In a way, it was similar to how the engineers and kids who were nerds in school broke down what it took to socialize as if it were an engineering problem. By knowing all the data, they could figure out social cues and how they should talk and interact. Dating and mingling were difficult for them; maybe an algorithm could fix it. Engineers studied networking with an obsessive compulsion, thinking they could hack that too.
In one sense, the digitization of character was a way to remain politically correct while still sticking to the facts. The data didn’t lie, right? Instead of offending anyone with subjective descriptions, digital character judgments were objective. They had predicted crime, after all, with systems such as CompStat in New York, a computer statistics management tool introduced into the NYPD in the mid-1990s. No one had to say, “That’s a seedy neighborhood composed of this race or that race.” The data did it for them.
So, they figured, why couldn’t an algorithm decide whether someone would be successful or not? In a way, their system went against the Silicon Valley ethos. All of life was somehow quantified and could be expanded exponentially. Rocketing into outer space, for example, or changing the financial world code wasn’t that impossible if it was just a bunch of numbers. Data eliminated the emotion, the fear, the—very rational—sense of failure. Numbers were cold, trackable metrics. There was no writer’s block; none of the namby-pamby roadblocks you encountered in the softer subjects.
Gu looked at the numbers and realized that most millennials used credit cards to pay for things. “About fifty percent of the population in America have credit card balances that roll over month to month,” he said. But even after building up even minimal credit, banks were hesitant to issue loans, allowing users to refinance credit cards at lower rates. They knew the grads had a lot of debt—after all, they had paid a lot of money for college. At Yale, for instance, Gu’s tuition was $60,000 a year for room and board.
He became one of the few people ever to drop out of the university with three years’ worth of credits. Gu started seeing that decision, and many others in his life, in terms of Upstart metrics. For him, the Upstart methodology became his world view. “I’ve applied this way of thinking not just to work problems or school problems, but actually to how I think about my life,” he said. “For example, every couple of months, I will do a review of myself—an analytical type of review. I write three to four pages of analysis just on where I see my strengths and weaknesses going, what things I’ve improved at, what things I haven’t improved at. I create a plan to sort of improve these things. This same process I would use in thinking about solving a credit modeling problem, I think I should also use when thinking about improving myself as a person and as someone who can contribute in the world.”
But while Upstart’s intention was to help finance entrepreneurs, Gu didn’t think it was worth starting a company just for the sake of becoming an entrepreneur. Becoming an entrepreneur to “change the world” had become not only a cliché but also an epidemic. “I think it’s important to have a problem that you care deeply about and have a way of solving that you really want to work on,” he reflected.
The company officially started in early 2012. Four months after Gu and David Girouard came up with the idea, they handed out their first envelopes to the first few young students who were borrowing money using Upstart. The funds totaled just over $200,000 and would be given out at a restaurant in the Mission District in San Francisco. The students had never met, but they all had different kinds of ideas, such as a music platform or a novel. The idea would be to allow the twenty-somethings to do what they wanted rather than have to take a job just to make money.
“We’re counting on you,” he told the students, Business Insider magazine reported. “Don’t spend it all in one place. And do the right thing—make us proud.”III
The idea was to connect students with wealthy investors who wanted to help them build their companies. By the time it launched, the idea had spread. Upstart joined a growing field of companies, such as Affirm, founded by PayPal cofounder Max Levchin, and Pave, that were changing the way that loans worked.
As more and more students decided to take an entrepreneurial route versus a traditional path, they were finding few ways to finance their activities. Upstart was an answer. They often had to get day jobs, giving them less time to work on their passions.
Girouard thought that along with crowdfunding for people, Upstart should offer mentorships to help college graduates pursue the same kinds of career paths that had attracted Gu. He didn’t understand why companies would recruit and hire graduates to help them raise money, when the recent graduates hardly had any network to leverage anyway.
Instead, Gu wanted students to be free to figure out what they wanted to do without the added pressure of earning a steady paycheck. He didn’t want other students to feel the pressure his friends had to go into banking or a hedge fund just to be able to pay rent. He also thought that other kids would feel the way he did about being his own boss. To millennials, reporting to someone else didn’t seem as much of a given as it was to previous generations. This way, with funding, someone starting out after school could immediately feel ownership, Paul thought, from raising money for his own venture. Part of the plan was giving investors percentages of the borrowers’ income. The borrowers would have to pay only if they were making enough money to do so. Students would sign up with goals and achievements, list their credentials, and then say how much money they needed to raise.
Then Upstart’s algorithm would determine how much of their future earnings they’d have to share to make it worthwhile for investors. Some college graduates were more promising than others. Upstart expected them to make more money, so they wouldn’t have to give as much of their income. Investors could pay graduates in increments of $1,000 and the borrowers made payments on a monthly basis. The most a graduate could offer for the future was 7 percent, and they wouldn’t have to pay during times when they were earning only $30,000 or less a year. Both Girouard and Gu thought this system was ideal for entrepreneurs. They could focus on their companies at the beginning stages even if they didn’t have a steady paycheck. Backers would benefit if the “upstart” did well, but the upstart wouldn’t lose too much if he or she didn’t.
Borrowers were called “upstarts.” Investors or those who loaned to them were called “backers.” That way, Upstart treated people as their own start-ups versus cogs in a machine. It was like a crowdfunding site for innovative people. In its first few years, Upstart funded upstarts from a range of professions, from poets, to artists, to bank founders. They have been self-published authors and writers, or promising graduates who still had to pay off their student loans. It would be a risky bet on a novel or an art project. They would receive a contract for five to ten years; if their earnings were below a certain number, they wouldn’t have to pay their backers anything. Investors had to be accredited with the US Securities and Exchange Commission (SEC), as well as either earn more than $200,000 a year or have a net worth of at least $1 million. They weren’t allowed to dictate how upstarts used the money, but they could and were encouraged to mentor and support them. Upstart took a cut of the deal, such as 3 percent of what students made up front, and then 0.5 percent on investments.
It was selling a chance to follow a dream, as was the way in Silicon Valley. And it was taking something that could hardly be predicted and attempting to make it predictable and quantifiable, which was also very Silicon Valley. It was also an attempt to cross class lines. Someone from a low-income family with a great idea wouldn’t need family funding if he wanted to go into the arts. He didn’t have to try to work at Goldman Sachs. The founders thought of it as democratizing talent.
“It’s actually going to have a big effect on the socioeconomic makeup of America if we’re successful,” said Oren Bass, cofounder of Pave. “It’s a huge leveling of the playing field.”
Originally, Upstart talked to Pave abo
ut what they were doing, but the two companies had different ideas of what would work. A few years later, they were pretty similar, which was part of the problem. Both used data from colleges, the Internal Revenue Service, and the US Bureau of Labor Statistics. Both had to sign some sort of confidentiality agreement, too.
Critics argued that they were too similar and that their predictive models favored people who already had more advantages, such as those who had gone to Ivy League schools and those who had received job offers from known firms.IV There were a lot of aspiring upstarts with degrees from Stanford, Harvard, and the Wharton School of the University of Pennsylvania. The loans often worked out that way because investors chose whom to back based on their education and area of interest. In some ways, the system resembled typical job applications.
Gu explained that his model revealed that the highest early-career salaries came from people with degrees in computer science from MIT. Those with Princeton economics degrees had the most midcareer success. It wasn’t all that surprising.
Girouard responded to critics by saying the results were simply how the country was made up socioeconomically. It wasn’t Upstart’s job to correct for class divisions. “That’s kind of a systemic challenge that our country has,” he said.
They started to find that some majors predictably still led to more successful career paths and steadier salaries—at the very companies the apps had been formed to guard against students having to join. In a way, Upstart reconfirmed the traditional order of things, but it was aimed at finding unusual people who didn’t want to have to do that. Gu still said it was mainly just geared to give people a chance to try something new.
“Like anything else in life, if you’re not as smart or talented, or as ambitious or as creative, you’re probably not going to make it as far,” said upstart Trina Spear, a Harvard Business School graduate. “If you don’t work hard and get good grades, you might not get as good a job.” She used Upstart to launch her own company. “There’s always going to be people that are better than others and have more opportunities than others. That’s just life.”V
Back in 2012, hers was the fastest funded start-up. She raised $20,000 in exchange for 1 percent of her income for the next ten years. She used the money to pay off her business school loans and put them into her own medical apparel company, Figs, selling scrubs, lab coats, and so on. Three years later, it had yet to take off. She wasn’t able to draw a salary and thus couldn’t afford her yearly payments. Now she wasn’t so sure Upstart was scalable. And there was a limited return on investment. No matter how successful a borrower was, the backer didn’t make more than $150,000.
As of 2016, more than 1,200 backers had invested a total of more than $472 million in 36,000 upstarts. Silicon Valley’s venture firms were betting that it would be profitable. KPCB, Google Ventures, and billionaire investor Mark Cuban, owner of the NBA Dallas Mavericks basketball team, were all supporting it. Partnerships were piling up. Upstart had other ideas, such as collaborating with credit card companies, car loan companies—anyone who wanted to help rate people’s credit ability.
Still, some investors started to worry that Upstart was enabling entrepreneurs who had little real promise. Would it just allow anyone to throw himself or herself into any crazy idea without much accountability or proof of concept? The company tried to balance that impulse by funding people with varied interests, such as art or design. It tried to find students who didn’t want to sell their souls to go into banking or consulting just to pay the rent.
The ultimate goal for these loan companies was to become as large as something like LendingTree, the online lending exchange. Technologically enhanced versions of lending companies had been taking off since the recession in 2008 and 2009. Lending was another way that Silicon Valley was trying to disrupt banking, or at least rewrite its rules. In 2015 Jamie Dimon, the head of JPMorgan Chase & Company, warned in an investor letter: “Silicon Valley is coming” for their business. Tech entrepreneurs—so young, anyway—were noticing that millennials didn’t want to save money, raise money, or bank in the normal way. They shopped online. Companies such as Upstart were fueled in part by people’s growing distrust of the banking industry, which in Silicon Valley felt a world away—an old world, at that.
Millennials didn’t like institutions; they liked start-ups, and they liked freedom, and they liked leaving behind the East Coast. Everyone was looking for a new way, especially after the New York finance industry had taken such a hit. Could Silicon Valley be the solution?
* * *
I. “Paul Gu Tackles the Issue of Student Loans with Upstart,” by Britt Hysen, Millennial Magazine, April 13, 2015.
II. “Using Algorithms to Determine Character,” by Quentin Hardy, The New York Times, July 26, 2015.
III. “A Group of Investors Is Buying a Stake in the Next Generation of Geniuses,” by Alison Griswold, Business Insider, Feb. 22, 2014.
IV. “A Group of Investors Is Buying a Stake in the Next Generation of Geniuses,” by Alison Griswold, Business Insider, Feb. 22, 2014.
V. “A Group of Investors Is Buying a Stake in the Next Generation of Geniuses,” by Alison Griswold, Business Insider, Feb. 22, 2014.
10
When Do You Beg Forgiveness and When Do You Ask for Permission?
By the end of 2015, the Thiel Fellowship’s latest leader, an entrepreneur named Jack Abraham (who had replaced Danielle Strachman), was starting to counsel the new fellows on what to do in the event that their companies came under government scrutiny. It was a new concern for start-ups in Silicon Valley. Until now, government oversight was over single issues and only really touched Google, Apple, and other behemoths. But companies such as Uber and Airbnb started to change that because their existence required government consent. They changed laws in cities and upset local unions. Their new structures not only influenced the government’s attention to the tech industry, leading officials to shine a brighter spotlight out west, but also they were changing political policies.
For most of the Thiel fellows, government intervention was a faraway worry. Abraham didn’t have any go-to lobbyists on call at the time, but he knew which investors had more political connections. The new executive director thought the general rule with the government was that it didn’t care about a company unless it started hearing about it, and word traveled of what the newcomer was doing to disrupt the “incumbent.” The incumbent was the entrenched interest that the tech industry’s lobbyists tried to unseat in favor of their tech clients, such as hotel lobbies and taxi and limousine unions.
“They have to be successful enough to be actually causing pain to a stakeholder in the local economy,” said Abraham. “It takes a while for the pain to be acute enough for those organizations to go to the government.” He advised founders not to alert the government about their companies without absolutely needing to do so.
“The preference is to avoid government as much as possible, and if they’re required to interact, have people on staff who know how lobbying works,” Abraham explained. According to him, there were known venture capitalists in the valley who knew how to deal with the government.
Most of the government interruptions, he said, happened at a local level, so having an ally nearby was valuable. The federal government wasn’t involved in the tech industry as much as city governments were, though it differed state by state. “You never want to be in a position in a company where there’s one person who could say, ‘No,’ and then your company gets shut down,” he said.
• • •
By early 2016, the Thiel fellow James Proud, who had started GigLocator, had raised over $30 million for his new invention, a sleep device designed for the bedroom called Sense. He started it after his fellowship ended. The twenty-four-year-old from South London didn’t like to be associated with the other young people in his fellowship class because he didn’t consider them nearly
as successful as he was. In his mind, he had arrived; they hadn’t. Before moving to the Mission District, he had a spacious office in young, hip Potrero Hill, a neighborhood on the San Francisco Bay filled with tech offices, smoothie stores, artisanal coffee makers, and make-your-own gelato shops. All along Seventeenth Street, where his office was, young tech workers in the dorm-chic jeans and saggy backpacks walked back and forth, hailing Ubers and buses and riding their bikes.
From the outside, Proud’s office looked like it could be a greenhouse. Through the small, narrow front door, it seemed like a jungle with all the palm fronds. But upon opening the door, the space soon took on the familiar characteristics of a start-up: a hive of workers clacking away on their laptops, a snack area in back filled with products containing the au courant ingredients such as chia seeds, avocado flavoring, green-tea extract. The fridge full of cold-pressed coffee was placed in the front of the kitchen. Proud sat at one of the picnic benches near a lunch spread of quinoa, kale salad, and chicken whose vital juices looked like they had been steamed so far into oblivion all that was left was a block of protein—all the better to engineer with efficiently.
All was going so well that Proud was expanding into a bigger office. He wanted to hire more people and had already been doing so at a clip, flying to Norway, London, and Finland to recruit worthy engineers. He found a space nearby that nearly doubled the company’s footprint and amped up its design: an old warehouse with exposed brick walls and glass-lined offices. Proud posted it to his Facebook page with a picture of his swelling staff. “Where are you in the photo?” asked one friend. “I’m the Annie Leibovitz,” he replied.
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