The alternative lender Upstart laid off 365 employees, roughly 20% of its workforce, on Tuesday.
The San Mateo, California-based company cited the constant struggle to get enough funding from banks and other credit investors as the main reason for this reorganization plan.
The January 2023 Plan, as the company named it, is designed to get Upstart back to making profits while streamlining operations and reducing operating costs and headcount, it said in the Securities and Exchange Commission filing Tuesday.
Upstart also plans to suspend the development of its small business loan product “until macroeconomic conditions improve,” the statement said.
This is the second round of job cuts since November when the company laid off 140 employees, though the current 1,500 headcount is the same as it was about a year ago, a spokesperson told American Banker.
“As difficult as this decision was, it was necessary to allow us to return to profitability while continuing to invest in our future growth,” the spokesperson told the outlet. “We’re extremely grateful for the many contributions of those leaving Upstart.”
Upstart’s main selling point is its artificial intelligence, which helps lend to borrowers with lower credit scores who are otherwise ineligible to take loans.
The job cull will incur around $15 million in total charges, including severance payouts, employee benefits and taxes. The charges and cash expenditures of the January 2023 Plan will be completed in the quarter ending March 31, 2023, according to the statement.
After the plan is implemented, the company plans to realize cash savings of approximately $57 million in operating expenses over the next 12 months and additional non-cash savings of around $42 million in stock-based compensation through 2025.
Upstart’s plans are aimed at “returning the company to profitability sooner than its prior trajectory,” Wedbush Securities analyst David Chiaverini wrote in a note to clients as reported by American Banker. He also noted that the lender’s underwriting model has yet to face the battle during a long recession, which will be a major challenge, according to Chiaverini.
Upstart was in the news last year when the Consumer Financial Protection Bureau terminated the company’s no-action letter at its request.
In 2017, the CFPB allowed the company to experiment with an algorithm that used alternative standards for lending (rent and bill payment history, for example, rather than credit score and employment status). The CFPB agreed not to threaten any regulatory action as long as Upstart agreed to update the CFPB on its findings regularly.
According to the agency, Upstart wanted to make time-sensitive changes, like adding several new variables to its underwriting and pricing model, so it asked for more time to review and “rigorously evaluate the implications of the changes.” But the company asked to shorten its no-action letter’s term to 18 months thereby effectively ending it immediately.
“Our request was motivated by a need to keep our risk models accurate and up-to-date during a period of significant economic change,” Nat Hoopes, Upstart’s vice president and head of public policy and regulatory affairs, said in a blog post in June.
“Effective cooperation between the government and financial technology innovators remains critical to improving financial access for the millions of borrowers left behind by America’s current credit system,” Hoopes said in the post.