Start-ups that grow to a value exceeding $1 billion are so scarce that they’ve been given a pointedly mythical epithet. But the UK is home to a handful of unicorns – and Director has tracked down the founders of three such rare beasts for a series of exclusive interviews. In this Q&A Rishi Khosla – co-founder and CEO of digital bank OakNorth – discusses credible mentors and decisive deals…
A digital bank that specialises in lending to entrepreneurs and fast-growing ventures, OakNorth was launched by business partners Rishi Khosla and Joel Perlman in 2015, when they secured only the third new banking licence to be awarded in the UK in 150 years. With a headcount of 258 people, the company is valued at $1.4 billion (£1.04 billion) and in 2017 raised investments totalling £250 million, including £90 million in secondary capital from GIC in Singapore. In March 2018 OakNorth became the first UK digital bank to record a profit, with a pre-tax figure of £10.6 million.
What’s the toughest challenge you have faced during your company’s rapid rise?
Hiring too quickly because you require someone in a seat as soon as possible. You therefore recruit a B or a C because you just need the horsepower. That is, without doubt, the biggest mistake we made.
How did you get over that?
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.
You raised £250 million last year. What’s your advice on getting the right investments?
My view is that a highly structured transaction is normally a bad one. If you build lots of bells and whistles – things such as ratchets or options – into an investment, that’s generally bad. The best investment is X amount of money for Y per cent of shares. Even if that’s a higher portion of the business, it’s clean. The main thing is that you’re both fully incentivised. Any structure that puts you and your investor on opposite sides when you should be pulling in the same direction is bad.
OakNorth specialises in lending to SMEs. What makes an investment-ready venture?
A focus on financials – you should be able to intuitively answer any question. We’ve seen companies that look great on paper, but when you sit down with their people you realise that they’re not on top of their business. And then there’s the inverse: firms that look marginal on paper, but when you meet their teams you think: “Wow, they really know their business.” You give them the benefit of the doubt that they’ll execute and that, if something goes wrong, they’ll be on top of it.
How have you evolved as a leader to meet the growing demands of your business?
Being an entrepreneur is incredibly lonely, because ultimately you’re the one who has to keep your team, clients and suppliers engaged. You can’t necessarily share the inevitable troughs that occur in any business. What’s worked for me is to surround myself with strong mentors who, crucially, have really excelled and are highly believable.
How have your mentors helped you the most?
The full interview with Rishi Khosla can be read exclusively by IoD members in the latest edition of Director magazine, out Thursday 24 May
Bonus points: Rishi Khosla on…
Attracting funding to a venture…
Firstly, start a business with your own money. In our last business we put in our own money – we didn’t have much, it was in the tens of thousands, but that’s what we started with. Secondly, have a very clear economic model – financial discipline is the best way to make investors comfortable with you. Tell them what you’re going to do and then show them you’ve done it. Have them live with the business for a period of time so they can track you, see what you’ve said and see what you’ve executed. Ultimately, at the earlier stages, the people who’ll put money behind you are people who know you and know you can deliver. Going to a totally unknown person with a great idea and saying “back me at an early stage” is really high bar, especially if you haven’t built something before.
Building a resilient business…
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.
Nurturing future UK unicorns…
The government has done a phenomenal job with sectors like fintech, biotech and so on. For the Treasury to run an international fintech conference like it did recently – that’s a really forward thinking approach. We go to other countries when we meet bankers and regulators and everyone looks at the UK as the leader in the fintech space. However – to my earlier point – I love this county but in my view we have a general approach [as a society] of ‘if someone is doing well, I’m going to be critical of that person’. In the US the general approach is that people are aspirational – they see the next person doing well and they cheer for them because that is where they want to be too… It’s a society problem.