Think big and raise capital early: Fractal's Srikanth to entrepreneurs

Srikanth Velamakanni, founder, Fractal Analytics Inc.
Srikanth Velamakanni, founder, Fractal Analytics Inc.

Summary

Most companies don't go out of business because they have a bad idea. They go out of business because they've run out of money, says Fractal founder Srikanth Velamakanni

MUMBAI : The initial days of starting up are never easy for any founder. And they weren't easy for Fractal Analytics' Srikanth Velamakanni either. The company, which had been toying with artificial intelligence (AI) long before it captured the imagination of entrepreneurs around the world, became a unicorn or a company with a billion-dollar valuation in 2022, nearly two decades after its inception.

Velamakanni advises founders today to seek capital earlier than later. "Most companies don't go out of business because they have a bad idea. They go out of business because they've run out of money...so, capital gives you that survival advantage because you'll fail multiple times."

Also, according to him, it is better to have a small stake in a large pie than a large stake in a small pie. “I will tell any entrepreneur: Raise capital earlier than later. Again, you will get contrary advice from multiple people; I would say capital helps you prolong the journey and gives you multiple shots at success."

Founder Diaries
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Founder Diaries

In an interview with Mint, the IIT-IIM graduate recounts his 24-year journey as an entrepreneur and what inspires him as the company prepares for its next phase of growth.

Tell us about your journey. Did you always know that you wanted to be a startup founder?

Quite the contrary. I grew up in a small town in Assam. My father worked for an oil company, and I was certain I would always work for other companies, never as an entrepreneur. There were two main reasons: First, we came from a middle-class family; we didn't have that much capital to start a business. I assumed you needed significant capital to start a business, which we didn't have. My second assumption was that there was no such thing as an "honest businessman"; that it was an oxymoron. My dad used to say that, and it was something I was not comfortable with. During my MBA, I even avoided a course on entrepreneurship because I was convinced I’d never need those skills. Things changed and I became an entrepreneur. But certainly not something I had planned.

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You became an investment banker after doing an MBA. What made you switch to entrepreneurship within just two years?

Two significant things happened. During my MBA, I took a course on business ethics taught by professor Deepti Bhatnagar. She was inviting a bunch of entrepreneurs to talk about business ethics. One of the people who came was Narayan Murthy of Infosys. He spoke about how he was building Infosys. Infosys was still a startup; it had just gone public but I was inspired by the story of how he built Infosys. That story made me rethink my assumption—if a company could be that ethical and build a reasonably large (business), maybe my assumption of an honest businessman being an oxymoron needed to be revisited.

Secondly, this was around the dot-com boom, where many startups were raising capital. My friends were starting businesses, and I had to revisit my assumption that I needed capital to start a company. When those assumptions went away, I think it cleared my path to entrepreneurship.

You started with a data analytics business. How did you go about solving problems for clients and building your clientele?

We started differently than most. After the dot-com crash, we had to find something where we could add value. We realized we were good at math, and I had a great interest in human psychology. So, we thought about how to use math to help companies do something. And it turned out we helped companies make better decisions for their data.

Our first project was with ICICI Ltd, where we pitched the idea of using statistical scorecards, which are analytical models, AI models, which tell you which customer is likely to default on a credit card based on the customer's past information.

Capital gives you a survival advantage because you'll fail multiple times. What is the cushion? It's the capital that prevents you from going out of business.

We built a 30-minute loan product that ICICI launched. The idea was anyone could walk into a branch and get a loan, or a store, let's say, a consumer durables store, buy a consumer durable, get a loan and walk out of the store with the product. We wanted to enable that through credit scoring.

We realised that this was exciting because you could use math, you could build algorithms to figure out human decision-making and company decision-making, and we could also use human psychology, (through which) we were predicting who was going to default on credit cards.

That led to us building this business as an analytics business over the next many, many years. Now, we do a lot of work in AI (artificial intelligence).

AI and analytics are essentially the same continuum. It is about decisions and powering those decisions using algorithms and data.

Why couldn't you do this in investment banking, where math, algorithms and human psychology are also crucial?

Math in investment banking was interesting, and it led me to enjoy it to an extent.

As I was doing that, I realised it was not very meaningful—in the sense that a lot of the value of this came from regulatory arbitrage, how much capital you have to allocate for what kind of risk.

I was growing a little sour with the financial services industry because I couldn't see the value addition. It was fun but not meaningful. So, that was also something that triggered me into starting Fractal.

Besides, ICICI, were you looking at other clients at that time? When did you realize this could become a business?

We knew that we wanted to use math to make better decisions. So, we were looking around for other companies, thinking of good ideas to pitch to various companies. One of those conversations I had was with Unilever.

I met the chief economist of Unilever, Dr Roy—who was a very interesting, philosophical, wise man. The first time he met me, he said, 'You know what, I'm going to give you the data, but show me some joy with the data.'

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And we showed him joy. We looked at the data of customers buying products and recording each of their consumption. It was magical to see customer behaviour reflected in the data set—because you could see what they were doing at a different time.

It was intoxicating, and that's when we knew that this is the holy grail of business—to make better decisions with data. We never looked back after that.

You mentioned the joy of working with data. Can you share other instances where data fundamentally changed your approach and reinforced your belief in your startup?

I don’t want to create any misconceptions—there’s very little joy in a startup at the beginning. That is the truth. A startup is a lot of struggle. Remember, what's happening in a startup situation is an entrepreneur is saying: I think the world should be working in a different way, and I'm going to achieve that reality. The world is like this. It's broken. I got to fix it.

The good reason to start a business is you see something wrong with the world, and you feel like I can't I simply cannot wait another day to fix it. You feel energized by a problem, and you feel like you want to solve it and you want to spend your life solving it.

It's just that no one else cares about it. No one else wants to help you get there. You are alone, trying to do that. There's a lot of struggle involved. There is some joy every time you make a little progress. There's a sense of joy for having achieved the progress. But there is an incredible amount of frustration because 99% of what you do is not going to work. You're failing repeatedly. You're finding it hard to hire people. You're finding it hard to convince investors, or clients, or landlords that this is worthwhile.

The joy is occasionally when you see something you did works out, but an entrepreneur is instantly going back and saying: Okay, I've solved this problem. Let me solve the next problem. You're always sort of chasing that high of the struggle rather than just the rewards.

Was it easy to convince people to pay for your services?

Not at all. In the early days, people would say, I will pay you if I succeed, and therefore, prove to me that this is successful. And instead of (selling a model), we had to sell the outcomes of this.

We would say: We'll prove it to you, we'll do it for free. If you like it, you pay the next time you work with us. That was the initial days.

How long did you have to do free work before things got easier?

The first year to year and a half was the hardest. After that, it was a lot easier.

Even after that, with new clients, we still had to prove ourselves. I remember in 2004, four years after we started, I pitched to the chief executive of Citibank India (Sanjay Nayar, who later became the India head of private equity firm KKR).

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I pitched the idea that (they) should be using more data, more analytics, more AI to make better decisions. And he said: You know what, we have 150 PhDs sitting in New York. How can you hold a candle to that?

We took on the challenge. We told them: If you don't think our models work, then don't pay us. So, this became like a contest.

We built a model. The idea was to cross-sell a personal loan to a credit card customer. Our models were super accurate, and Citibank became a client.

Did this help you in selling your models globally?

We realized very early on that what we did was very global in nature, and we could solve for anybody in the world.

We initially expanded to Singapore, working with Visa and its member banks across Asia, focusing on customer segmentation and profitability for Visa credit cards. Then we made a trip to the US and built a little base in the US. We realized that our global clients like what we do. So, our business became much more international and global very early on.

This became a big pivot for us—not rely too much on Indian clients, but to make the business global.

The lesson here is that if you're a B2B (business-to-business enterprise, it's often more sensible to focus on global markets rather than just India. India can be exciting but challenging with demanding clients and lower financial returns. It makes a ton of sense for you to focus on the rest of the world and not on India. India is very challenging and exciting—clients are very demanding, but there's not much money to be made.

I would say (B2B, especially SaaS) entrepreneurs should think of completely pivoting to a new global market and dropping the India business if they want to be successful.

Has your hiring process changed now that you are more established?

Honestly, it hasn’t changed much. From day one, despite our limited bargaining power, we set very high standards and were quite selective about our hires. Initially, we hired maybe five to ten people a year, but now it's about 2,000 annually. Last year, we received 400,000 applications and hired only one in every 200, a very rigorous process.

We run a test that gives us an idea of their raw IQ. Then we see other things like attitude and (look for candidates who are) humble, hungry and smart.

Are these qualities—humble, hungry and smart—also important for entrepreneurs?

Absolutely. Some entrepreneurs start without humility, but entrepreneurship is an ego-crushing experience. So, humility—you already learn in the process. The other quality is that an entrepreneur must have resilience; emotional resilience, the willingness to pick up the pieces and start again, not giving up quickly. This is a very hard skill because entrepreneurship is a lot more about failure than about success. You fail 100 times before you find some success. And therefore, are you going to try the 101th time?

Entrepreneurs must be able to face failure repeatedly and continue trying with persistence and adaptability. The other one, I would say, which is an additional quality an entrepreneur needs to have, is the ability to convince people in the world and raise capital. So, you need to be a salesman in some way or the other. You have to convince investors, employees and others. You have to get people to buy into the idea that the world should be different, and (you) are going to make it happen, and you better believe in me.

When did Fractal reach the point of needing external capital to fuel growth?

We needed capital right from the start. Without any significant savings or capital reserves, raising funds was crucial for our survival. So, initially we raised a small amount of capital to get us going, and that was very, very instrumental in our survival. Capital gives you a survival advantage because you'll fail multiple times. What is the cushion? It's the capital that prevents you from going out of business. Most companies don't go out of business because they have a bad idea. They go out of business because they've run out of money. You have to have enough capital. And I will tell any entrepreneur: Raise capital earlier than later. Again, you will get contrary advice from multiple people. I would say capital helps you prolong the journey and gives you multiple shots at success.

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They could end up diluting a lot at the beginning.

It is true. Look at it this way: Would you want to have a large share of a small pie or a small share of a very large pie? It's always better to make the pie bigger. Entrepreneurs are about creating a bigger pie. It's not about a bigger share. The modern entrepreneurs are thinking of changing the world. Your satisfaction comes from having fixed something in the world. In the process, you will automatically become better. If you build a big enough idea, money will take care of itself. You don't have to worry about that. So, I would always urge entrepreneurs to build a bigger idea and get more capital rather than have a much larger share of a small idea.

Many Fractal employees have gone on to become entrepreneurs themselves. What advice do you give them?

Fractal has spawned multiple entrepreneurs—not just the incubated businesses, but we've taken pride in the number of people who became entrepreneurs after having spent time at Fractal. So, anyone who wants to be entrepreneur is welcome.

Now, what is your hunger to be an entrepreneur is also the question.

If you're saying: Hey, I'm secure, all the money is there, now I want to be an entrepreneur. Maybe, your chance of success actually goes down when you have too much security.

If you're technically qualified, if you're reasonably technically sharp, and your business is a tech business, then MBA is a net negative because MBA gives you a lot of other tools.

Because now, you don't have to succeed. You don't have the fire in the belly to get out there. So, you have to examine your motivations for entrepreneurship. Why do you want to be an entrepreneur?

This is a question that everyone has to ask themselves.

There are three reasons why people start businesses, which are wrong.

To make more money. No, entrepreneurship, in general, does not make more money.

To have better control over your life. No, you can't have better control over your time.

Entrepreneurs, every time, get sucked into everything.

And three, I want to be my own boss. No, for an entrepreneur, everybody is your boss because you have to convince the whole world initially. If these are the reasons why anyone wants to start a business, these are bad reasons. The good reason to start a business is you see something wrong with the world and you feel like, 'I can't, I simply cannot wait another day to fix it'. You feel energized by a problem, and you feel like you want to solve it, and you want to spend your life solving it.

Do you often return to management colleges to speak to students?

Yes, I frequently return to MBA settings to discuss career paths, including entrepreneurship.

Most people get into the MBA thinking of a job in mind or entrepreneurship in mind, and they spend the two years fighting with all other students out there in order to be slightly ahead of them in grades and have a slight advantage in placements.

I would say that MBA is all about making and building those relationships. Throughout Fractal’s history, through my engineering days and through my MBA days, I met so many friends without any conscious awareness of that. All of those friends have been instrumental in Fractal's success—our first client, our employees, our investors, our references, everyone has been a classmate or a college mate or something like that, and that has become very helpful in Fractal's overall success.

So, the network that you build during MBA and the investment you make in building those friendships with people is vital to your success in life and the future because 20 years out, these are the people who will be running the world some way or the other. If you build those relationships now, you can help them and use those relationships 20 years later. You can't build or start building those relationships 20 years later.

Do you think an MBA is necessary for entrepreneurship?

In this, my opinion has changed somewhat in the last few years. If you ask me, till very recently, my opinion was that an MBA is not necessary because what it teaches you is mostly common sense. There's so many successful MBAs, so many successful entrepreneurs who have no MBAs, and I would say that they stay sharp—MBA makes you too well-rounded, and it takes off your edge.

Now, my view is a little more nuanced. If you're technically qualified, if you're reasonably technically sharp, and your business is a tech business, then MBA is a net negative because MBA gives you a lot of other tools, but the reason you are successful—your sharp technical skills—becomes dulled in the process.

So, I would say if you're technically strong, and you're the CTO type, then do not do an MBA. It's a net negative.

If you're the CEO or co-founder type, then MBA does add value because what I now think of as common sense of how to deal with people, how to deal with investors, how to deal with leadership issues, I (have) realized that the ones who do not have an MBA, they struggle with it a lot. They don't have the right answer. Because the basic framework of how to run a business and how to think about management, these are some things that you learn while doing an MBA. So, an MBA does work if you are the CEO type or a co-founder or if you were the salesman type of a co-founder.

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Is it helpful in raising capital?

I haven't seen the data on this, but I would be surprised if MBA gives you any extra edge in terms of raising capital. I would say that a lot more investors would be convinced if you have a really sharp product, sharp tech and enough business skills rather than you're a super businessman with a mediocre product. I think you're more likely to get funding in the first scenario.

Is capital a constraint anymore?

At Fractal, there are no capital constraints.

But, in general, for entrepreneurs, capital is a huge constraint. While there's so much money chasing so few ideas in the world, globally, there's a glut of capital, too much capital, with an insufficient number of ideas. If you see from the entrepreneur's point of view, it's very hard to raise capital, and most companies just fail because they haven't been able to raise enough capital to survive till they get to a product market fit, etc. So yes, from an entrepreneur's point of view, capital is one of the biggest constraints. And if you know how to raise capital, if you can convince people to believe in your idea and give you capital, you will have that much higher chance of success.

Can AI make entrepreneurship easier?

I guess AI could make some of the managerial decisions easier. AI could be a little coach and advisor answering questions. An example of that is what we built as Marshall bot. Marshall Goldsmith is the world's leading executive coach. We've taken his three million words, all his videos, everything that he's written, and put it into a bot which gives you life advice, management advice, so you can talk to Marshall bot and Marshall, in his own voice, answers those questions. It's all free, completely free for everyone in the world.

So, can AI make the world's knowledge accessible to me in real-time in a way that I can use better? Absolutely, to that extent, entrepreneurship could get better.

AI can give you ideas. It can help you create better pitch decks. It can create a number of different ways in which I could be a better entrepreneur if I leveraged AI in building my business.

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