OakNorth may be the jewel in SoftBank's crown, worth $2.8 billion and profitable. Its new CEO comes in as the bank looks to enter hypergrowth without burning cash.

OakNorth

Sunil Chandra, OakNorth's new chief executive.

• OakNorth is a UK bank which lends money to small- and medium-sized businesses. It is one of the few profitable, high-profile startups backed by SoftBank's $100 billion Vision Fund and worth $2.8 billion.
• The startup recently appointed Sunil Chandra, and experienced executive formerly of Google and Barclays Capital, as CEO, marking a period of international expansion.
  
• The company claims working with SoftBank has been "wonderful" even as other Vision Fund portfolio startups draw scrutiny over their business models and extreme growth.
  
• Chandra was specifically brought in to ramp up the startup's scaling plans as it looks to strengthen its grip on an estimated $7.9 trillion market.
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It's been a tricky year for SoftBank and its $100 billion Vision Fund.

The fund wants to be a kingmaker, but turbulence at its most high-profile investments - Uber, WeWork - has raised questions about its investment strategy.

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But there is one standout in the portfolio that bucks the trend, British lender OakNorth.

OakNorth loans money to small- and medium-sized businesses. It raised $390 million from the Vision Fund, as part of a wider $440 million round in 2018, one of the biggest for a UK startup. It has quietly disrupted the $7.9 trillion mid-market lending space.

The firm is valued at $2.8 billion as a result. It is also profitable, making it a rarity both in the Vision Fund's portfolio and on the wider unicorn scene.

In October, OakNorth hired ex-Google, McKinsey, and Barclays Capital executive Sunil Chandra as CEO to kickstart the next stage of the company's journey. Chandra takes over the job from Rishi Khosla, OakNorth's cofounder.

Chandra met Khosla six months ago in New York and took over to help build what he describes as a "generational company."

"When I met OakNorth it reminded me of early days of Google, you have great founders and a young team that's really focused on building a generational company," Chandra told Business Insider in an interview.

"I have experience from Barclays Capital and McKinsey, before Google, in Asia and China but despite different industries and geographies the scaling experience is similar and that's my background so I'm here for this hyper-scale period."

While at Google, Chandra helped scale the company from 7,000 to 100,000 people.

That OakNorth is switching out its CEO while it enters a growth phase is a marked difference from other SoftBank-backed founders who have, perhaps, stuck around too long in the top job.

Uber's cofounder and one-time CEO Travis Kalanick was publicly ousted pre-IPO, and more recently WeWork's Adam Neumann stepped down from the top job after months of lurid stories about his own behavior and his company's business model. Both were replaced by more experienced executives.

OakNorth made $44 million in pre-tax profits in 2018

OakNorth

OakNorth cofounder Rishi Khosla has stepped down as CEO and handed the reins over.

OakNorth was founded in 2015 by Khosla and Joel Perlman, who sold their previous business to Moody's in 2014. The two remain involved in the running of the business.

The company has a full banking license in the UK, but its focus is bespoke lending to companies around the world.

Notably, OakNorth has reported profitability claiming figures of a pre-tax profit of £33.9 million ($43.6 million) last year having lent more than £2.5 billion since launch.

OakNorth funds its lending through equity and deposit functions in its customer base and specializes in customized small business lending.

That sector of the market generally sees loan sizes of between $1 and $25 million and OakNorth offers a variety of credit facilities to small businesses which make up some 95% of the available market worldwide. The company's own research into current and potential markets for growth estimate that the overall volume of potential loans could be $7.9 trillion globally.

Mid-market loans typically include stronger covenant packages, more frequent and transparent financial
reporting, and often have higher amortization payments.

In basic terms, the lending conditions of these products are generally superior to other forms of corporate debt with the upshot being that OakNorth can be more stringent in its terms. This may also explain the sector's low default rates, with OakNorth claiming to have never had one so far. That could be tested in the event of an economic downturn, but for now things are rosy.

"It's where the money is there to be made," Sarah Kocianski, head of research at fintech consultancy firm 11:FS, told Business Insider in an interview. "OakNorth has gone after a very specific sector of the market which has more complex needs than the usual retail banking sector and have been very successful."

It's unusual for a company to be profitable so early on, particularly in an age where mega rounds and curious financial metrics are in vogue, but OakNorth has no plans of taking money for the sake of it.

"Our great joy is that from nine months in onward we have been profitable and want to do that year after year and still be extremely aggressive in our growth agenda," Chandra said.

"We're not looking at raising more capital and we're not burning more capital. That's the business model, high growth, very disciplined execution, run it like a business that has profit and profit margins across it."

OakNorth has staved off the WeWork aftershocks

Profitability appears to have made OakNorth's relationship with its main investor easier.

SoftBank, after the WeWork fiasco, is reportedly doing additional due diligence on its existing portfolio to make sure there isn't a second PR and financial disaster on the same scale. One such example was car leasing company Fair, which saw hundreds of layoffs and a change to its business model following SoftBank investigations while insurtech firm Lemonade delayed its IPO after markets were spooked by WeWork.

Michael Kovac/Getty Images for WeWork

Former WeWork CEO Adam Neumann.

And there are jitters at other SoftBank firms. Oyo, the Indian hotel company, is drawing closer scrutiny thanks to its apparent similarities to WeWork. Dog-walking startup Wag just lost its latest CEO and appointed a 29-year-old to take charge.

Equally, there has been greater soul-searching following the death of journalist Jamal Khashoggi at Saudi Arabian hands earlier this year. The kingdom is a major backer of SoftBank's Vision Fund.

SoftBank did not respond to requests for comment.

OakNorth said it not seen greater interference from SoftBank.

"Every company is different but SoftBank have been nothing but wonderful investors for us," Chandra added. "Really nothing has changed, we're a small part of their overall portfolio obviously and we're profitable so we have not had a change."

The company has raised $1 billion to-date from investors including GIC and Clermont Group.

OakNorth says it wants to grow carefully, and launched in the US this year

OakNorth is planning its expansion carefully, focusing initially on the US.

The startup has 35 staff in its New York office with the world's deepest lending market a massive target for the company's growth going forward. It also has some staff in India.

The company's own research, seen by Business Insider, indicates that the current SME loan market in the US is around $1.6 trillion. Figures for Asia are higher, potentially $3.3 trillion, meaning there is no shortage of potential customers for the startup.

Interestingly, OakNorth has been keen to utilize SoftBank's contact network both via partners, board members, and other portfolio companies to accentuate this growth. "Given our opportunities we will take all the help we can get," Chandra said. It's a common trait for Vision Fund portfolio firms to do business with each other.

The company wants to stay committed to a core plan. "There a few different things that we want to maintain as we grow: stay customer obsessed, keep a strong executive team, invest in top talent plus people and culture these serves you well when hyper-scaling and helps you maintain agility," Chandra added.

"I want us to stay very close to customers to ensure we know what delivers the most value to our customers."

OakNorth says it is highly differentiated thanks to its financial forecasting

Perhaps the key point in OakNorth's growth plan is the continued expansion of OakNorth Analytical Intelligence, its forecasting service.

It helps lenders decide who to loan money to, increasingly important in an age of booming corporate debt.

OakNorth explains its advantage thus: "Overall, our model is man and machine. We have a large data set and repository plus propriety information and reference data," Chandra said. "But the secret sauce on top of that is credit science which is the moniker we use for credit analysis done by really really fantastic analysts from world's top banks alongside machine learning and data to really understand which companies need which credit facilities and how they are going to do in the future."

Using AI to automate much of the credit analysis process is helpful but so is licensing its solutions for third parties.

In overseas markets, other financial institutions can purchase OakNorth's white-labelled software and use it within their own businesses with one notable example being a deal with Dutch lender NIBC.

The company also competes on savings products by offering competitive interest rates on short term bond issues, for example. It found more customers for its products through a tie-up with fellow London unicorn Monzo.