Oaknorth’s founder is banking on challenging incumbent lenders

Entrepreneurs are often as grateful for the opportunities that don’t come to fruition as those that do. Take Rishi Khosla: he started his first business with so little capital (he and his business partner, Joel Perlman, had just £40k to invest between them), that frugality became part of its DNA.

For three years, he and Joel didn’t receive a salary – and when they finally loosened the purse strings, they awarded themselves around £12,000 each. So when an investor offered the duo £250,000 for the company, they asked where to sign. Fortunately, however, the offer fell through. As did another a few years later, for over £10m. And another after that, for £24m. But the founders had long settled on a new business mantra: “build a company as though you’ll own it for life”. Thus they committed to running their financial research outsourcing business – Copal Amba –

It grew to 3,000 employees but Khosla, who had previously worked at GE Capital and as an investor for Lakshmi Mittal, yearned to build something “significantly more scalable”. When Copal was sold to Moody’s, Khosla and Perlman awarded themselves a generous four-day break before embarking on their next venture: OakNorth, a commercial bank that provides debt finance – loans of between £500,000 to £25m to fast-growth businesses.

This new venture stemmed from the painful experience they had in trying to secure working capital to scale Copal. Although Copal was in good shape with a healthy cash flow, UK banks were unwilling to lend unless they could provide property to act as security. Many smaller companies, they realised, faced the same struggle. “Three decades ago, branch managers would take time to analyse local businesses and offer loans accordingly. Today, we see too much tick-box, claymodel lending”. If the pair could combine their knowledge of credit with data analytics and machine learning, they could revolutionise the UK’s SME lending market. As proof that there is no magic bullet to the trials of entrepreneurship, even if you’ve previously pioneered a new industry and have enough capital to retire extremely comfortably, OakNorth’s early days were tough.

First came the personal challenges. “The toughest part was getting our asses back into gear,” Khosla quipped at a recent Leap 100 event. Next came the staff. “Turnover was high in the first 18 months – two CEOs, two deputy CEOs and one CFO.” Khosla and Perlman felt they needed a team with the relevant experience to set up a commercial bank but, perhaps inevitably, those hires lacked the disruptive, bold vision required to lead a company trying to innovate in a traditional, established industry. Today, OakNorth will interview between 30 and 40 candidates for every role.

And finally, Khosla and Perlman wildly underestimated the amount of documentation that would be required by the PRA and FCA. “We created 120 policies and 3,000 standard operating procedures, and detailed every minute activity, all before we’d even set up the bank.” The bar was high, but the process was made easier by OakNorth’s decision to appoint former FCA chief Lord (Adair) Turner to its board in 2015.

Every entrepreneur will make bad choices, Khosla says, but “you just have to make more good ones”. He mentions a Silicon Valley entrepreneur whose first business went bust, second was sold for around £30m, third went bust, and who exited his fourth for around £1bn. “That would never happen in the UK,” Khosla laments. “Unfortunately, the ambition here is lower, people are more willing to get off the train.” Not so Khosla.

OakNorth is the fastest ever European company to be given “unicorn” status, it has a loan book of just shy of £1bn and is now in discussions
with lenders across the globe to license its fintech platform, ACORN machine. While the potential is greater than Khosla and Perlman could have dreamed, there’s something admirable in what they’re trying to achieve. There are too many business owners who have a proven model that’s making money, but who feel forced to dilute and choose equity finance because traditional bank finance isn’t fast or flexible enough.

While in discussions with the PRA, Khosla was often told that innovation within commercial banking was near impossible. “But you can always challenge the status quo. If you’re trying to do the right thing in the medium-long term, you’re on the right side anyway.”