Startup Circle: How OakNorth is redefining lending to SMEs globally?

OakNorth is a UK-based digital banking startup that focuses on lending to small and medium enterprises (SMEs). It was valued at $2.3 billion when it raised $100 million in September 2018.

OakNorth had reached a cash flow break-even just 11 months after starting operations in September 2015 and had made over $13 million in profits in only the second year of operations.

The Company acquired a new banking licence in the UK in 150 years and has made a net income of over £10 million in the second year of operations and is now operating at four times the starting point. It is the fastest unicorn in European history, within two years of launching operations.

OakNorth

OakNorth is the next-generation credit platform that is redefining lending to small and medium-sized businesses globally. It allows traditional financial institutions to significantly improve and accelerate their credit decisioning and monitoring capabilities in the lower mid-market business segment ($0.5m-$25m loan size) by using data science and machine learning. Today, the platform is being licensed to a dozen banks globally.

The journey began with launching OakNorth Bank in the UK to lend and using the platform to prove the strength of the proposition. OakNorth Bank obtained its license in March 2015 and began lending £0.5m-£40m to small and medium-sized businesses in September 2015. To date, the bank has lent several billion pounds and has had several hundred million pounds of repayments, maintaining one of the best asset quality metrics across the banking industry. It has been named by industry leaders as the most successful challenger bank in the UK and as the FT said: it’s “the only one of the UK’s high-profile neobanks to turn a sustained profit.

How did you come up with the idea?

In 2006, the founders, Rishi Khosla and Joel Perlman, were entrepreneurs trying to scale their rapidly growing business (Copal Amba). Despite healthy cash flows and strong projections for the future, they struggled to secure working capital because they didn’t have traditional assets, like property, to act as security for a loan. As Copal Amba kept growing, Rishi and Joel realised that there are millions of other entrepreneurs with growth businesses around the world facing the same struggle of securing growth capital.

The idea for OakNorth began to form…

After scaling that business to almost 3,000 employees and selling it to Moody’s Corporation in 2014, the two took the expertise they’d developed in financial research at Copal Amba and set out to solve the problem they’d experienced when trying to obtain debt finance to scale.

How does your platform work?

The platform supplements the traditional method of relying on backwards-looking historical data sourced from the borrower, and scenario analysis based on standard haircuts that are not necessarily linked to industry drivers (Level 1 and 2 analysis), with technology and massive data sets, to model a forward-looking view that’s informed by industry benchmarks, macroeconomic drivers, and scenario analysis specific to each business (Level 3 and 4 analysis).

The benefits for OakNorth partners are:

Better customer experience leading to accelerated revenue and business growth – customised loans completed in days or weeks vs months

Attractive economics – origination and credit teams who can transact several times more deals per year

Enhanced credit and portfolio performance – larger data sets and Level 3 and 4 analysis to make decisions and more proactive monitoring leading to better credit outcomes”

What were the challenges and How did you overcome them?

One of the biggest challenges to overcome was obtaining the banking license as it is (rightfully so!) a very difficult thing to do. We were the third new bank in 150 years to be granted UK banking licenses, so it was a big achievement for us.

Another challenge that we’ve had to remain mindful of is to not hire too quickly because you require someone in a seat as soon as possible.

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.

How did you build the core team (co-founders and initial employees)?

Well, the co-founders knew each other from building their previous business together and with the initial team, we made sure to ask our network for recommendations of brilliant people.

What has been your business growth till now?

For the bank - we secured our banking licence in March 2015 and began lending in September 2015, offering loans of £0.5m to £45m, as well as a range of savings accounts for individuals and businesses (which help fund our lending). Our total loan book (across business and property) has grown to c.£3bn and we’ve lent to about 600 UK businesses, we’ve had over £650m of repayments, we are profitable (£33.9m pre-tax profit in 2018), and we’re about 650 people globally.

For the platform – it is being licensed by a dozen banks around the world who have combined assets of over $800bn.

What is the one thing that sets you apart from your competitors?

What sets us apart is a relentless focus on the customer and how we approach lending to them – our credit analysis is much more in-depth and rigorous than what you’d typically find at a bank (it’s more akin to what you’d find in a private equity firm), and we do proactive monitoring.

Our revenue model is two-fold: licensing our platform to banks and lending institutions around the world, and using the platform to lend off of our own balance sheet in the UK.”

Funding

Since inception, OakNorth has secured over $1bn from several investors, including Clermont Group, Coltrane, EDBI of Singapore, GIC, Indiabulls, NIBC, Toscafund, and SoftBank’s Vision Fund.

Future plans

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.

In terms of wider challenges, one of the biggest ones 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, our CEO, Rishi Khosla always believes 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.

Praveen Agrawal, Managing Director, OakNorth

Praveen has over 15 years’ experience in the financial services industry. Formerly, Praveen was part of the leadership team at Moody’s Analytics Knowledge Services (formerly Copal Amba), where he set up and scaled multiple business lines with focus on Investment Banking, equity and credit analysis teams to over 800 employees.

He was involved in Copal’s acquisition of Amba Research and subsequent integration of Amba into Copal. He was also responsible for overseeing the company’s corporate development efforts, pricing decisions and strategic roadmap for the Company.

Praveen graduated with Bachelors of Engineering from Indore, MP and is an MBA from IIT Delhi.