Forbes India 15th Anniversary Special

What excites me most is that we have a profitable unicorn: Rishi Khosla

The OakNorth co-founder on Indian unicorns, launching lending operations here and why the startup ecosystem in Britain is less buoyant than in India

Rajiv Singh
Published: Jan 16, 2019 05:20:00 PM IST
Updated: Jan 16, 2019 05:34:36 PM IST

Rishi Khosla, promoter and co-founder of fintech firm OakNorth Holdings, says being profitable is important, but being profi table and having high growth is an interesting mix
Image: Madhu Kapparath

What would give a startup founder the biggest kick? Would it be when the venture gets billed as the fastest unicorn (with a billion dollar valuation) in European history? Or would it be when it becomes just the third company in the United Kingdom (UK) to get a new banking licence in 150 years? For Rishi Khosla, co-founder of OakNorth, it is none of these. “What excites me the most is that we have a profitable unicorn,” he says. OakNorth, a UK-based digital banking upstart focussed on lending to small and medium enterprises (SMEs), was valued at $2.3 billion when it raised $100 million in September 2018. The digital lender 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 full year of operations.

“Being profitable is important, but being profitable and having high growth is an interesting mix,” says Khosla, who was in India recently. India happens to be the biggest market for OakNorth in terms of headcount. Though the startup does not lend in India, it has offices in Gurugram and Bengaluru, which form the core of its global operations.

In an exclusive interview with Forbes India, Khosla talks about his India connect, Indian unicorns and the startup ecosystem in Britain. Edited excerpts:

Q. You happen to be the quickest unicorn in European history, within two years of launching operations…
The unicorn tag does not excite me. What drives me most is our achievements as a business rather than the unicorn tag. 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 over £10 million in the second year of operations is again a big positive. Obviously, we are going to significantly make much more in the third year. 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.

Q. But there is a difference. You are a profitable unicorn, aren’t you?
(Laughs) Yes, and that indeed makes me excited. I used very little money to build my last business. That’s my background. When you are building things in a traditional way, brick by brick, then it’s hard to waste money. Ultimately, my business is my positive cash flow because that’s the basic. Being profitable is important. But being profitable and having high growth is an interesting mix.

Q. In India, almost all unicorns are bleeding. What’s your take on trade-off between scale and bottom line?
High-growth companies would say that they would need to lose more to grow faster, and that focusing on profitability would be the wrong thing. It’s an interesting dynamic. I just finished reading Blitzscaling by Reid Hoffman and Chris Yeh, which tells this story beautifully. Fundamentally, because of so much capital flowing into the market, there is a perception that unless you grab the market you are going to lose the game. Grabbing the market, in turn, means how well-capitalised you are and how much money you can throw to get that share. And then, it becomes a race. The significant increase in capital flow in the startup world has created a dynamic where it is not about a fundamental business. It’s about land grab, and a frenzy of burning significant amounts of money.

Q. You were an early-stage investor in PayPal some 17 years ago. And that was a time when it used to bleed…
Yes. It was losing several millions a month, which, in those days was an unbelievable amount. But what they were clear about is that once they switched on the revenue generation business by charging for transfers, they would be able to turn the curve. And that worked perfectly. The bigger issue is when you don’t have strong unit economics and you go for land grab. That defies logic. The function of so much capital coming in has somewhat distorted the basic fundamentals of business.

OakNorth’s India operations, based out of Gurugram and Bengaluru, are a critical part of its overall operations. Khosla says India is a core contributor to its mission of changing SME lending globally for growth companies
Image: Madhu Kapparath

Q. At OakNorth, did you ever try flirting with the ‘scale fast, fail fast’ theory?
We have been scaling fast (laughs). I don’t like ‘fail fast’. On a micro basis, one does fail in lots of things every day. That’s fine. But I love to scale fast, and if you are doing that with profit, it’s even better.

Q. OakNorth is not operational in India in terms of lending but you have an office here which happens to be your biggest in terms of headcount…
India operations, based out of Gurugram and Bengaluru, are a critical part of OakNorth’s overall operations. We are solving the problem of bespoke SME credit, and within that space, the most important part is the credit. We are combining strong credit skills with technology and data science. India operations are at the core of our credit skills, and they help us drive the roadmap for our technology development and data science evolution.

OakNorth India is a core contributor to our mission of changing SME lending globally for growth companies. The team here constitutes some of the best credit analysts in India, along with a team of engineers and data scientists who integrate into a global product team, all focussed on developing the OakNorth Analytical Intelligence platform. Today, the platform is being used by banks across Europe, North America and Asia, who have a combined balance sheet in excess of $800 billion. In the UK, the platform has helped us build a profitable loan book of over $2.3 billion with no defaults to date. Today, the India team is made up of 200 people and we plan to scale it to 300 by the second quarter of 2019.

Q. You are of Indian origin…
Yes. Being of Indian origin gives me a strong affiliation and connect with the country. It’s an important part of who I am. Though I live in the UK and am a British national, I still view myself very much as an Indian.

Q. You are focussed on SME lending globally. In India, demonetisation was a fatal blow to this segment…

Pulling the SME, which was over 90 percent about cash dealing, into the formal economy was a great and bold move. It took a few months for SMEs to re-adjust. Overall, demonetisation made the economy stronger by bringing them into the formal economy. This also increased the SMEs’ ability to borrow money as they are now into a formal system.

Foreign versus domestic capital is a non-argument. The winners in this battle, even if we presume there are any, are the local, domestic companies.”

Q. Indiabulls was reportedly planning to sell their stake and exit from OakNorth. Is that happening?
Indiabulls was an investor in Copal Partners, which was the previous venture of the founders of OakNorth. The venture was sold to Moody’s Corporation in 2014 after scaling to 3,000 employees, and Indiabulls did well on the investment. We have strong relations with them. Indiabulls was the first major institutional investor in OakNorth, investing $100 million in the company in November 2015. Ultimately it’s for them to determine what’s most appropriate for them to do, based on their requirements. They have brought down their stake to under 20 percent from a high of 40 percent. The single biggest ownership still rests with the founder group.

Q. There were also reports of SoftBank planning to invest in your company.
I also got to know about that from the media (laughs). Any transaction requires both parties to have the right terms. From where we sit today, we have got a fully-funded business plan and have no urgency to raise money.

Q. How does the UK startup ecosystem differ from India’s?
The Indian startup scene is much more buoyant than the UK. Back there in the UK, there is almost no capital to start a business and get it off the ground. So, getting angel and seed kind of funding is really hard. Once you reach Series A level, then you have got funding kicking in from Series B onward.

India is a different story. You get angel, seed, Series A, B readily. It’s a much deeper capital market. Secondly, India is a high-growth market, and such markets attract investors. So we see large number of unicorns coming out of India and China. The markets in these countries are big, and they are growing. This explains why there are relatively fewer unicorns out of the European market, which are generally low-growth. The depth of people who have the entrepreneurial drive to establish themselves is obviously bigger in India. In terms of our family office, most of our recent investments in fintech and tech startups, all undisclosed, have been in India.

Q. Flipkart sold out to Walmart, and most founders of unicorns and big startups in India have a low, maybe single-digit stake in their ventures. As a startup grows, the founders keep diluting their stake. Your comments?
Having worked with Lakshmi Mittal [Khosla ran the venture fund for LNM Internet Ventures from 2000 to 2002] and having seen how much he didn’t dilute was a big lesson for me. The standard thing is that a small percent of a bigger pie makes sense. But what ends up happening, and I find this in India and the Bay area, is that people start chasing hype. What’s my next valuation? Who can I go next to raise? How can I pump up the value and create more noise around the company? These ultimately leads to the question: How can I ultimately sell and exit? As a strategy (there is) nothing wrong in it. But in my view, it’s a high risk strategy. My view is to build a fundamentally strong business which you can run for life. This focus helps in building a business with high unit economics.

Q. Do you think most startups in India are into the high-valuation game?
It’s an infectious environment for an entrepreneur. If you are an early stage entrepreneur and get money from a venture capitalist (VC), your mind starts thinking about the value, and then one ends up chasing more value. I do think that people get caught up in this massively.

Q You started as a VC. How much blame should VCs take for fanning the valuation game?
It’s all about supply and demand.

You have entrepreneurs on one hand and capital on the other. When the capital providers are going to beat each other up for the best opportunities, then that’s going to increase valuation. Is that rational? Probably not. But that’s how even public markets work.

Q. What’s your take on the colour of the money? I mean, sporadically, some Indian entrepreneurs have voiced concerns about foreign players dumping capital in India, which doesn’t result in fair play for the local players.
On international basis, all money is green (laughs). The currency of the world is still the dollar.

Foreign versus domestic capital is actually a non-argument. If the best guys are attracting foreign capital, then it’s fair. What’s there to complain about? Sorry, I am a capitalist person (laughs). The winners in this battle, even if we presume there are any, are the local, domestic companies.

Q. When do you intend to start lending operations in India?

India is on our high-priority list. But I don’t want to get into a cash burn environment. Right now, the focus is on building the UK operations, and the India business, and scaling it even higher.

(This story appears in the 01 February, 2019 issue of Forbes India. To visit our Archives, click here.)