Comparing Upstart to angel and seed investments

Over the past week, I spent time visiting our pilot schools and speaking with lots of students about Upstart. Many of these students are thinking of starting a business and are evaluating various financing options. One question that came up repeatedly was “how does receiving funding through Upstart compare with raising funds through angel/seed investors?” Now, we don’t think of Upstart as funding exclusively for entrepreneurs. However, it’s a great question and one I wanted to address for a broader audience.

The major difference between Upstart and more traditional sources of funding is that Upstart backers invest in you and your personal potential. Upstart investors are paid based on your personal income - as defined by the IRS for federal tax purposes. Traditional angel or seed investors make an investment in your business, not you as an individual, and they make money based on the increasing value of your business. This distinction makes a difference in several ways.

• Because an Upstart investment is in your personally, you can use the funds not only to grow your business.  Many of our Upstarts are paying off student loans and covering personal living expenses in addition to investing in their ventures.

• Upstart backers are committed to and invested in you even if your initial plan, project or business does not work out.  Similarly, your obligation to them continues for 10 years irrespective of the success or failure of particular ventures.

• A traditional investment requires a valuation of a business. This requires sharing details about your project and generally limits the availability of these funds to companies that are somewhat developed already. For more information on valuations, check out these blog posts: Fred Wilson, Brad Feld

• Traditional investors realize their returns if your business grows and creates a “liquidity event”-- usually an acquisition or an IPO. Businesses that are unlikely to have this sort of an “exit” are therefore less attractive to investors.

Upstart provides a way for investors to earn a return in a variety of scenarios - not just during traditional liquidity events.  Therefore, our backers can invest in students interested in a wide variety of careers such as sole proprietorships, freelance design or writing or small business ownership in addition to those interested in traditional, high-growth startup companies.

These important differences should also change the way students think about using the money they raise through Upstart. While a traditional investor expects their funds to be used exclusively for the business, Upstart investments can be used to make student loan payments, cover rent, or work to gain relevant experience. Upstarts can certainly invest some (or all) of the money they raise through our platform into their business. However, they should think of that as “self-funding” that business and make sure that their investment is being recognized in the ownership structure of the entity.

We see Upstart as a complementary investment to other forms of financing. It’s a great mechanism to free potential founders from financial concerns so they can focus on starting their business. However, as the business grows, it may make sense to raise additional funding from more traditional means. We look forward to seeing some upstarts raise money from seed/angel investors and venture capital firms.

Posted by Jeff Keltner, Head of Business Development