The fintech scene in India is incredible and the start-up scene is much more buoyant than the UK. The innovation coming out of India is unbelievable, avers Joel Perlman l Co-founder & Senior Managing Director l OakNorth AI, on an exclusive chat with Jyoti Gazmer, BIS Sub-editor as he unravels the mantra of OakNorth AI’s recent achievements and notes few predictions for India’s Fintech scenario. Edited Nub.
1. To start off, would you like to tell us a bit about OakNorth Holdings?
“The group was founded by myself and my business partner, Rishi Khosla. We were inspired to launch the business following the challenges we faced in securing debt finance from high street banks for our previous business, Copal Amba (which we scaled to c.3,000 employees and sold to Moody’s Corporation in 2014).
“The business’ mission is to provide small and medium-sized growth companies with the debt finance they need to compete against large corporates. 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.
“Today, OakNorth is Europe’s fastest-growing fintech by assets, valuation, profits and revenue.”
2. India is advancing its Fintech Industry and likely to grow 1.7 times by 2020, according to some reports. What are your plans for expansion in India?
“With over 250 people across offices in Gurugram and Bengaluru, India is our biggest market in terms of headcount and is critical to our operations and the ongoing success of the business. The team is made up of some of the best credit analysts, along with engineers and data scientists who integrate into a global product team, all focussed on developing the ON AI platform. We will continue scaling the team with several hundred more hires to come this year.”
3. Kindly tell us more about OakNorth’s recent achievements?
“Since its inception, the OakNorth group has secured over $1bn from leading investors, including Coltrane, EDBI of Singapore, GIC, Indiabulls, NIBC, Toscafund, and in February this year, we secured a $440m investment from SoftBank’s Vision Fund and Clermont Group. This financing is currently being used to grow 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.
“In March this year, we announced our 2018 annual results, revealing a 220% increase in our profit-before-tax – up from £10.6m in 2017 to £33.9m in 2018, as well as total loan facility growth of 160% from £850m in 2017 to £2.2bn in 2018. Going forward, we’ll also be donating 1% of group net profits to supporting charitable causes and social entrepreneurship.”
4. OakNorth AI was previously known as ACORN Machine, any reasons behind the change? How does OakNorth AI help assist lenders?
“Since our founding, our mission has been to enable small and medium-sized businesses to obtain the debt finance they need to grow. Our fintech platform, which we developed to address this problem, is being used by a number of leading banks globally, and by us in the UK. To create a single brand to support this mission, we have changed ACORN machine’s name to OakNorth Analytical Intelligence (ON AI).
“In terms of how OakNorth AI assists lenders, it essentially combines our credit analysis and underwriting expertise with machine learning to enable credit papers, the 30-40-page documents that banks’ credit committees use to make informed lending decisions, to be pulled together in days rather than the weeks it would normally take. The platform then proactively monitors the financial and operational data of every borrower in a bank’s portfolio, flagging up any potential issues to assist in reducing the likelihood of a late payment or default in the future. This means that transactions can be completed in much shorter time frames, with incredibly robust, private-equity level underwriting, and ensure that banks have a clear view of their SME lending portfolio at all times.”
5. Few trends that you want to predict for the Indian Fintech industry?
“The fintech scene in India is incredible and the start-up scene is much more buoyant than the UK. The innovation coming out of India is unbelievable. Back 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 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 a 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.”
6. What are Oak North’s goals for the year ahead?
“We have a relentless focus on helping small and medium sizes businesses across the world that is 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 teams 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.”
7. OakNorth is referred to as a ‘rare breed of Fintech unicorn’. Your thoughts on this.
“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 license 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 percent 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.”
8. What are the hurdles in the Fintech industry?
“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.”
9. You being on a pivotal role for an organization that has seen growth since being founded, what advice do you want to give to the young ideates?
“Don’t sell too soon. As Copal grew, we began to get noticed. We had one offer to sell for a million dollars that was considered. Luckily, that buyer walked away. Then, in 2006, we had another offer for a lot more. We thought seriously about selling the company then—it was quite a lot of money and tempting, but we decided not to sell as we knew we had way further to go. By the time we did sell in 2014, we had a deal that would return over 175X capital to our original investors. So, my advice would be to think about ways of taking cash out of the business without having to sell it. For example, a dividend recap allows the founders to take cash out without having to sell their business.
“Too much money in the bank when starting out is a bad thing. When a company has too much capital available upfront, it tends to be built on fundamentally bloated cost structures. Spending more money than is necessary becomes a part of the company’s DNA and changing this is hard. Having little to no money forces businesses to operate from a mentality of scarcity, and these businesses end up operating much more efficiently. We started Copal with just £40k so even though it was much easier to raise capital to start OakNorth, we still took a very frugal approach, ensuring we didn’t spend a penny more than we absolutely needed to.
“Make your employees investors. One of the best decisions we’ve made at OakNorth is giving our team the opportunity to buy equity, rather than just giving it away in the form of bonuses. Our teams have invested circa £3m in the business. When someone has skin in the game, it completely changes their mindset. They start to think like an owner in the business. They care that much more, negotiate that much harder, and understand just a little bit more the risk that our clients (the business owners we’re lending to) have taken in setting up on their own.”
10. How do you think technologies like AI and ML disrupt the analytical intelligence industry?
“I’d probably be writing for the next month if I were to explain how AI and ML is disrupting the analytical intelligence industry but in terms of how we’re using it to change how things are done in our industry (i.e. business lending), this is obviously done through our platform, OakNorth Analytical Intelligence.”
11. Lastly, any major announcement that you want our readers to know?
“We have plenty of major announcements coming soon. Watch this space!”