Elliot Moss
Welcome to the Jazz Shaper’s Podcast from Mishcon de Reya. What you are about to hear was originally broadcast on Jazz FM however the music has been cut or shortened due to rights issues.
That was George Benson with Nature Boy. Welcome to another Jazz Shapers where the shapers of jazz, soul and blues collide with the shapers of business. I am Elliot Moss and today’s Business Shaper with a story to tell is Rishi Khosla the Co-Founder of the fintech bank firm OakNorth. Rishi started out with a Bachelor’s Degree in economics from UCL and went on to do a Masters in accounting and finance from the London School of Economics. This platform allowed him to understand fully the world of investment and he was an active and early investor to several companies including Indiabulls and Paypal. In 2015 he founded OakNorth where to date it has lent £1.5 billion pounds and clients that include Leon, Brasserie Bar Co, Gallear, Z Hotels and Frogmore. Rishi, hello.
Rishi Khosla
Hi, how are you doing?
Elliot Moss
Thank you for joining. Tell me about OakNorth, tell me about what was the thinking behind setting up this business back I think it was in 2014?
Rishi Khosla
2014/2015, we actually launched September 2015. I think it was pretty simple when we were building our last business we had actually gone to a couple of the major commercial banks and had totally unsuccessfully tried to get some financing for the business and predominantly because we didn’t have the hard collateral behind us even there we were a business which was actually growing at a good clip we had long-term contracts with top tier clients and we had guaranteed revenue contracts that the bank sort of said they won’t lent to us because they won’t even spend the time to analyse our business. A few months later we managed to raise a sort of hundred times the amount of debt that we were looking at from them from an institutional provider of finance and we said to ourselves something’s wrong with commercial banks in the way that they look at growth companies specifically and especially sort of companies which are in that scale up phase. So we looked at the problem and sort of said how large a problem is this for the UK and we figured if you actually have a look at where a lot of the activity has been for financing and sort of banks it has been around in the SME space it has been around how do I solve the loan for £10,000, £20,000, £50,000 whereas those companies they’re obviously vital for the country but they’re not necessarily the ones which are going to help propel the country forward in the same way that a company which is looking to borrow I don’t know £1,000,000, £5,000,000, £10,000,000 and really take that next leap up in terms of growth is looking to do and those are the companies in our view which fundamentally drive GDP growth, employment growth in the country and the ones which are being massively overlooked and underserved by the major banks. So our view was actually that’s a mission which is worth actually living for and therefore building a business around.
Elliot Moss
I mean it’s a great and the analysis must be right and indeed it’s been proved to be right but to say you’re going to do that and we’ll come to your first business in a moment, first significant business in a moment but that’s a massive undertaking. People don’t just create banks like that do they?
Rishi Khosla
I mean what was interesting is we started having the seed of the idea back in 2013 and started working on the project properly in 2014 and at that point in time you’d had one bank in the last one hundred and fifty years getting a new licence so the bar was pretty high. We actually figured that the opportunity and the problem for the country is so big that it is worth investing the time to try to actually build a solution around it and building it through a bank in our view is the most robust way to do that so it was definitely a large goal, a large ambition but you have to think big so and that’s what we love doing.
Elliot Moss
And you never for a moment thought you wouldn’t be able to do it?
Rishi Khosla
No because there’s never a plan B. There’s only a plan A.
Elliot Moss
Stay with me for much more from my Business Shaper today Rishi Khosla who is the Plan A man because as he said there is no plan B. Much more coming up from him CEO and Co-Founder at OakNorth the second or third bank I guess, you can tell me, that’s been licensed in the last one hundred and fifty X number of years. Before the bank though and I want to go back in time a little bit just at the beginning of the 2000s, around 2002 I think. You set up a business, tell me a little bit about that and why at the tender age of twenty-seven you thought that would be a good idea, why that was your plan A then?
Rishi Khosla
So back in 2002 we, I’d come off actually having spent two or three years investing, venture investing and during that period had a couple of reasonably big wins so seed funded a company called Indiabulls which has ended up at about a £16,000,000,000 market cap and Series B funded PayPal which obviously ended up reasonably well as well. But what I figured very clearly was actually you look at the best venture investors they’ve all been entrepreneurs and they’ve all built businesses and in a way the impetus for me actually starting in 2002 my own business was to almost prove my own worth as an entrepreneur so I could one day go back into investing which let’s be clear I’ll never go back into investing as a main gig.
Elliot Moss
That decision, you’ve made that one.
Rishi Khosla
Fully, fully because all the energy, all the activity, all the sort of charge is all in the front line operating. So that was original impetus, the business was basically around financial research and doing financial research in our view in a smarter way for the major global financial institutions. So again at the tender age of twenty seven I decided to write to the top ten CEOs of all the major global investment banks and ask them for a meeting to pitch to them my business and shockingly two or three of them replied and I had meetings with, not necessarily directly, I had a meeting with one of them with the other two with other people in the CEOs office and we ended up getting our first client that way and we sort of ended up in business.
Elliott Moss
Just like that.
Rishi Khosla
Just like that and with a lot of elbow grease and a lot of as I sort of say sweating blood we built that business into a three thousand employee company by using a total of $60,000 to build the business over a twelve year period.
Elliot Moss
And you sold that business?
Rishi Khosla
We did indeed to Moody’s.
Elliot Moss
To Moody’s, right and what did you learn about yourself in that sales process because it’s one thing having and I can already sense that you’ve got this energy and obviously an intellect which you put together to great effect. Selling is kind of I imagine its tiring, its emotional, its unpredictable, it’s probably a little unfair in some parts and you may feel out of control in others. Where were you emotionally at that time if you can recall?
Rishi Khosla
So it’s a real interesting question, so number one, zero emotion on doing any transaction okay and why do I say that? The first time we looked at selling the business was actually to sell it for 250K with a 750K earn out, okay. The second time we looked at selling the business was for £16,000,000 with like a £4,000,000 earn out. Both times the potential buyers walked away from us right and it caused a massive rollercoaster of emotions, right and we said to ourselves Joel and I, Joel’s my business partner that no emotions, right. We are going to strip emotions out of any transaction and actually we also stripped emotions out of actually winning new clients as well because you fight a lot and you can’t deal with the lows because it takes a long time to come back from the lows, right. So you should celebrate the highs but you shouldn’t go low the lows so our view was that we had to change our attitude this was very early on, the first two transactions were sort of 2003 and the next one 2004 or something, 2005 that type of time period. So when we came to selling the business there was zero emotion and we were absolutely willing not to do the deal. The actual deal was immense fun right because we had a situation where we had been negotiating, negotiating, negotiating we got to the Sunday and basically it looked like the deal was not going to happen. The buyers obviously they had courted in New York and I said to myself do you know what I’ve flown to New York so many times I’m going to get on a plane just to see if I can sort of recover the deal or not and if I can great, if I can’t I’m just going to turn back round and fly straight back right. So rocked up on Monday morning and sort of we managed within like six/seven hours to course correct, find a solution for the core fundamental point and what we agreed is we’re going to go into the office on Tuesday and we’re not going to leave the office until we actually get the deal concluded and so that’s what we did and we got back in on the, actually it was the Tuesday or the Wednesday so it was seventy two hours we ended up doing straight right, the meetings, it was my lawyer and myself on our side. On the other side there were about twelve/fourteen people sort of interfacing against us and through that sort of seventy two hour period straight right so without sleep, without anything, showering, you sort of ended up with literally it was on the Thursday night you had people sleeping all over on the floors, all over the place and we managed to get the deal closed, signed on like you know past whatever it was 1.00am or something on Friday morning and closed everything and it was great, it was a phenomenal experience, I enjoyed it a lot.
Elliot Moss
But no emotion?
Rishi Khosla
But no emotion. I was fully prepared to walk away from the transaction at any point in time even in the crux of sort of that session.
Elliot Moss
And what was the sale at that point? What was the value of that sale?
Rishi Khosla
It was a reasonable amount of money.
Elliot Moss
I had a feeling it might be. Stay with me for much more from Rishi Khosla my successful Business Shaper, CEO and Co-Founder at OakNorth you’ve just been hearing about his no emotion approach to his first big deal. Much more coming up from him but first some words of advice for your business from our programme partners at Mishcon de Reya.
You are listening to Jazz Shapers here on Jazz FM. Don’t forget if you enjoy what you’re hearing today there are many more ways to listen to the programme and the hundreds of guests that have appeared on it. You can ask your smart speaker to play Jazz Shapers where you can hear many of the recent programmes or if you pop Jazz Shapers into wherever you listen to your podcast you’ll get the full archive of past conversations as well. But today right here, right now it’s Rishi Khosla he’s my Business Shaper, CEO and Co-Founder at OakNorth and you took me, Rishi into a room where there were lots of smelly people sleeping before you did your deal. The lesson from that was no emotion. Tell me about then the emotional state you were in when you set up the next business were you as cool and as calculated, you saw that opportunity and you said right we’re just going to go and do it?
Rishi Khosla
So look setting up the second business after having been reasonably successful with the first was actually pretty tough because setting up the first business we had no cash, we had nothing to our name and in a way you put everything in and suddenly you’ve got a few pennies in your pocket and you sort of feel a little fatter and lazier right and you can’t build in my view a good business if you’ve got that type of attitude so actually stripping yourself back to the point where actually you took away that almost ability to say that I don’t need to work all night I can spend the extra money on X, Y or Z and actually going back to basics took an adjustment period of at least a few weeks and having gone… that adjustment period was tough because it was like why do I need to do this, you know if I want to go home at whatever 9.00pm and go see my kids before they sleep that’s what I should be doing opposed to sort of saying that I need to go to 2.00am or 3.00am that night. However having made that adjustment I would say that again the energy and sort of the spark and the hunger just fully came back and that’s what I’m running on.
Elliot Moss
And those hours you’ve just referred to it kind of gently you said ‘oh you know leaving at 9.00pm’, most people go ‘whoa 9.00pm’; Are you now still in that, I’ll do whatever it takes mode?
Rishi Khosla
I’m 100% in that mode. I mean I would say that every moment I’m awake I’m thinking about the business, I’m thinking about how to propel the business, I try to think about how I propel the business when I sleep and for me it’s 24/7.
Elliot Moss
And how are you avoiding burning out? You don’t look burnt out at all, you look really enthused and energised and so on but is there balance in your life?
Rishi Khosla
Look for me my life’s my work and my family right so my family brings my balance. I have four children and that’s what brings me my balance so I believe I have balance as my definition. Other people may not define it the same way but that works for me.
Elliot Moss
And your partner Joel is obviously a critical part of this equation. Tell me a little about how that dynamic works because this is kind of the second time round for both of you?
Rishi Khosla
Look in a way if anything its closer than a marriage because in a marriage you probably don’t spend that many waking hours together in the same way that Joel and I do. We work very intensely together for effectively sixteen years now. That equation for us works phenomenally well otherwise it wouldn’t have survived the period that is has and it works well because we know what to defer on which topics to each other and effectively we’re each other’s sort of have high believability as we call it. So…
Elliot Moss
You’ve even made a science of the emotion?
Rishi Khosla
There you go.
Elliot Moss
High believability, I love it. You’ve quantified when to defer?
Rishi Khosla
Absolutely.
Elliot Moss
That’s brilliant and why not.
Rishi Khosla
Exactly.
Elliot Moss
But right at the heart of your business is as I understand it the technology and there is a lot of it is essentially helping you make better decisions and quicker decisions so that the algorhythms, the machine learning piece of it. Just tell me a little bit about why you knew that would be important because that’s really one of the big innovations in the business that enables you to make big lending decisions quicker and better than other people?
Rishi Khosla
So fully, so we were very clear that if you look at the segment of companies wanting to borrow like I said for say £500,000 to £20,000,000 they just don’t get serviced in the same way that if you were looking to borrow £50,000,000 or £100,000,000 right because if you’re looking to borrow £50,000,000 or £100,000,000 you get a corporate institutional lender who is willing to go in, send an analyst in, do two or three weeks of work and actually put together a bespoke lending package which is very specific for that business. And our view was that is actually what a number of those companies in that segment require the companies which want to borrow £500,000 to £20,000,000 have attributes which are closer or needs which are closer to the large corporate businesses so our whole challenge was to say how do we apply that tool set to the smaller businesses efficiently and fundamentally using technology, using machine learning our view was that you could get there and I think we’ve more than proven that with what we’ve done with OakNorth in terms of actually bringing in machine learning into areas which I would argue machine learning hasn’t been used in previously to be able to bring the efficiency levels to actually looking at analysing businesses at speed but in high fundamental detail to be able to go back to a client with actually a very bespoke customised deal structure for them which is done as I said much more in the way than an institutional player would but for a smaller ticket.
Elliot Moss
Now in that obviously data and data scientists play a really important role and the conventional part of a business pre-technology was human beings interacting ensuring that they worked together. You’ve not got this interface with technology, it’s a fundamental part of your business. When you look at team and bringing on your team of however many people and the interface with tech how do you manage those because it’s a different equation isn’t it?
Rishi Khosla
It fully is and what we have which I think again is, makes the business tick is that we have credit analysts sitting next to data scientists right and the data scientists’ role is to continually help train models based on what the credit analysts are actually doing so the models get more and more intelligent as time goes along and that combination is critical for us.
Elliot Moss
Although you talk about the lack of emotional rather than the intentional removal of emotion from certain things, how much does emotion play a role in these things because historically if you go back to the good old or the bad old days depending on how you look at it if you wanted to borrow £8,000,000 from your bank you would have a conversation with Rishi the Bank Manager and the Bank Manager would have a conversation with a few other people, they’d look at their own numbers and they’d decide. Now it’s ostensibly a bit of technology making those decisions but there is a very important connection with your client so how do you ensure again that there’s that human side to it?
Rishi Khosla
So excellent point right. So for us it’s a combination of saying let’s have really strong analytics and analysis around the business and figure out how much we can lend and what structure we can lend with, coupled with, especially for larger loans actually inviting our clients into credit committee where they actually present to the credit committee and then you have the combination of the character, the individual coupled with the analytics to make a strong credit decision and that to us is an amazingly important combination. What we are not, and this is the way that large commercial banks have gone, are tick box lenders where effectively you just put numbers into a computer programme and the computer says no. That’s exactly what we’re fighting against and for us therefore what we view us having done is actually taking the institutional level of credit analysis and couple that with very old school meet the client and make the decision based on the client as well.
Elliot Moss
And that makes perfect sense and again just saying something publicly a couple of years ago it appeared in the press, a big two page spread in the times John Vincent had been on the programme a few times from Leon talking about his bank, you, OakNorth and the new credit line that he opened up as if he had just won the lottery. I mean in that sense which is extraordinary isn’t it in this day and age. Stay with me for my final chat with my Business Shaper today that’s Rishi Khosla plus we’ll be playing a track from the one and only Stevie Wonder.
That was Stevie Wonder with Don’t You Worry About A Thing. Rishi Khosla’s my Business Shaper today and has been for almost the last hour and we’ve been talking all about the cheeky person here who’s decided to reinvent what banking looks like but actually standing on the fundamentals which is talk to people, talk to your clients, have a relationship with them but the big thrust in the middle is the power of technology to make some really important decisions. Your business now has a valuation of $1.4 million I read and you’ve had a bunch of investment which would indeed make that figure correct. Doesn’t sound like that’s going to be enough for you?
Rishi Khosla
We like to think big and we have big ambition.
Elliot Moss
The money bit within that though Rishi what drives you, again you made a bunch of money on the first transaction it doesn’t strike me that that’s the thing that’s going to make you feel good about yourself?
Rishi Khosla
Do you know what there’s immense hunger to actually perform, to build, we’ve got a very clear mission, we’ve got a very clear vision and its actually performing against that to take this to a very significant scale size business which actually looks at attacking this particular problem in multiple markets around the world and that drives Joel and me immensely so it is the hunger to achieve, the hunger to prove which is the propeller for us.
Elliot Moss
And the achieving and the proving why is that important to you do you think?
Rishi Khosla
It’s important to me for myself in a way just, there’s a whole series of things through one’s life which creates hunger in you and that’s just continue to propel. I mean going from my first business to the second business we took a weekend off right so…
Elliot Moss
That’s intense, I mean that is intense.
Rishi Khosla
Straight from one to the next to the next.
Elliot Moss
Has this been a rebound from stuff when you were younger that you just had to feel that you were compensating or is it just because you know you’re a bright guy and in your head that means you’re going to achieve a certain thing and until you’ve achieved it you won’t be happy? You know if it is a decker what’s the name…
Rishi Khosla
Decker horn.
Elliot Moss
A decker horn, a 10 billion dollar or pound business. I’ve got a feeling you’re not going to be happy?
Rishi Khosla
No because I’ll be underachieving as well.
Elliot Moss
You’ll be underachieving so why is that pressure on yourself, where does that come from?
Rishi Khosla
I don’t view it as pressure, I view it as again a drive right so I view it in the positive rather than the negative. Where does it come from? I think there are always going to be formative events which actually create who you are and how you think and I think they’ve been a multitude of those in my life which have continually reinforced that hunger within me and have made me who I am so I do think it is very much sort of environment events which actually get you there rather than anything else.
Elliot Moss
And if you did have that decker horn, the decker horn business and then someone comes along and says we’ll pay you for it and you essentially make a bunch of money. Have you got any sense of what you would do with all that because as I think Johan Croy said ‘there are only so many steaks you can have in a day’. What would Rishi do and suddenly Rishi became a multi billionaire? A nice problem to have obviously but I’m just thinking, just trying to get under the skin of your relationship with money.
Rishi Khosla
So the drive is to build, the drive is to build and to as I say focus on the mission that we have and actually address this problem across all major markets round the world. What would I do, so therefore I don’t have a vision of selling this business in anywhere near the short or even medium term we will continue building this business right. However if I had a lot of liquidity what would I do? I mean look I have a relatively simple philosophy about how I think about money which is what you made is great, it’s all about what you’re going to do in the future, right so I’m not one of those people who will go off into the beach and sort of sit around. I’ll be focused on building my next business.
Elliot Moss
I was going to say you might give yourself a weekend off if you’re feeling generous?
Rishi Khosla
Exactly.
Elliot Moss
Really good luck with it, I’ve got a feeling there’s lot more to come and I look forward to the conversation in a few years when you have indeed gone global and the business is worth way in excess, way in the north of 10 billion. Thanks for your time today Rishi just before I let you go what’s your song choice and why have you chosen it?
Rishi Khosla
So Louis Armstrong, What A Wonderful World. Why have I chosen it,? Look I have an attitude where every morning I thank God for everything and my saying with my kids in the morning is have an excellent day. So there you go.
Elliot Moss
Here it is just for you.
That was What A Wonderful World by Louis Armstrong, the song choice of my Business Shaper today, Rishi Khosla. Brilliant advice around no emotions in a transaction and a sense of he is just going to keep on going until he gets to that serious level of value in his business. How does he do it? He is super, super intense.
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