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Fracta secures strategic funding from Kurita Water Industries

Strategic investment scales Fracta’s artificial intelligence platform for aging water infrastructure

Fracta (IH2O 2018) recently announced a $37 million strategic investment from Kurita Water Industries. We recently sat down with Takashi Kato, Fracta’s Founder and CEO, to discuss the company’s founding and new partnership with Kurita.

Fracta uses machine learning and big data to optimize infrastructure investments — starting with a water main pipe replacement prioritization solution for U.S. water utilities. Over a trillion dollars will be needed to replace the aging U.S. pipe main system before 2050. Fracta offers utilities an accurate, scalable solution to assess pipe replacement needs, forecast risk and control spending. Fracta gives utilities a comprehensive, up-to-date view of pipe network conditions, allowing managers to optimize replacement decisions and reduce replacement-related costs by 40 percent or more between now and 2050.

How did you start Fracta, and at what point did you decide to turn the idea into a business?

We started Fracta in June 2015. At the time, I was with a Japanese robotics firm looking to introduce a portfolio of technologies into strategic markets. We spent considerable time looking at robotics applications in the North American pipe inspection market — both in oil & gas, and in water.

My partner Lars Stenstedt and I spent considerable time in Houston meeting with oil & gas pipeline companies and refineries. Although we could see the market opportunity, it was apparent that we would be entering a crowded market. We gradually started to look at the water industry and realized that aging infrastructure represented a big, big problem. Lars and I began to survey water utility executives in the San Francisco Bay and realize that there were few, if any, solutions. We initially founded Fracta with the idea that we could run robots inside water mains to to detect the weakest part of the pipe.

That idea ran in to cost implications pretty early, so we started pursuing software solutions. I began engaging software experts and soon met Daichi Yoshikawa at the Stanford University Artificial Intelligence Lab. I just happened to meet him in the lobby. We quickly bonded as we were both Japanese and I immediately pitched him on coding for our idea. Soon after graduating from Stanford he became our CTO.

Daichi’s coding quickly convinced Lars and me that we could develop machine learning software that would change how people in the water industry conduct condition assessment. However, we were still operating as a subsidiary of a Japanese robotics company where hardware was the priority. Lars and I then purchased the U.S. operation ourselves and changed the name from HiBot USA to Fracta.

We took a round of venture capital funding from AI/Robotics Venture Strategies to grow the Fracta concept. We entirely abandoned the robotics space and took a laser-focused approach to machine learning in less than a year. So that’s the inception of Fracta — we started as a hardware/robotics company in the oil & gas sector, but eventually became a software and machine learning business in the municipal water industry.

What’s been your approach to introducing AI solutions to water utilities and agencies? It seems like only a handful of companies are bridging the gap between the technology and actual customer needs in water.

It’s incredibly painful to acquire customers in the municipal water market. As a result, the competition for AI solutions is not as intense as it is in other markets. We pursued corporate strategic investment precisely for this reason. I knew Fracta could survive in the market and secure considerable market share. We had to plan for the long-term and had to abandon the venture model. We wanted to place ourselves strategically in the market, understanding that growth might not happen for several years. Although we are in AI, we operate in the water industry and must operate on a vastly different timescale than the venture model.

Customer engagement, from an early-stage, has been core to our growth. In addition to engaging two of the largest municipal utilities in the Bay Area, we were able to work with investor-owned utilities including SUEZ in Pennsylvania and New Jersey as well as American Water’s operations in Tennessee. These partnerships provided reference customers in both the municipal and investor-owned models. Working with these four partners enabled us to build on our minimum viable product before pushing it out to the market.

Creating a professional sales organization was also important to Fracta. We hired Doug Hatler to lead this effort and he’s done a great job creating an approach that is reflective of the relationship-based customer networks in water. We’ve now hired sales reps in California, New England, the Great Lakes region and Texas. Doug and his team have also made a point of engaging groups like the American Water Works Association and the Rural Water Association.

Fracta’s partnership with Kurita will enable us to grow our sales team. Kurita has been in the business for over 70 years, enabling Fracta to align with an established brand.

Kato-san, you’re really an outsider in the water sector. Yet, you enter as someone who successfully sold a robotics business in another industry. What’s been your experience entering water?

Yes, I’ve been fortunate to be involved with some incredible entrepreneurial outcomes. Google acquired my previous company SCHAFT, a humanoid robotics venture. Eventually that got reacquired by SoftBank now, so it’s been a fun journey. Nothing is simple. At Fracta we’ve pivoted two times from robotics to artificial intelligence, and from the oil industry to water industry.

Entrepreneurship is all about pursuing the opportunity. For me, my career has really been about identifying and solving the biggest challenges in a particular industry. At Fracta, my role is continual investigation into the opportunity. As we’ve grown, I’ve been fortunate to hire the right people to take on specific roles that support our solution. I studied physics in college and am fascinated with technologies. Yet, I’ve also had to develop my financial analysis skills and work to find the right people and team to grow the business.

I also realized that successfully introducing AI into the water industry would be contingent on partnerships. Partnering with Kurita’s brand and reputation seemed critical to our future success, and now they’ve made a sizable investment in Fracta allowing us to grow strategically over time. They also bring the credibility that Fracta needs as we develop an entirely new product category in the water industry.

What happened after participating in Imagine H2O’s programming and Gala in March?

Actually, I was super-surprised! Nikkei Business Online covered the story and I received a lot of supportive comments from people back home in Japan. I soon realized that winning Imagine H2O wasn’t just a compliment, it was something very real. The water industry is very close and Imagine H2O’s ability to validate a technology is a tremendous boost to a company like ours — especially as we pursue customers.

We’ve seen a lot of activity from strategic investors within the Imagine H2O portfolio. In fact, Fracta follows Apana as our second company to secure funding from Kurita. Additionally, Tencent has now invested in two of our other AI companies and Xylem recently acquired Valor Water Analytics from our 2015 program. Do you see this as a strategic play amongst kind of larger companies that know this change in water is coming? And, do you think that this is going to be a new nexus of competition? Or, would you even apply a larger narrative to this?

Broadly speaking, human operation is now being augmented and in many cases replaced by computers. The so-called 4th Industrial Revolution is impacting every industry. In water, software currently contributes to perhaps 3–5% of overall operations. In my opinion, software will eventually run 20% or 30% of the industry’s operations. Corporates are starting to see this, and so are entrepreneurs. Pattern recognition is a powerful tool in an industry that has very little data. Hardware will still be the primary driver in water, but software will play a more significant role.

What’s the timeframe for this transformation?

I really don’t know. It’s incredibly challenging to predict when the market will reach a critical mass. Fracta’s best approach is to prepare and position ourselves for when the market takes off. Funding from Kurita, as a long-term corporate player, enables us to secure a dominant market position in advance of such an event. Working within the venture model would require us to operate on a short-term basis that would likely cause us to fall short of such a moment. Strategic capital enables us to play the long game. Although the water sector will undoubtedly move slowly, it will be a massive transformation with extraordinary opportunities for companies like ours.