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21 years, a lot of struggle, profitability: How Fractal finally became a unicorn

One of the few profitable unicorns, Fractal is also a successful turnaround story after recovering from a huge setback in 2007 when some of its founders left the firm over the choice of the CEO and the company lost one of its key clients.

January 06, 2022 / 02:56 PM IST
Srikanth Velamakanni, group CEO of US-based artificial intelligence firm Fractal

Srikanth Velamakanni, group CEO of US-based artificial intelligence firm Fractal

US-based artificial intelligence (AI) firm Fractal, which became the second unicorn in 2022 with the latest investment of $360 million from private equity company TPG Capital Asia, is not a usual company.

At a time when startups are becoming unicorns in six months, here is a company that took 21 years to get there. One of the few profitable unicorns, Fractal is also a successful turnaround story after recovering from a huge setback in 2007 when some of its founders left the firm over the choice of the CEO and the company lost one of its key clients.

Fractal was founded in 2000 by five graduates from IIM Ahmedabad in Mumbai to help consumers make better decisions using analytics. Only two of the founders remain: Srikanth Velamakanni, group CEO, and Pranay Agrawal, CEO.

Velamakanni said back then nobody knew analytics nor did they want it, and it was all fine. However, after the firm's breakthrough with ICICI Bank and HDFC in India, the company decided to move business to the US in 2005 where the opportunities were significant.

Fast forward to 2022: the firm is now valued at $1 billion, after the $360 million from TPG. Fractal employs 3500 people, and is on its way to register $190 million in revenue. Bullish about growth, it has plans to hire 2000 people this year. Velamakanni says the next target is to reach $1 billion in 4-5 years.

In this interaction with Moneycontrol, Velamakanni talks about the firm morphing into a unicorn, what's next for Fractal and the company's early days as one of the first analytics firms in India.

Edited Excerpts:

After 21 years you are now valued at $1 billion and are now a unicorn. How does it feel and what is next for Fractal?

My goal is to build this company for the next 100 years and ensure that it remains solid. Being a unicorn is a small milestone in the scheme of things when you look back 10 years later. But I think the next step really is to be a public company. Our focus is how to be really client-centric. As Jeff Bezos keeps saying, if you're really client-centric, then you have to invent on behalf of your clients. So we have been doing that. We have been investing 10-20 percent of our revenues in building new products. We also have been investing in newer areas of research such as computational neuroscience, and quantum computing. With digital acceleration, we are seeing an uncapped demand situation. So I'm looking forward to what's next.

You started the company in 2000, when analytics wasn't as mainstream as it is today. It has taken 21 years to reach $1 billion, whereas some companies have been able to do that in 6 months. Could you talk more about your journey?

In those early days this was such a new space. You must have heard of the proverbial selling of shoes in Africa, where nobody wants shoes, and nobody has shoes. So in that sense, nobody wanted analytics, nobody had analytics, and it was all fine. We were trying to educate everybody, and it was hard to sell initially. The first year was pure startup mode, like sleeping in the office type of situation. We found initial success with ICICI Bank, where we worked to create the 30-minute loan product. It was a product where anybody can walk into a store, buy a product, get a loan and take the product home, like a TV or a flat screen TV. So that was the first of its kind in India to use a risk model. Some of the fin-tech companies are using some of those techniques now, 20 years later. Then, HDFC Bank was another big success. They became so good in risk management that in 2008, they were the most stable bank, certainly in India from a credit standpoint, because they had such solid mathematical risk models that we had built using analytics and AI predictive models.

So we realised very early on that what we are doing is making a huge difference to the world, and we just have to wait for our time to come. So we moved the business to the US as we realised that very big companies have huge problems that we can solve for them. That change in focus coupled with movement in AI helped us reach here at this stage. But obviously it's not nothing, it takes a long time to get here.

Now AI is everywhere, and it is just powering our lives in a very significant way, like improving the video quality of this call. This transition has happened in the last 10-15 years.

You started with Indian clients, and moved to the US chasing opportunities. Could you throw more light on the revenue split-up?

From where the clients are headquartered, it's largely US, Europe and Australia, with a revenue share of 70 percent, 25 percent and 5 percent, respectively.

You had shared earlier about building the company for 100 years. Can you share more about how you are building it? Do you have an internal goal for the same?

So the way we visualise it is that in the not-so-distant future, many decisions that companies will make will have AI, analytics and algorithms involved in them. Companies will be more profitable, productive, customer-centric, and secure, because they have used analytics and AI to power those decisions. We want to be in that place where a vast majority of the Fortune 100, 200, 500 companies trust Fractal to do that for them. So that's really where we want to be. That's how we visualise our success. To do that we have to have a great workplace and work culture. So that's something I would like us to be known for.

From the revenue standpoint, I think the next logical step is to think of $1 billion in about four or five years. That is where we are headed as a next step.

And when do you plan to go for the IPO? I know, you've been talking about it, but any timeline which you can share?

I don't think I can share any specific timeline at this point of time. But suffice to say that we would want to be public sooner than later. But we are in no hurry, either.

Why is the huge focus on going public? Is it the increasing investor interest the space has seen, or is it driven by other factors?

Wanting to be public has other benefits, which like I said is long-term thinking. Also any private equity player has a horizon, some have longer, and others shorter. Only when you're truly public can you have permanent capital, and that's when you can build it for the really long term. So I think going public is consistent with being positioned for the very long term. And that is the attraction. It is also helpful that, market certainly seems to value these sorts of companies quite significantly, whether it is LatentView here, or Palantir in the US. But to me, I think being public has a lot of other benefits of being accountable to all your stakeholders including shareholders, clients, employees, suppliers and the world at large. Being public also puts a spotlight on you to behave in a more sustainable way in the long term.

You not only had the challenge of starting early, but also had to face two of your co-founders leaving the company on bitter terms in 2007, and losing a key client General Motors. How much of a setback was that?

The road to success is not a straight line. There are some good things and bad things that will happen in anybody's journey. In some ways, co-founders exiting in 2007 was a setback. We were in a very good place and we suddenly had to take five steps backwards before we moved forward. So it definitely created its own issues. But then, if not that, something else would have happened. We were in a nascent market and first to start in the analytic space. But 2-3 years after we started, companies started springing up. Not many survived, and they all have morphed into something else or sold their business. What this teaches me is the value of perseverance and the value of grit. I feel good about where we are and this journey has been great. Every minute of this journey has been super fun. To fail, get better and grow bigger every day. So even if any setbacks happened, each of them was a huge learning experience.

Even as you see increased interest in analytics, bigger IT companies are getting into it. Is competition heating up and how will it bode for Fractal?

Yes, I think it (competition) is real. IT firms see this as the future and it's rightly so. I think that that also makes it clear that this is a big space, and it is here to stay. In that sense, the pie that we can address also becomes much, much larger. Think about it that way. It just opens up a huge space for us. We feel good about our capability, our ability to win. Certainly all competition is welcome and it only makes us better. Because more competition means that we have a higher bar to reach.

With increasing demand, are you stepping up hiring as well from 3500 employees?

Yes. We are looking to add 2000 people in 2022.

You are already the second unicorn in 2022 and it has been just week one of new year. What are your thoughts on being a profitable unicorn, which are so few in India?

We have been profitable throughout and generating cash from the early 2000s. The good news is that we do good work and clients pay. But we are not reckless with it (money). Let us say that we don't do TV ads and ads on cricket matches. We are investing in the right things, but we are not wasting any money on anything (unnecessary).

With IPO on the horizon, what are your thoughts about loss-making companies going public?

I think there is a case to be made for what we call blitz scaling. If you are a winner-takes-all market, you want to expand so fast that scale and speed are more important than profitability for a long time. There are some industries like that, for example, payments or food delivery. But there are some others, which are probably not like that. I don't think ed-tech is that space. Honestly, I don't feel that those make sense to me. Because I don't think it (ed-tech) is a winner-takes-all market. So I don't understand some of those businesses, why they don't make money and how they're building their businesses. But as far as Fractal is concerned, this is not a blitz-scaling business and that mindset doesn't apply to us. We are in a business that has many winners. Think of the IT industry, there are many winners in that space, and they're all doing well. We don't have to really be hyper-aggressive. So I'm uncomfortable with the choices that Fractal has made. And I know that some other industries have slightly different choices, and I'm respectful of the people who are making those choices as well.

Are there any regrets over the whole 21-year journey?

By regret, if you mean, would I do some things differently if I knew what was happening? Yes, definitely. There are quite a few, including the founders' exit in 2007. I wish I was a better CEO that they didn't have to leave. I could have been a better leader for them. So I do feel like I take very strong personal accountability for everything that's happened, especially the bad things that happened. So yes, I could have avoided a bunch of different bad things that have happened if I was a better human being, a better leader and made better decisions. But on the whole, if you look at it, I feel like this is good.

Swathi Moorthy
Tags: #AI #Fractal
first published: Jan 6, 2022 12:18 pm