Freshworks journey to India’s first SaaS unicorn and beyond

This is Part 2 of a Series on India SaaS. In Part 1, I write about how SaaS is eating Software and why India is uniquely positioned to benefit from this revolution, and In Part 3, I write about Potential whitespaces/ under penetrated segments in non-enterprise India SaaS landscape. Do check it out!

Freshworks (earlier called Freshdesk) has long been the torch bearer of the Indian SaaS ecosystem. It was India’s first SaaS unicorn, and paved the way for a second wave of young SaaS players who are on the way to making India a SaaS powerhouse.

Girish Mathrubootham founded Freshworks in 2010, when a comment on Hacker News sparked his interest. It was on an article about Zendesk raising their prices 60–300% and how their users were unhappy about it. He was Vice President of product management at software products firm Zoho at that time. Armed with domain experience and a foresight that transition to cloud would make customer support products delivered as SAAS a huge opportunity, he plunged into entrepreneurship despite having a family with two small kids to support.

Freshworks strategy for succeeding in a red ocean market

Let us look at the breadth of Freshworks’ services: Freshdesk was the original help desk product the company started with. It went on to launch other SaaS products like Freshservice (2014), Freshsales (2016), Freshteam (2017) and now it has expanded to a full suite of enterprise solutions to capture the entire customer life cycle.

(A) Creating a red ocean market playbook

All of these products are in large markets by themselves — Customer support, marketing automation, IT support etc. Girish talks about picking red ocean markets, and building a playbook that works well in such markets. In blue ocean markets, the company would need a dedicated sales team to educate the customers on why they need the product vs in a red ocean market, there exists a clear market that doesn’t need to be discovered. When Freshdesk started, there were over 600 help desk products in the market, hence a deep red ocean market. Freshdesk also able to win through with a easy to configure product, smart execution and aesthetic design.

(B) Smart execution to win over competitors

Freshworks grew from $1 million in ARR (annual recurring revenue) to $100 million ARR in just five years, and this rate of growth matches those of the best SaaS startups globally, as shown by the graph above. And it took certain unconventional ways as well to reach to this level. Freshworks created online content and employed guerilla marketing techniques to compete against established players such as Zendesk and Salesforce. Freshworks got itself a mention alongside leading companies such as Zendesk through a RipoffOrNot campaign. Freshdesk was called a Rip Off by the Zendesk CEO on Twitter (because of ‘desk’ in both names). But instead of fighting back on Twitter, Freshdesk created this RipoffOrNot campaign where it proudly displayed Zendesk’s CEO’s accusation, and invited users to make up their minds for themselves. This led to Freshdesk getting PR alongside Zendesk — essentially putting it in the same plane as market leader Zendesk — a brilliant way of capitalizing on a competitor’s insult.

In 2018, Freshworks gatecrashed Dreamforce, SalesForce’s largest customer event and took to the skies with a #Failsforce blimp that circled Salesforce Tower during the week long annual conference. The idea was to tell people to stop paying for bloated software like Salesforce. Twitter was full of Freshworks within a few hours, and this campaign resulted in Freshworks again getting free coverage from publications like Forbes, Adweek, and Techcrunch.

Girish discusses about how Freshworks relies on online acquisition of customers, and how that has helped Freshworks go global with local talent. That’s why Freshworks hasn’t been shy in positioning itself as the #1 Helpdesk player. A search for Zendesk vs Freshdesk returns the first result as “Freshdesk Vs The Others — See Who’s The #1 Helpdesk Tool”.

(C) Building for the long tail of underserved SMBs

Freshworks was able to gain market share since it catered to the long tail of SMBs, and not only in India but SMBs across the globe. Though the helpdesk market was hyper competitive, the SMB market was a blue ocean — these SMBs were underserved by available solutions which were mostly complicated/ expensive for SMBs to deploy. Girish calls this deer/ rabbit hunting, instead of elephant hunting (large enterprises), which the global players were focusing on. The company at present gets 50% of its revenue from SMBs, rest from mid-market and enterprises. Other factors that played a key role in helping Freshworks gain traction are its simple to navigate website, transparent pricing, intuitive interface and ease of configuration, which are critical for any tool to see adoption by SMBs. A crucial element of Freshworks’s playbook as Girish says is “If you want to win globally, and if you want to win through product, since you don’t have sales people to make big presentations to companies, the product cannot be confusing”, calling this the consumerization of enterprise software.

In US, players such as Salesforce work on a different model. They build a SaaS tool, and keep going upmarket by following a sales driven expansion model. Learning from these global competitors, Freshworks today has 2 Go-To-Market playbooks — one is the inbound long tail SMB playbook i.e deals which it closes from Chennai; and the outbound mid market/ enterprise playbook where the company hires sales executives and reaches out to companies globally.

Summarizing, Freshworks has emerged as a leader because of 3 reasons:

  • Riding the wave: Freshworks chose a growing market, and was able to win through product, execution and design.
  • Playing to their strengths: Instead of adopting the global SaaS playbook of following a sales driven expansion plan, Freshworks developed its own strategy to serve the long tail of SMBs
  • Getting invited to play in the big league: Getting positioned alongside market leaders such as Zendesk and Salesforce early in its journey by standing out and making noise through innovative PR techniques

Freshworks in numbers

From six customers in 2011, the company now services a clientele of over 220,000 customers across more than 120 countries. From a team strength of four, Freshworks now has over 3,000 employees. With a total funding of $400 million, Freshworks is now valued at $3.5 billion

Freshworks, at time of raising $150 million in its last financing round had crossed $200 million in Annual Recurring Revenue (ARR). The company claims to have 2,20,000 customers. This translates to $900/ customer/ year i.e $76 per month. Freshworks’ products prices range from Free — $100 per month per user, depending on the service. Taking an average price of $35/ user per month means that an average customer uses 2 Freshworks’ services (Freshdesk, Freshsales, Freshchat etc).

Further, the company’s revenue grew from $100 million in June 2018 to $200 million a year later, and customers grew from 1,50,000 to 2,20,000. Assuming sales and marketing expenses to be 50% of revenue (in line with Salesforce spending 46% of its revenue on sales and marketing), means that Freshworks spent $50 million during the year to acquire 70,000 customers, implying a CAC of $714. At an annual revenue of ~$900 per user per annum, 80% gross margin (typical gross margin for top performing SaaS companies), we get to a payback period of almost 1 year, in line with the average payback period of SaaS companies. Further, assuming an average life cycle usage of 4 years, gives an LTV of $ 2,880 (ARPA $900, gross margin 80% and churn 25%), implying a LTV/ CAC of 4x ($2,880/714), better than the typical LTV/ CAC ratio of SaaS companies. Freshworks gets 41% of its traffic from Referrals, vs 20% for Zendesk, which speaks about the quality of services and healthy financials.

Road ahead — IPO

In July 2019, Freshworks was planning an IPO by 2021, with the listing expected to be on NASDAQ. The last financing round could be a pre IPO round, setting the valuation of the company and putting a benchmark to what Freshworks could be valued a the IPO. This could be India’s first homegrown SaaS IPO. Freshworks $200 million ARR is a drop in the ocean in the $158 billion global SaaS Market, indicating the huge potential for growth. Definitely a long journey ahead for Freshworks, from being the torch bearer of the Indian SaaS ecosystem to a leader in the global SaaS landscape!

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Please note that these views are personal and do not reflect the views of my employer. All data is taken from public sources.

Private Equity Investor | Previously Public Market investing at Premji Invest | SRCC