The emboldened number, 17, is Q2 2020. AKA peak covid. Covid cratered their business last year. So this deflates last years numbers and makes them easier to beat this year. If you look at the five quarters of available data we have before covid hit, their revenues never shrank quarter to quarter. So we could guess that revenues would have been at least $$65mm in Q2 2020 had covid never hit. If we substitute the $17mm Q2 with $65mm, it means 2020 revenues may have been in the ball park of $281mm. 2021 forecast is for $500mm, which is still 78% growth YoY in this imaginary scenario.
On the whole I don’t think these problems are deal breakers, and I took a 1% position in the company after their earnings report came out.
Before the conference call, here are some take away’s from their 10-k presentation:
71% of loans instantly approved and fully automated
97% of revenue comes from fees from banks or servicing with no credit exposure
AI models use employment history, credit experience, education, application interaction, Bank transactions, cost of living
Value proposition to consumers: Higher approval rates, lower APR’s
71% instantly approved - no document uploads, calls or waiting
More inclusive - improved credit access for all demographics tested
Value prop to banks: highly automated, all digital experience
customizable to bank’s credit policies and risk appetite
more inclusive and profitable lending programs
My own calculation: P/S = Market cap / past year’s sales. Currently $9b market cap and sales of $233mm in the last 4 quarters. $9b/233mm = 38
Opening Conference Call Remarks from CEO/Founder Dave Girouard
Upstart grew revenues 42% in 2020 compared to 2019 and was GAAP profitable as well. Our Q4 2020 revenues were up 39% year on year. Upstart is a fee-based business. We don’t make loans and we aren’t exposed to material balance sheet risk.
But despite this, we care a lot about how Upstart loans perform. So we’re happy to report that the COVID-19 pandemic had no material impact on the returns that our bank partners and loan investors experienced this past year.
We’re also excited to announce that we’ve entered into an agreement to acquire Prodigy Software, a leader in cloud-based automotive commerce. Toward the end of last year, we originated the first AI-enabled auto loan on our platform.
In this initial phase, Upstart is enabling consumers to refinance expensive and mid-priced car loans, saving them on average $72 per month. With the acquisition of Prodigy, we aim to accelerate upstart’s presence in one of the largest buy-now, pay-later opportunities. Prodigy is bridging the gap between how dealerships operate and the new way that people shop for cars. More than $2 billion in vehicle sales have been powered by Prodigy at franchise dealers from top brands such as Toyota, Honda, and Ford.
To step back for a moment, Paul, Anna, and I founded Upstart nine years ago with the idea that modern technology and data science could improve access to affordable credit
There’s far less consensus that modern data science, namely artificial intelligence, can remedy the situation, but Upstart is validating this thesis every day. In a 2018 study, Upstart demonstrated to several large U.S. banks that our AI-based lending platform could almost triple their approval rates while holding losses constant compared to their current risk models. And that was in 2018.
Upstart’s AI models have improved constantly and dramatically since then. This is an important point. One way to grasp the potential for AI lending and how different it is from traditional approaches that we look back at our own models from just a few years ago and shake our heads at how simplistic and rudimentary they were compared to our current capabilities.
Our AI models, like all AI systems, are fueled by incredible amounts of data and sophisticated software to interpret that data, while most lenders consider only a handful of variables as part of a lending decision, Upstart’s model considers more than 1,000 variables about each applicant. You can think of these as the columns in a spreadsheet. And as of December 31, 2020, our model was trained on more than 10.5 million unique repayment events.
These are like the rows in the spreadsheet.
And we continually upgrade the machine learning software that interprets this data, enabling us to price the next loan on our platform just a bit more accurately. Upstart goes far beyond a singular AI model predicting default risk. We have discrete AI model that improve the entire lending process, including identity fraud, income misrepresentation, loan stacking, prepayment risk, fee optimization, and more.
But of course, our model that targets default risk is the centerpiece of our system. It predicts not just the likelihood that a loan will default, but when that default can be expected to happen. The advantages Upstart’s AI model offers our bank partners is obvious: higher approval rates, lower loss rates, and a highly automated digital experience. Upstart enables lending programs that are more predictable, more profitable, and more inclusive.
For consumers, the advantages of AI-based lending are equally compelling: higher approval rates, lower APRs, and fully automated approval, with more than 70% of Upstart loans approved in near real-time with zero documentation or phone calls required. In fact, 58% of the loans on our platform in 2020 happened on a mobile device. Consumer expectations for a seamless digital experience have never been higher, and Upstart helps our bank partners meet and beat that expectation. It’s also important to say that AI lending can be and should be inclusive, fair, and unbiased, in fact, more so than traditional systems.
As a company dedicated to improving access to credit, fairness and inclusion are central to our mission. We test every single loan application on our platform for fairness and share the results of these tests quarterly with the Consumer Financial Protection Bureau. It’s also worth noting that we do this rigorous testing on behalf of each of our bank partners. This level of rigor and transparency and fairness testing is quite unique in the personal lending industry.
The results of these tests say it all, Upstart’s platform offers significantly higher approval rates and lower interest rates to every demographic group tested.
Very soon, we’ll release a Spanish language version of our product that we believe is the first of its kind among digital lending platforms in the U.S.
While restaurants and retailers routinely offer a Spanish language alternative, online lenders, unfortunately, do not. Taking out a loan is a big decision, and it comes with important obligations. So it’s clearly better for the consumer if the entire experience, including disclosures, the loan agreement, and customer support are available in their preferred language. In closing, I want to say that while we’re in the first stages of adoption of AI lending, we’re confident that this transformation will play out for years and decades to come.
Our revenues in Q4 were $86.7 million, up 39% from the same quarter of the prior year. Of that amount, revenue from fees represented $84.4 million or 97% of the total. Underpinning this fee-based revenue was the origination of 123,396 loans by all of the bank partners across our platform, up 57% from the same quarter of the prior year and a 17.4% conversion rate on rate requests, up from 14.9% in the prior year.
Our contribution profit, a non-GAAP metric, which we define as revenue from fees minus variable costs for borrower acquisition, verification, and servicing, was $41 million in Q4, up 77% year over year and representing a 49% contribution margin, up from a margin of 38% in the year prior. The margin improvement was driven by increases in marketing and operating efficiency, as well as a rise in the percentage of loans fully automated to 71%, up from 69% in the prior year. This level of contribution margin is slightly above our expected longer-term trend line and we expect it to normalize downwards mildly over the coming few quarters.
Q4 operating expenses were $76.3 million, up 29% year over year or 25% when netting out the impact of stock-based compensation.
Investment in engineering and R&D was our priority over the past year, growing 94% year over year to $14.1 million in Q4. However, general and administrative spend grew more slowly than revenue in Q4, increasing 29% year over year to $14.8 million,
Our Q4 GAAP net income was $1 million, down from $6.1 million in Q4 of 2019.
This year-over-year decrease is almost entirely attributable to changes in the fair value of warrants that were granted in our first year as a company and carried on our balance sheet as liabilities up until their exercises in Q4, coinciding with our December IPO. Adjusted EBITDA, in which we adjust for this warrant fair value expense, as well as for stock-based compensation, came in at $15.5 million in Q4, up from $7 million in Q4 of 2019. Adjusted net income per share for Q4 was $0.07 based on a diluted weighted average share count of 80.3 million. ($5.6mm adjusted net income for Q4)
Our fiscal 2020 full-year revenue came in at $233.4 million, growing 42% year over year despite a severe adverse impact from COVID. Contribution profit was $105 million on the year, up 115% over 2019 and representing a 46% contribution margin.
GAAP net income came in at $6 million for the full year and adjusted EBITDA was $31.5 million, representing a 13% adjusted EBITDA margin versus 3% a year earlier. On the balance sheet side, we ended with $311 million in restricted and unrestricted cash, largely flowing from the proceeds of our December IPO and which was up from $80 million at the end of 2019.
In terms of loan assets, we carried an aggregate balance of loans, notes, and residuals of $98 million at the end of 2020, down from $266 million at the end of 2019, reflecting the continued reduction in the percentage of platform loans funded through our own balance sheet. This $98 million of loan assets represents the totality of the direct exposure we have to credit risk.
We would highlight a few dynamics which are impacting how we currently forecast the balance of the year.
The first is that part of the growth we have been and are currently experiencing is simply the business catching up to where the technology has improved to over the past year. So in a sense, we are recovering to where we otherwise would have expected to be absent the impact of the pandemic. The second is that our contribution margins remain slightly above their historical trend as we emerge from the recovery phase, and we expect them to mildly contract as we return to our normal operating equilibrium.
for Q1 of 2021, we are expecting total revenues of $112 million to $118 million, representing a growth rate at midpoint of 80% year over year; contribution margin of approximately 44%; net income of $7.8 million to $8.3 million; adjusted net income of $13.4 million to $14.2 million; adjusted EBITDA of $14.6 million to $15.3 million; and a diluted weighted average share count of approximately 92.4 million shares. For the full year of 2021, we now expect revenue of approximately $500 million, representing a growth rate of 114% year over year; contribution margin of approximately 41%; and an adjusted EBITDA margin of approximately 10%
Our business model has proven to be resilient. The accuracy of our AI models has continued to improve steadily. And most importantly, the credit underwritten by our platform has performed unimpeachably through the turbulence of the past year. We continue to be excited about the sheer magnitude of the opportunity ahead of us in applying our technologies to the broader landscape of risk across financial services.
Q & A
Analyst:
Fantastic. I wanted to – Dave, I wanted to talk about the auto opportunity here. Certainly, the Prodigy acquisition will accelerate the front end of the business. But as we think about building up the financing partners and customizing the model to suit the auto market per se, how should we think about the timing of scaling that product, I guess, over the next 12 or so months? And I have a quick follow-up.
Dave Girouard – Chief Executive Officer
Sure. Thanks for the question. This is Dave. I’ll just say quickly, we are just entering the auto lending space over the last few months and started this year in one state, have expanded to 14.
But we’re still really in the formative stages of establishing this product and refining it, so we don’t expect it to contribute materially in 2021. This is really a year of building out, testing, improving the funnel, bringing on bank partners, etc. And this is kind of a process that took several years for our personal loan product to really reach the state it’s gotten to. Certainly, we expect this to happen much faster.
But 2021, from our perspective with auto, is really a building year. And the acquisition of Prodigy, we certainly view as an accelerator toward the point of sale, the majority of the market that happens at the dealership. But still, that guidance would hold, which is we don’t expect it to be material to our 2021 results
Pete Christiansen – Citi – Analyst
That’s helpful. And then as we look at the credit profile of your average consumer, I mean, average credit card debt came down 12% in 2020. You certainly have stimulus distributions going out now. How much do you see that as a factor in growth in the personal loan side, considering No. 1 use cases is really debt consensual headwind? And how do you guys think about that?
Sanjay Datta – Chief Financial Officer
Pete, this is Sanjay. Thanks for your question. I’ll jump in on this. So I think that the – sort of the impact of the pandemic and all the stimulus that’s been injected in the economy, we think of the impact of that maybe on two levels.
One is we believe it’s been constructive to credit performance. On the other hand, it’s been adverse to volume. And put another way, with the stimulus in the economy, the economy is at sort of record savings rates, at least in recent memory, low amounts of consumer spend. That has manifested, as you said, in sort of record-low credit card balances.
**ExponentialDave:**I am interpreting the boldened text as: stimulus causes the demand for loans to go down, but it also causes defaults to go down.
Analyst:
I think, Sanjay, you mentioned that a key growth driver is the business sort of catching up to where the tech has improved over the past year, kind of catching up to where you would have been.
Can you elaborate that in a little bit? Like what exactly are you talking about there in terms of the underwriting models in terms of other aspects of the business? Just curious for a little more color there.
ExponentialDave: I am interpreting this question as “c-suite speak” for how the heck are you guys gonna double your business in 2021?
Sanjay Datta – Chief Financial Officer
Yes. Sure. Thanks. Great to hear from you, Ramsey.
So I would not call this as the key driver, but it certainly is a factor in how we think about the recent path of growth and the path forward. But just to kind of briefly describe it, our underlying technology has been improving steadily over the past year. The AI models have gotten more accurate, our ability to underwrite risk on behalf of our bank partners has improved. And it hasn’t necessarily shown up directly in the business because as you know, the business has undergone a lot of volatility for a lot of extraneous factors.
But as the sort of the impact of COVID itself subsides, the business is now catching up to where we otherwise would have expected it to be had there never been an impact of the pandemic. And so as rates of return for investors normalize, as the risk in the economy normalizes, we’re sort of converging to that sort of – you can imagine a trend line had COVID never happen and we’re converging to that trend line. So part of what is propagated our sequential growth quarter over quarter is that dynamic. And of course, that’s not going to last throughout the entire year.
But there are other things that are creating tailwinds as well that have to do with the ongoing sort of performance of our marketing campaigns, the ongoing improvements we are making this year to the model. And some of the things I described around how – as the effect of the pandemic does subside, we do imagine some tailwinds as the consumers return to the economy. So I think what we’re doing is calling out one impact of the sequential quarterly growth in particular. And to the extent that that’s moderated in our guidance going forward, that’s one of the factors.
Ramsey El-Assal – Barclays – Analyst
OK. That makes a ton of sense. I wanted to ask a follow-up on the Credit Karma relationship. I just kind of wanted to get an update there in terms of Lightbox, and it seems like you more than maybe backfilled some headwind there. What’s going on there? Did things play out the way you thought? And then just a quick bolt-on there is, what is Prodigy contributing to revenues and EBITDA in 2021? And I’ll hop back in the queue.
Dave Girouard – Chief Executive Officer
Sure. This is Dave. Credit Karma is a really important partner of ours, has been for a while, and we expect will continue to be there now part of Intuit, who we’ve had a relationship with previously. The scale of our partnership continues to grow.
I mean, we see ourselves as co-leaders in kind of adjacent areas. So as they’ve been successful, we’ve been successful, the relationship continues to become more meaningful to both of us. We don’t anticipate that changing. There’s certainly a lot of different approaches they take and ways we can work with them. And we will, over time, make decisions about where it makes sense for us to work with them or not.
Our goal, as much as we have talked about having a lot of our loan sort of lead volume coming through Credit Karma, it’s actually important for us to continue to build other channels. We have no desire to reduce the scale of the partnership we have with Credit Karma. In fact, we want to keep building it.
We are a unique company in that we have a proprietary product. Most people in FinTech or in lending FinTech don’t really have a proprietary product so they seek out proprietary distribution. We actually do have a proprietary product, so we’re very happy to have a partnership with somebody like Credit Karma to take advantage of that.
John Hecht – Jefferies – Analyst
You guys gave some good stat about the growth on kind of the bank platforms and the volume tied to that. And I saw you announced the Apple Bank adoption and some other credit unions over the course of the last few months. Maybe can you give us an update on, call it, the penetration and momentum there and pipeline.
Dave Girouard – Chief Executive Officer
Yeah, sure. This is Dave. Let’s just say, I think our momentum has continued since our IPO. We’ve signed agreements with three additional banks.
We’ve had two, including Apple Bank, as you referenced, go live on our platform. There’s today a total of 15 banks on our platform. I think there’s a lot of interesting things happening in the market. First of all, COVID has clearly accelerated the digitization efforts and projects that banks are undergoing because, of course, there’s pretty dramatically reduced traffic to their branches, which is a trend that’s been going on for years regardless but accelerated during COVID.
So the importance of digital is there. And certainly, there’s a lot of more interest for that reason in our platform. It’s also clear that banks have excess deposits these days and a shortage of loans, and that is true almost across the board for banks . One sort of reaction that we’ve taken to that is we’re a little more focused on helping banks get loans from our platform really referred from upstart.com to the banks.
This is something we can readily do. Our volumes are growing, as can be seen, very quickly. And so it’s really the fastest way to solve a very acute problem that banks have, which is, again, surplus deposits and a lack of demand for loans, particularly through branches, which for a large time, have been closed or likely traffic. So this is really the state of it.
We’re definitely seeing increased interest from larger banks. I think both because of this excess deposit issue, as well as the fact that our entry into auto is into a category that larger banks are much more familiar with, have a lot more history with, and a lot more confidence in. So we would anticipate continuing to grow our pipeline of banks. I’ll also add we did something super interesting, which has signed an agreement recently with a very small bank in about a 90-day process. And that, for us, is fairly groundbreaking. One of our goals is certainly to make it faster and easier for banks to join our platform and be onboarded.
John Hecht – Jefferies – Analyst
OK. That’s very helpful color. And then, yeah, I know I look at things from a different lens, but just looking at the momentum you guys were exhibiting through the second part of last year, I guess, post the shelter-in-place period when things started to normalize. And looking at our forecast, the guidance is clearly – it’s significantly ahead of that.
And I’m wondering – so I guess I understand we look through different lens, but can you guys characterize where you – maybe where some of this improved momentum has come from despite stimulus maybe knocking down a little bit of secular loan demand? Is it the bank channel? Is it more of the consistent credit fund channel? Is it the new product channel? Is it all of the above? Or is there any kind of – where you can steer us to where some of the upside is coming from, maybe in a more meaningful way?
ExponentialDave: In analyst speak: No seriously, HOW are you gonna double your business in 2021???
Dave Girouard – Chief Executive Officer
Yes. This is Dave. Let me try to maybe explain why I think our business is doing so well these days. Part of it is internal.
And by that, I mean, despite all the turbulence last year in the world and the industry, we invested a lot in R&D. Our models and our team kept getting bigger and stronger. You can tell by our R&D spend last year we did not hold back. And so the technology has been improving dramatically.
And I’d even say that COVID accelerated that because a change in the environment is really a learning opportunity for an AI system. So there was just very fast forward progress in the quality of the technology. That generally means the throughput of our funnel gets much better. Now, at the same time, the environment changed a lot, of course, and two things changed.
First, the level of risk in the environment went up a lot, and that really meant that it really stressed out competing models. And we feel like we have pretty significant advantage in an environment where there’s elevated levels of risk. And having an AI-based system that can discern risk and handle it properly becomes even a more important advantage. he second thing that happened, as we’ve mentioned, is demand for credit dropped.
And this really is because people spent less, weren’t traveling, weren’t eating out, etc. Credit card balance is lower, as Sanjay mentioned. And that translates to us as demand for smaller loans. But we are a company that has invested a lot in automation.
So smaller loans are something we handle really well from a profitability perspective. When you put those two together, I think what you’re seeing is Upstart taking pretty significant market share during a time of turbulence. When different models are handling things differently, companies are naturally reacting in different ways, whether they’re pulling back, tightening credit, etc. But this has really presented an opportunity for a new platform to shine that is really built differently.
And I think that’s what we’ve seen play out during 2020, and we are certainly seeing it playing out as we get into 2021.
Analyst question omitted because Sanjay’s answer is comprehensible without it:
Sanjay Datta – Chief Financial Officer
Sure, Ron. Thanks for the question. I guess I would say the overall mix or spread between channels has not evolved greatly. We continue to improve all of our channels.
And really, the dynamic that we think about is when the underlying strength of the model improves, it improves our ability to convert loans in the funnel. And when that happens, it creates expansiveness. It allows us to send larger campaigns at better unit economics. And so there has been a growth across channels.
Nat Schindler – Bank of America Merrill Lynch – Analyst
Yes. I know it’s been talked about a bunch of times on this call, but I’m trying to figure out the difference. You did talk about changes that Credit Karma did in November affecting your ability to take on that incremental – that do that last loan through getting that last lead through them because of their change in the ability for you to get that at the right price. Yet you accelerated in the quarter, and it looks like you’re going to accelerate rather dramatically for the coming year.
What changed there? And how easy is it for you to just repurpose marketing dollars from one platform to another?
Dave girouard
Sure, Nat. This is Dave. So, yes, let’s see. I mean, there was a little noise about back and forth with Credit Karma in the fall in terms of them having a program that we had elected not to participate in.
But frankly, that was all sort of a small matter and sort of demand for our product and through all channels, including Credit Karma, frankly, overwhelmed it. And you sort of – as we said, sort of like back and forth between us and Credit Karma deciding how we work together is a little bit of, I don’t know, a sideshow compared to what is really just the emergence of a product that is distinct in the market. Our ability to model and help our banks successfully underwrite the torso of the market, the breadth of the market is really what is unique. And Credit Karma is an important partner.
But as Sanjay said, our channel mix has not really changed. And what I think that really means is, increasingly, consumers find their way to the best product. And that’s our belief. We don’t believe in the notion of a captive FinTech that owns its customers.
Nat Schindler – Bank of America Merrill Lynch – Analyst
OK. And then just a second question on a kind of longer-term basis, and this goes to – you did talk about your bank source loans going up quite a bit from the worst parts of COVID when the banks weren’t really all that active. But just longer term, and you did add some banks, said – I think you were up to 15 now. Why wouldn’t most small banks – why isn’t small, medium banks just running to this platform if it’s largely a very high-margin origination fee for them for a product that they did not have and could not do on their own and services their customers as well?
Dave Girouard – Chief Executive Officer
Sure. Right. Nat, it’s a great question. We ask ourselves that sometimes admittedly.
But banks are built on a conservative structure. They are conservative by nature, and AI is a very new technology from their perspective. So they tend toward making sure everything is as it should be, that their regulators are supportive of it, that they’ve seen it through cycles. So I think this is almost a perfectly expected adoption rate for banks.
They are not purely driven by incremental profits or desire to grow, probably a little different than most businesses in many ways. But it is happening, and the pipeline is growing. And fortunately, we’ve built our model such that we are not dependent on how many banks and how quickly these banks adopt our technology.
We’ve developed a platform that flows loans through to capital markets and institutional buyers if banks are not ready and willing to fund them and hold them.
And that’s why our business can grow as quickly as it does, the models can continue improving as rapidly as they are. And the banks can come on board when they’re ready to do it, when they’re confident.
We’re going to be there, and the model keeps getting better. And 15 is a great number, 30, 40, 50 will be better. But at some point, it becomes commonplace that banks who are winning market share, who are doing well, who are serving their customers with their very best product are using somebody like Upstart to help them do it. And when it becomes commonplace, there’s certainly, I think, a moment of acceleration in the future where it’s really a mainstream technology that most banks use.
It’s only a question of when that day comes.
Nat Schindler – Bank of America Merrill Lynch – Analyst
And would you really want them to do it, to fully come on board, tons of small banks and doing this and taking customers because, in the end, you make more EBITDA per funded loan if you source it yourself?
Dave Girouard – Chief Executive Officer
This is Dave again. We’re a little neutral to that, whether the customer comes to upstart.com, which is a model that has a higher revenue profile, or whether the bank sources the customer and they’re only paying us what we call our platform fee, which is essentially a lower revenue profile but higher gross profit. So frankly, we’re kind of neutral to them. We like both and we, of course, want Upstart and Upstart loans to be ubiquitous and customers got to find them wherever they go.
So we don’t necessarily have a favorite in that race. We certainly would like to see both grow rapidly over time.
Analyst: Can you speak a little bit about on the funding front, Sanjay, kind of what developments you’re seeing in terms of maybe the number of investors that are signing up for kind of the latest securitization? Any developments on forward flow arrangements and the like? Just overall breadth of funding partners that are emerging?
Sanjay Datta – Chief Financial Officer
Hey, On the funding side, I guess I would say, obviously, in the depth of the COVID impact is really Q2 of last year coming into Q3. A lot of funding sources, whether they be banks or sort of institutional investors, obviously, concerned about risk, obviously, pulled back.
Risk premiums went very high, required yields have been very high. That sort of underpinned a bit of what you saw in terms of the business cycle on our side. As the sort of broader risk landscape started to clear a bit, the smoke started to clear a little bit as we got to the end of the year, people felt more comfortable. I think you saw some of the original investors sort of coming back into the fray.
And then certainly, as we got toward the end of the year, you saw other funding sources that maybe were sitting on the sidelines with respect to digital, if you will, waiting to see what would happen in the first macro shock that we then were able to observe over the course of 2020. Really coming to the space and starting to participate, showing interest. And so our pipeline today, I’d say, is as good as it’s ever been with respect to demand for loans on the funding side.
Dave talked a little bit about the demand or the interest from the banking side.
And that’s been really sort of encouraging. On the institutional side, equally, you’re seeing a lot of new names and interest. I think you probably would have seen that manifest in the securitization markets at the end of the year or in Q1, which are some of the most constructive markets we’ve seen, certainly since we’ve begun ourselves. So I think a lot of folks are a combination of starting to feel more comfortable now even though yields are still – or required returns are still above where they were pre-COVID.
There’s certainly a much higher level of comfort. And there’s a broader secular sort of trend where a bunch of people were just kind of waiting to see what the first macro shock did to some of these digital platforms now feel pretty good about participating and recognizing that the performance was actually very good, if not better than some of the other parts of the economy. And therefore, showing interest where they didn’t before. So I think the short summary of all of that is we feel really confident on the funding side.
And the rapid reconstruction of our own volume that you’ve seen in the results in our guidance, funding has not been an obstacle to that in any way.
Pete Christiansen – Citi – Analyst
Thanks for squeezing me in here. Dave, I want to ask you a bit of a high-level question here. Certainly in FinTech, there’s this concept of the super app. And you see it certainly among some payments companies, some of the challenger banks.
The credit functionality isn’t there yet, but we can kind of see where the evolution is going. One could think that could be a threat to Upstart just by having multiple banking products on one app. But on the other hand, I kind of think of that as potentially an opportunity for another referral distribution channel or even the opportunity to white label perhaps to challenger banks or even some of these other FinTechs. Just curious to hear what you’re thinking is.
This is obviously a bit off in the grand scheme of things, but how do you think about how the FinTech market is evolving in that way? And could Upstart play a meaningful part in that?
Dave Girouard – Chief Executive Officer
Yes, that’s a good question. So let me first say I think there will be emergence of new-age banks that will challenge the larger banks that have been around for decades. I think that is a good and healthy thing. And there’s a whole bunch of them vying for it, and I’m sure at least some of them will be very successful in doing that with white label models, etc.
We don’t, in any way, see that as a threat to us. If anything, having banks that – new banks, if you will, that are sort of tech-forward and very hypersensitive to the quality of experience they’re giving to their customers is a good thing and we would hope to partner with them over time. We think lending is a very special and unique function. And for nine years, we’ve been building these models that do it in a unique manner.
So we don’t at all feel threatened in any way that some of these new banks will suddenly become lenders. They have a large captive audience that will never get loans elsewhere. I think one of the fallacies of FinTech is in some sense for banks themselves is believing you own your customers. It’s a free world out there.
If the Internet has done anything in the last 30-plus years, it has shown that a better product is a few clicks away. And we are firmly of the belief that consumers are going to go to the best place for the best product.