The man who built a unicorn: an interview with Rishi Khosla

Indian-British serial entrepreneur Rishi Khosla has achieved something remarkable: he founded OakNorth, a company which is both a ‘unicorn’ and profitable.

BLM spoke to Rishi about his background, his thoughts on UK FinTech, and what makes OakNorth so special. 

What was your background before founding OakNorth?

After gaining my bachelor’s degree in Economics from University College London and a Masters in Accounting & Finance from the London School of Economics (which is where I met my business partner, Joel Perlman), I started my career in banking at ABN Amro before joining GE Capital in 1999.

In 2002, both Joel and I were keen to start something of our own so in our late 20s, with only $60k of start-up capital, we launched Copal Amba – a financial research outsourcing business. Over the next 12 years, we scaled the business to 3,000 people across 11 markets, eventually selling it to Moody’s Corporation in 2014.

How has that background influenced your approach to founding a business?

It was whilst looking for debt finance to scale Copal that the idea for OakNorth first came to Joel and I. It was 2006, so pre-crisis and before the days of alternative finance such as P2P lending or crowdfunding, and we were looking for finance to grow. However, the best offer we could get was £100k from a high-street bank and only if we could secure it against a property. We were already all in so this wasn’t an option for us.

Fortunately, we then went to the US several times over the next few months and were approached by the special situations desk at Citi who took the time to understand our business and provided us with a $10m dividend recap. This gave us the ability to continue scaling the business without having to dilute.

Over the next few years, we met countless entrepreneurs who’d had similarly painful experiences when looking for finance, so this inspired us to found our second business – OakNorth – which would focus on tackling this problem for growth businesses globally.

What is your vision for OakNorth? Has the vision changed since the business was founded in 2015?

The business’ mission is to provide small and medium-sized growth companies with the debt finance they need to compete against large corporates. This has always been the mission.

Historically, there’s been a massive focus on tech efficiency within the retail and small SME space, and a massive focus on people within the corporate and large business space. As a result, the segment of the market that we focus on (the mid-market growth companies) has been overlooked and underserved for decades.

Whether you’re an owner-managed business looking for a £500k loan, or a small cap listed business looking for a £20m loan, the issue is the same and your requirement for a bespoke, structured lending solution is the same.

Our big data and machine learning platform, OakNorth Analytical Intelligence (ON AI), is how we’re solving this problem globally – within the UK, we do this via balance sheet lending (OakNorth Bank plc) where we lend between £0.5m-£40m, and throughout the rest of the world, we do it with by licensing the ON AI technology to other banks and lenders so that they can replicate our success with SME lending in the UK, in their own markets. We are now working with partners across eight geographies who have combined balance sheets in excess of $800bn.

How do you evaluate potential SME loans?

What we look for is a number of things: the businesses have to be fast-growing, profitable companies with sufficient cash flows to carry interest and amortization, and an experienced management team with a strong track record. We only lend in the UK, but lend to businesses across the UK and across sectors.

Outside of the UK, we license the OakNorth Analytical Intelligence platform to other banks who in turn lend to businesses who meet the above description.

OakNorth has been hailed as one of the UK’s unicorns. Did you expect OakNorth to scale so quickly? Has it ramped up the pressure?

While we are extremely proud and humbled to have reached a $2.8bn valuation as quickly as we have, and a “unicorn” valuation faster than any other business in European history, the “unicorn” tag isn’t what excites me. What drives me most is our achievements as a business.

Ultimately, valuation should be a function of the result of a business rather than a function of any potential hype. So, for me, what matters most is the actual business. The fact that we got the third new banking licence in the UK in 150 years is a big positive. That we made a net income of £10.6m in our second year of operations (2017) and increased this by 220% last year to £33.9m is another huge positive. We are operating at four times the original plan we had when we launched. All these things are the core drivers that make me more excited than being a unicorn.

How does running a unicorn differ from slower-growing companies?

My personal view is that we’ve been lucky on how robust the economy has been. I don’t necessarily believe that will continue – I think there’s a high risk that it won’t continue. But it won’t make us slow down as a business, there will always be good businesses in any type of economic environment.

One of the major things which most lenders do is pull back out when times are bad because they’ve got so many issues with their loan book. We like to think we approach our lending differently – we stay on top of our loans in a different way so we won’t be so subsumed with issues that we can’t carry on lending.

What advice do you wish you could give yourself in 2015?

To not hire too quickly because you require someone in a seat as soon as possible. You therefore recruit a B or a C person because you just need the horsepower. That is, without doubt, the biggest mistake we have made.

Money-lending in the UK has been dominated by a handful of banks, which are monolithic, public-service-type organisations. In these firms you generally find people with this approach: “The less I do, the less trouble I can get into. The more I do, I can only get into trouble.” When that’s your pool to hire from, it’s challenging. The solution is to hire from outside, which is what we ultimately did. The people we have here now come from lots of different paths.

What are some of the most exciting developments in FinTech at the moment?

I often link this back to some of the excellent work that the government has done within this space – for example with its FinTech bridges, its international sandbox, and FinTech trade missions. We go to other countries where we meet bankers and regulators and everyone looks at the UK as the leader in the FinTech space. This argument has strengthened as a result of the huge investment that the UK FinTech scene has been subject to in recent years, including by businesses like OakNorth.

What are some of the challenges in FinTech?

One of the biggest challenges that the FinTech sector will need to overcome is to withstand a market correction, proving the viability of individual business models and the strength of management teams. However, I always believe that the best businesses thrive in times of economic turmoil and with over $1bn in capital raised and triple-digit profit growth, we’re in a strong position to turn the economic threat into a significant opportunity.

What are your goals for the next few years?

We have a relentless focus on helping small and medium sizes businesses across the world that are in growth mode access better financing to fund their development – and we will ensure this continues. These businesses are the backbone of economies and communities, as evidenced by the thousands of new homes and jobs created from the loans we’ve done so far.

Our latest fundraising will also help our lending operations in the US, providing North American lenders with the capability to greatly expand business lending opportunities and accelerate their business lending, while creating efficiencies and improving credit quality. Our NYC-based team have already built up a pipeline of more than $100 Million of initial deals with the first loans expected to be transacted this summer.

Moreover, the latest funding round will also help open doors to market-leading institutions, with the goal of enabling OakNorth to deploy the OakNorth Analytical Intelligence platform to more banks and lenders around the world.