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H2O.ai raises $100M at a $1.6B pre-money valuation for tools to make AI usable by any kind of enterprise

·7-min read

H2O.ai -- a startup that has developed an open-source framework as well as proprietary apps that make it easier for any kind of enterprise to build and operate artificial intelligence-based services -- has seen a surge of interest as AI applications have become more ubiquitous, and enterprises beyond tech companies want to get in on the action. Now, it has raised $100 million to fuel its growth, a round of funding that values H2O.ai at $1.7 billion post-money ($1.6 billion pre-money).

This is a Series E round, and it's being led by a strategic backer, the Commonwealth Bank of Australia (CBA), which has been a customer of the startup and will be using the backing to kick off a deeper partnership between the two to build new services. Others in the round include Goldman Sachs, Pivot Investment Partners, Crane Venture Partners and Celesta Capital. Further plans for the funding include building more products for H2O.ai as a whole, and hiring more talent to continue expanding the company's H2O AI Hybrid Cloud platform.

This is not the first time that a customer has led a round as a strategic backer: in 2019, Goldman Sachs led the company's Series D of $72.5 million. As a sign of how the company has been growing, and the general appetite for what it does, H2O's valuation has leapfrogged since that last round, when it was valued at $400 million, per PitchBook data. Mountain View-based H2O.ai has raised $246.5 million to date.

The fact that both of the last rounds have been led by big banks that are also customers of H2O.ai's speaks a lot to where the opportunity has been for the startup. Sri Ambati, the founder and CEO (who previously was also a co-founder of Platfora, which was acquired by Workday), told me over email that about 40% of the company's revenues currently come from the very wide and all-encompassing world of financial services.

"Retail banking, credit cards, payments -- almost every payment system from PayPal to MasterCard are customers of H2O," he said. On the equities side, companies power fixed income, asset management, and mortgage backed security services using H2O's technology, with MarketAxess, Franklin Templeton, and BNY Mellon also "strong" customers, he said.

That is also seeing a growing complement of business from other verticals, he added: Unilever, Reckitt P&G are among those in consumer goods; UPS is one of its users in logistics and delivery; Chipotle is among those in food services; and he said that AT&T "is one of our largest customers."

Covid-19 has had a role to play here, too.

"Manufacturing became a fast-growing vertical due to supply chain disruption and demand sensing," he said of the pandemic. "We launched H2O AI Health to help our hospitals and providers, payers like Aetna and pharma customers."

Notably, H2O.ai is also now breaking ground into working more with other tech companies that want to build more AI into their own workflows to in turn provide services to their own customers. "Our latest wins are in vertical clouds and SaaS ISVs," Ambati said.

The company has offered an open source component to its services, which it calls simply H2O, from its earliest days, and that is now used by over 20,000 enterprises. Part of the reason for that is its flexibility: H2O.ai says that its open source framework works both on top of existing big data infrastructure, on bare metal or on top of existing Hadoop, Spark or Kubernetes clusters and is able to ingest data directly from HDFS, Spark, S3, Azure Data Lake or any other data source into it’s in-memory distributed key-value store.

"Our open source platform gives freedom and ability for customers to build their own AI centers of competence and excellence," Ambati said of the open source tools. "We are like the Tenzing Sherpas of the AI mountains helping our customers to traverse and conquer AI peaks."

That framework can be used by engineers to build customized applications, while H2O.ai's proprietary tools provide more completed applications in areas like fraud detection, churn prediction, anomaly detection, price optimization and credit scoring -- areas that can benefit from the ingestion of massive amounts of data in order to gain better insights into what might happen next: these sit either as a complement to what human analysts and data scientists might be able to unearth, or potentially, in some cases, as a replacement for the more basic work they might do. In all, there are currently some 45 applications in all.

The plan, Ambati said, is to over time build out more of these, which will reside in "app stores" in specific verticals offering a range of its proprietary, pre-built tools particular to the demands of each of them.

The trend fueling H2O.ai's growth has been gaining momentum for several years now.

Artificial intelligence holds a lot of promise for the world of enterprise IT: used well, tools like machine learning, natural language processing and computer vision can speed up productivity, or even open up completely new areas of opportunity for an organization. Over time, it can save companies billions of dollars in operational and other costs.

One big issue, however, is that in many cases, organizations might lack the internal teams to build or carry through projects that use AI, and that's before considering the fact that as needs and parameters evolve all of that infrastructure will need updating, too. Technology touches everything in an enterprise these days, but not every enterprise is a tech company.

H2O.ai is not the first or only startup that has aimed to fill this gap in the market, although it seems to have managed its task a little more successfully than others.

Notably, Element.AI out of Canada was built out on the back of a large amount of funding and buy-in from big tech companies like Microsoft and Nvidia also to address the idea of democratizing AI for the wider world of enterprises that might lack the resources to build and run AI tools themselves, but could very much benefit from them before their businesses simply get cannibalized by the many AI-fuelled tech companies moving into their spaces. It had a strong focus on integration (it was a little like an Accenture for AI services) but never managed to make a big enough jump from concept to business and was eventually acquired, in 2020, by ServiceNow to complement its own efforts to build tools for businesses.

Ambati said that only about 10% of H2O.ai's business is in the area of services, with the remainder, 90%, coming from its products, as an explanation for why one startup's approach worked while another did not.

"It is easy to get lured by services in data science and AI," he said. "Being true to our product maker culture and yet building deep customer empathy and listening is critical to success. Customers experience our maker culture and become makers themselves. We are continuously making our software easier (democratizing) low-code, reusable recipes and automation through AI Cloud and building data pipelines, AI AppStores and delivering AI as a service that our customers can use to improve their customer experiences, brands and communities.

"The big difference -- we are raising a forest, not just a tree. H2O AI Cloud, H2O Wave our low-code Application Development, H2O AI AppStores, Marketplace and H2O-3 Open Source ML are at the core of AI Applications and software already and we are partnering with customers and their ecosystem of partners and developers."

That's a play, and business, resonating well with investors, too,

“Commonwealth Bank has a significant asset in the millions of data points collected every day. AI already has helped us to improve our customer experience, however, we know there is untapped potential to do more," said Matt Comyn, CEO of CBA, in a statement. "The investment in and strategic partnership with H2O.ai extends our leadership in artificial intelligence and ultimately boosts the bank’s ability to offer leading digital propositions and reimagined products and services to customers." Dr. Andrew McMullan, chief data and analytics officer at CBA, will join the H2O.ai board.

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