'India is sitting on a huge opportunity reminiscent of the IT offshoring boom'

In January 2017, Raghu Yarlagadda quit his job at Google in Mountain View, California, to start discovering the possibilities in Web 3.0 — in particular the direction that bitcoin and crypto were taking. Within a year, he and Prabhakar Reddy founded FalconX to create a tech-stack for institutional clients to get into crypto trading.

With the onset of the global pandemic, the demand for FalconX's services skyrocketed, after hedge funds recognised bitcoin as an inflationary hedge, as central banks began to print more money.

By August 2021, FalconX got valued at $3.75 billion in its Series C round led by Altimeter Capital and Sapphire Ventures with participation from existing investors.

In this interview with YourStory, Raghu, who was in Bengaluru in early March, explains the FalconX journey so far, and the immense possibilities for India's technology and banking-services talent to contribute to the development of next-generation financial-services companies globally.

Edited excerpts from the interview:

YourStory (YS): Tell us about your early years.

Raghu Yarlagadda (RY): I am originally from Vijayawada, a city close to Hyderabad. I was passionate about engineering. There is something about engineering that gets me excited. More than a skill, engineering is a mindset of taking ideas and things to creating value for the society.

My father is a doctor who gave me clarity very early on that I don’t have the patience to be a doctor. (Laughs) But seriously, I was very passionate about engineering. I completed my engineering from Vellore Institute of Technology, and was an exchange student to Australia for a bit. I then went to the US for my first masters degree from the University of Texas.

After a few years working at Motorola, I got terrible advice that engineers must go to business school. Otherwise, the world’s not going to take you seriously. I fell for it.

YS: Why was it bad advice?

RY: Jokes aside, business school is what you make of it. For example, if you want to be an entrepreneur, there is an opportunity cost to going to business school. It might be better to start up, learn, and iterate than go to business school.

As long as you are precise about what you want out of business school, you make the best out of it. In my case, it helped with two things. One, the network was amazing. But more than the network at Harvard Business School (HBS), for the first time I saw a truly exceptional cohort of people. HBS takes a lot of pride in engineering section, and putting the right set of 70 people in the classroom.

The guy sitting next to me was a pop star in Vietnam. Even with such diverse backgrounds, there was so much commonality in terms of what it takes to be a great manager and a great leader.

Two, HBS pushed me to think bigger. Until then, I wanted to be an entrepreneur and start my company. I had been thinking of a business idea that would fit the Indian market. But business school pushed me to understand why I should not limit a business idea to just one market.

That nudge to think about playing in the global market apart from the Indian market is something that business school gave me.

YS: When you started FalconX, how did it translate to revenue in the early years?

RY: The question of monetisation is a very profound one because a lot of the crypto industry is still figuring out what monetisation is, especially around Web 3.

On the centralised side of crypto, we have really good models. But on the Web 3 side, people are figuring out what monetisation is.

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When we first started the company in 2018, there was no institutional crypto. I joke about this now, but when we pitched ‘institutional crypto’ to Accel, they were pretty confused because crypto itself was new, and there were no institutions in crypto.

They asked us what the thesis was behind institutionalising crypto, or for institutions coming into crypto.

YS: And what was the thesis?

RY: First and foremost, was there conviction that crypto is going to be mainstream? That conviction really came from some of the brightest engineers I have ever met — at the Googles and Facebooks of the world.

These engineers were going gung-ho. And I wanted to understand why. After working with these guys for a year or so through projects, brainstorming and all that, I walked out of that experience thinking that most of the world’s value will be tokenised.

Crypto is one aspect of tokenisation. There are also fiat currencies in the form of stable coins, art and culture in the form of NFTs (non fungible tokens). But most importantly, equities and fixed assets getting tokenised.

What does tokenisation give that the traditional system doesn’t give? For me, the blockchain drastically reduces the overhead of launching an asset.

The lower overheads meant that for the first time, you can basically have financial instruments working for you 24/7, truly global, and in a very elastic way.

That is very powerful because Google and Facebook don’t go down over the weekends. But the traditional financial institutions are not available in quite the same way.

That needs to change because money is coming from baby-boomers to millennials, and millennials have the 24/7 expectation. For these reasons, I felt that these assets must be available 24/7.  

On the global part, one disjointed experience for me was when I first landed in the US in 2006. All my data flew with me — I only had to connect to the internet for my Google and Gmail to be there. But my money wouldn’t flow with me.

The money that you pay taxes on, and work very hard to earn — why does that not flow with you? There are a lot of constraints there. So, for me, the 24X7 and truly global was a very important construct as the world is getting smaller and smaller.

So, the first conviction was: tokenisation is going to happen. Once that was formed, the second part was: how to build a company that is front and centre of the entire conviction that the world is going to tokenise?

There was a lot of innovation happening in retail with a lot of companies competing. We were late to it. There are a lot of retail exchanges. At the end of the day, these are businesses driven by network effects, and economies of scale. The user was getting a good value proposition on the retail side. 

But on the institutional side, there were no major offerings for institutions, and we were beginning to see early signs of institutional demand.

YS: What were the early signs?

RY: In 2018, the only set of institutions that were there were crypto-native. Essentially, prop shops (short for ‘proprietary’, a prop shop is a trading firm that deploys its own capital in pursuit of trading profits.) Or if somebody was successful, that money was being used to arbitrage between different retail exchanges, to make money in a market-neutral way.

The market was so inefficient that vast sums of money were simply getting arbitraged between different retail exchanges.

YS: How did this become business for FalconX?

RY: They quickly realised that arbitraging between different retail exchanges was very inefficient from a balance sheet perspective. They had to do their own inventory management. When we spoke to these institutions, they said that moving money between exchanges was incredibly hard — that was Pain-point Number 1.

Pain-point Number 2 was: A lot of these institutions were beginning to make a bet on which way bitcoin and Ethereum would move. Either, buying or selling for mid- to long-term.

Having known the liquidity on exchanges, the institutions didn’t want to pay between 30 and 100 basis points for $1 million or $2 million of bitcoin. They simply don’t pay that much in the traditional world.

So with these two anchors, what we started doing is: if crypto is real, meaning if we see a world that is tokenised, institutions will play a big role in it.

If institutions play a big role in it, what can FalconX offer that becomes a huge differentiation or moat? The toughest problem to work on in those days was finding really good pricing, and reliably executing on that pricing.

You may ask why that is hard. In traditional finance, the US Securities and Exchange Commission and a bunch of regulatory bodies mandate that all exchanges publish their prices. If there is something wrong, there are legal liabilities there.   

Just like the internet, in crypto, there is no global regulation. So today, 18,000 venues are there in crypto, buying and selling, and a lot of venues publish fake volumes just to stand out and say, ‘I have the most liquidity’. As a result, mining something like very good pricing is an exceptionally difficult math problem that is not solved in traditional finance.

Having experience from Google and a lot of applied machine learning, we were the first in the world to use applied machine learning to figure out what is real and fake.

With machine learning, the machine was learning based on every single trade, and improving and getting better. Literally, the company was founded on this one principle: I will find really good pricing, and help institutions reliably execute. That one product killed it.

Once institutions came to that one product for trading, we quickly realised that institutions are used to having one-stop shops that take care of all their needs. That is when we expanded FalconX from trading to credit and clearing. We are now a digital assets brokerage for a diverse set of institutions.

YS: How are your 500 customers segmented?

RY: The higher order of segmentation is crypto-native and traditional finance. Two years ago, 85 percent of our customers were crypto-native. Now, only 45 percent of our customers are crypto-native. The rest are traditional financial institutions.

Of the traditional financial institutions, hedge funds are the largest class of customers. We have prop shops who are trading with their own capital, and are at the leading edge of strategies. FalconX has a lot of these consumers from Chicago, and from the Southeast Asian countries.

The third segment among traditional institutions took us by surprise. Traditional banks and brokers, who don’t have the technology stack for crypto services, to serve retail customers. We are collapsing all the crypto services into a single API (application programming interface) for these institutions.

Our customers here include one of the largest retail-aggregators from the US, Southeast Asia’s largest retail aggregator, and Africa’s largest aggregator. That was 20 percent of our revenue in Q4 (fourth quarter).

YS: Are the retail aggregators digital-first companies or traditional banks?

RY: We are seeing both. Traditional legacy banks, which are also trying to give their customers exposure to crypto, are also our customers.

YS: How big is the FalconX team in India?

RY: Almost 45 percent of our global team — 75 people — are in India. At least 75 percent of FalconX's engineering team is here. This is not testing, but hardcore machine learning on the leading edge of fintech.

Half of our customer-success team is based here. They are building very deep relationships with some of the most sophisticated institutions in the west.

India is sitting on a huge opportunity that is reminiscent of the IT offshoring boom two decades ago. India has a young population and a large democracy, which is conducive for decentralised technologies.

India hasn’t officially banned crypto. When China took that stance, the US took the stance of not banning. India is leaning toward the US.

For any global company that wants to build and shape a high-quality global product, India is the place to be. We are really taking advantage of that, and I hope more companies around the world do the same.