The Business of Freshworks

How an underdog company braved against all odds and paved the way for Indian SaaS revolution

Shan Krishnasamy and Girish Mathrubootham are not household names in India, neither is the company they founded. Almost everyone in India, no matter what part of society they belong to, may recognize Flipkart and Ola, but very few know about Freshworks.

Yet this company, that started in a small office in Chennai on Oct 13th 2010, has paved the foundation for Indian SaaS industry - a $10 Billion per year industry that is growing at ~40% CAGR and represents a ~5% market share of the global SaaS market.

Pretty impressive figures for something that didn’t exist a decade ago.

This, is the story of Freshworks and the Indian SaaS revolution.

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This deep dive is divided into the following parts:

  1. Overview of the Global and Indian SaaS Industry

  2. A Brief History of Freshworks

  3. Product Offerings of Freshworks

  4. Profile of Key People at Freshworks

  5. Analysis of Competitive Landscape

  6. Analysis of Financial Statements

  7. Valuations

  8. Conclusion and My Take

1. Overview of the Global and Indian SaaS Industry

Traditionally software was built to order. Multinational corporations would either hire their own IT teams or outsource the development requirements to a third party. The software would be built once as per requirements and then ‘shipped’ upon completion.

As companies evolved and initial requirements changed, this software would quickly become outdated and the whole cycle would repeat again - with new requirements, new software orders to third parties and new shipping dates.

As you would assume, this entire process was expensive, rigid and relied on user requirements remaining static.

In a fast moving dynamic world, software development process needed to disrupt itself with something that could scale with a company’s evolution, remain dynamic, could get frequently updated with the latest and greatest technology, and was available for cheap.

This change came with the advent of cloud computing and particularly with the commercialization of Amazon Web Services (AWS). AWS made it incredibly cheap for anyone in the world to start their own technology company without worrying about the associated hardware costs. Anyone from any part of the world, could now ‘rent’ computing power on any scale and start building their own software company.

This simple change led to the birth of an entire industry we now call Software as a Service (SaaS).

Global SaaS Market

Globally, the SaaS market today is worth around ~$200 Billion and is expected to grow to ~$500 Billion by 2025 at a CAGR of ~20%.

The main drivers behind this growth is the increased adoption of SaaS products, especially by the small and medium scale businesses. Most giant software corporations do not create targeted products for this segment of the industry primarily due to the small sales ticket size. A large order worth a few million is worth more and easier to manage compared to thousands of orders worth a few hundred bucks a month.

This is the area where most new SaaS companies globally are thriving - selling software products to small and medium scale businesses.

Another key area of growth is the increased adoption of SaaS products by large enterprises. Traditionally these companies used to build their own software in-house and almost never purchase much less subscribe to software products. This trend is now changing - with enterprises more inclined to buy ‘off the shelve’ software products than build something on their own.

Today, anyone can start a company with traditional functions including HR, Marketing, Finance, Operations and Logistics by entirely using software that is available off the shelf. A new business today doesn’t need to make any large investments into setting up a traditional technology team.

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Indian SaaS Market

Indian SaaS companies were just a couple of ‘upstarts’ in 2010s - far and few existed and a large number of them didn’t make a lot of money. Today, that landscape has changed entirely - over 30 Indian SaaS companies make $10 Million in Annual Recurring Revenue and together Indian SaaS market is expected to reach ~$20 Billion by next year (2022), representing a 9% market share of the global SaaS market.

Indian companies are leaping up market share from global counter parts due to large in-built competitive advantages.

Building a SaaS company in India has lot of associated advantages:

  1. There is a lot of good, cheap and skilled engineering talent available
    (it costs 85% less to hire an entry level developer in India compared to US)

  2. There is a large ecosystem of venture capital and start up funding available (mostly driven by domestic venture funds and seed funds established by early founders of SaaS and successful start ups)

  3. Successful Indian SaaS companies are leaders in their field and have found customers globally
    (Postman created the industry for API Management, Freshworks serves 200K clients and Kissflow’s products are used in over 150+ countries)

The products from Indian SaaS companies are also increasingly finding acceptance among the top tier enterprises - Druva (a cyber security SaaS company), for example, serves more than 50 of the top Fortune 500 clients in the world.

Here is another metric to highlight the above point - more than 70% of revenue for all Indian SaaS companies comes from outside India.

India is increasingly producing top quality software for the world and is doing it at an incredible speed.

This fast growth is shown in Revenue metrics of these companies as well. Only a single SaaS company made over $100 Million in Annual Revenue, 5 years ago. Today more than 5 Indian SaaS start ups have cross that milestone.

The time taken to achieve these ARR milestones are also significantly shorter for Indian companies than their US counter parts.

This is an incredibly exciting space and if you want me to do a deep dive into Indian SaaS companies and their future potential along with various investment opportunities available, then please leave a comment.

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2. A Brief History of Freshworks

Freshworks is a company that wasn’t supposed to win. When the company started in late 2010, SaaS globally was still in its infancy and didn’t exit in India.

Freshworks is one of the original Indian SaaS companies that laid the foundation stone of the industry.

Right from inception, Girish Mathrubootham, founder and CEO of Freshworks, was told that his company will not succeed. Here is an extract from the S-1 where he states this in his opening remarks.

The idea of Freshworks came from a message board on Hacker News - ZenDesk (an old established CRM company) was raising its prices by 300% and many of its small and medium scale customers were unhappy. This was the lighting moment for Girish, he knew there was a market for cheap CRM software that caters to mainly small and medium scale businesses. Being in India and surrounded by tech talent, he could easily build such a product and maybe market it to customers globally - and so Freshdesk was born.

The company believes in ‘Dreaming in Increments’ - accomplishing small incremental goals that are larger than the previous ones. Right from day one, Girish and team has focused on product led growth - designing products that are advanced, well built, easy to use and available for cheap. It is this product led growth that enabled it to become a global company from inception - first few customers of Freshdesk were from four different continents.

From its initial CRM product (Freshdesk), the company now operates and offers software for a wide variety of business needs, ranging from:

  1. Customer Experience (Freshdesk)

  2. IT Service Management (Freshservice)

  3. Sales and Marketing (Freshsales)

  4. Developer Platform (Freshworks Neo)

Two out of these four products (Freshdesk and Freshservice) already generate over $100 Million in ARR and are used by more than 50,000 customers globally.

Not bad for a company that wasn’t supposed to win.

3. Product Offerings of Freshworks

Each of Freshworks products has several tiers of subscriptions plans ranging from free to enterprise. This helps the company attract a wide variety of users (mainly small and medium scale businesses) ranging from a fresh startup to an established enterprise.

Freshdesk is the one of the main product offerings of the company. Freshdesk is designed to help businesses enhance and cater to their customers experience by providing omni channel support.

Businesses use Freshdesk to interact with their customers and respond to customer service request. If you have ever contacted a customer support over apps like Swiggy etc., that customer support interaction and interface is powered via products like Freshdesk.

Below image depicts the pricing and subscription tiers for Freshdesk. As with most SaaS companies, the offerings increase along with the subscription tier.

Competitors of Freshdesk include companies like Salesforce, and Zendesk.

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Freshservice is the second main product offering from Freshworks. Unlike Freshdesk, which is targeted at managing customer experience and relationship, Freshservice is targeted to help organizations managed their employee productivity and increase technology throughput.

By leveraging Freshservice, a company can allow its employees to reach out to service desk efficiently, resolve service issues, enable non tech functions like HR and Legal to provide support services and lastly enable tech teams to organize and collaborate on projects by using the inbuilt project management capabilities.

Similar to Freshdesk, Freshservice too has various subscription plans, designed to attract businesses of all scale.

Here is a snapshot of how all of the above fits into Freshservice product suite.

Main competitors of Freshservice include companies like Atlassian and Service Now.

Both Freshdesk and Freshservice combined generate more than $200 Million in Annual Recurring Revenue for the company. They essentially represent the bulk of company’s revenue.

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Freshsales is the company’s product offering for sales force and marketing automation. It is designed to help a business boost productivity of its sales teams, enable them with generating quick leads and provide insights into data from previous and ongoing sales.

Leveraging Freshsales suite, a business can design and work with various marketing campaigns while integrating the results with their salesforce.

Here is a snapshot of how Freshsales suite looks like.

Freshsales too has various subscription tiers to enable its adoption across all categories of customers.

The final products offering from Freshworks stable is called Freshworks Neo. Freshworks Neo is a developer platform that enables customers of Freshworks to build solutions for themselves using low code development and third party service integrations.

Customers can leverage the Marketplace available on the Neo platform to integrate 1100+ free and paid applications ranging from categories like bots, reporting, analytics, messaging, e-commerce, etc.

Customer Insights

As of June 30, 2021, Freshworks has more than 52,500 paying customers spread across 120 countries around the world.

Out of these 52K customers,

  • There are over 13,000 that spend more than $5,000 per year

  • There are 1164 customers that spend more than $50,000 per year

More than 18% of Freshworks customers purchase two or more of its products. Such customers represent 45% of the overall ARR.

The above chart shows how much each customer cohort spends and contributes to the yearly $300 Million recurring revenue. Notice, how the more recent customers end up spending more, indicating that Freshworks is able to target and onboard more enterprise clients with larger spending budgets.

Freshworks is also increasing its ARR to a more diversified client base - no single customer accounts for more than 1% of ARR and top 10 customers combined represent less than 5% of the total ARR.

Here are some of the marquee customers of Freshworks.

4. Profile of Key People at Freshworks

Executive Compensation

Girish was paid $10.7 Million as compensation in 2020, the bulk of which came in the form of stock awards ($10.25 Million worth) and rest as base salary ($331K).

Tyler was paid $14.4 Million as compensation in 2020, the bulk of which came in the form of stock awards ($14.08 Million worth) and rest as base salary ($278K).

Jose was paid $14.35 Million as compensation in 2020, the bulk of which came in the form of stock awards ($14.17 Million worth) and rest as base salary ($87K).

Going forward, key employees including the leadership team will continue to be paid a large part of their compensation in the form of stock awards. Investors should account and build in future dilution of equity while valuing the company.

5. Analysis of Competitive Landscape

Freshworks is part of a highly competitive industry. There are more than 630+ CRM and IT Service management software available in the market. Each of these try to distinguish itself in term of offerings, subscription prices, capabilities or target market.

Only a handful of them survive and gather enough market share to become profitable in the long run.

The intensity of competition is increasing, vendors like Salesforce that were originally focused on enterprise customers have now released a strip down version of their software to target small and medium scale businesses.

Eventually this industry should undergo a lot of consolidation as it matures.

Porter’s 5 Force Analysis

If I were to run a Porter’s five force analysis on this industry it would come out to something like this.

Threat of New Entrants: Medium

Anyone in the world can start a SaaS based company providing the tools Freshworks does, but to gather momentum is hard to achieve and as such I would rate the threat of any new entrants as medium.

Threat of Substitutes: Medium

Its not easy for a customer of Freshworks to change and migrate to another product overnight, as such the threat of substitute is medium. Customers do tend to migrate but only when the alternative showcases large advantages.

Bargaining Power of Buyers: High

Customers in this industry are spoiled for choice, they get to pick and choose whatever software they want and companies usually hand out large discounts to attract customers.

Bargaining Power of Suppliers: Low

The supply side of the industry is standardized and as such there isn’t any bargaining power of suppliers.

Rivalry Among Existing Competitors: High

Every competitor in this industry is fighting to attract the next customer. Participants usually spend a significant percentage of their revenues in sales and marketing to retain and attract new customers. As such the intensity of competition is really high.


Growth At All Costs

Since this industry is relatively new, the only way to differentiate the winners from the losers is growth. Participants that grow well, are rewarded high valuation multiples.

Freshworks most recent quarterly revenue was $88.3 Million and is growing at 126%. That figure seems high until you realize that which has similar quarterly revenue is growing at 300%+. Part of the reason for high growth for both these companies is low base.

Companies like Zendesk (Freshworks closest competitor in terms of offerings) and HubSpot are growing at 64% and 90% respectively, but have considerable higher revenues than Freshworks (HubSpot generates 3.5x Freshworks quarterly revenue and Zendesk generates 3.6x Freshworks quarterly revenue).

As mentioned earlier, the margins in this business are very small - mostly cause of increased competition in the industry. Bulk of earnings are spent towards upfront cost of software development and customer acquisition costs.

Even though negative (-4%), Freshworks has one of the more respectable margins for a company its size in this space. Primary reason for this is Freshworks major development costs are in India while majority of its revenue is generated in North America.

As of June 2021, 88% of Freshworks employees were based in India while 42% of its revenue was generated from customers in North America.

As long as Freshworks keeps growing its customer base and increasing the portion of customers spending more than $5,000 in ARR, it should be able to capitalize on this competitive advantage and generate higher margins than its competitors.

6. Analysis of Financial Statements

Income Statement

In its latest quarter, June 2021, Freshworks generated $88.34 Million in Sales with stable gross margins of ~79%. This represents a YoY sales growth rate of ~55%.

Bulk of this revenue though goes towards selling and marketing expenses, with Selling and Administrative Expenses totaling around ~65% of its latest quarterly revenue.

This trend is typical of the industry, as intensity of competition is high and everyone is competing for a limited set of customers.

This results in very low income ratios and margins. While Gross Margins were ~78%, Operating Margins for latest quarter are -7.3% and Net Income and EPS both being in negative territory as well.

I do not expect Freshworks to start generating profit any time soon since its very much in its growth phase and as such while valuing the company, the focus should be entirely on its growth and its ability to increase its market share.

Balance Sheet

The company has enough cash on its books to meet any its debt obligations ($240 Million worth of debt). Its generating enough revenue to meet its growth requirements and the recent IPO proceeds will help it accelerate its growth further.

Total Assets stood at ~$380 Million vs Total Liabilities of $191.72 Million for the most recent quarter (June, 2021).

Cash Flow Statement

The company is Cash Flow from Operations positive - cash generated by the company is enough to meet its needs and incremental revenue goes towards future growth.

Since majority of revenue goes towards selling and marketing costs, the cash flow from operations can significantly improve as and when the company starts to limit spending in that bucket. The current Op. Margin of ~-7.7% should climb to high double digits whenever that happens. The company however, needs to ensure that this doesn’t happen at the cost of growth.

7. Valuations

Freshworks debuted on Nasdaq on 22nd Sep 2021 via direct listing. The price on that day closed at $47.55 per share. As of writing this article, Freshworks ($FRSH) latest closing price is $42.27 per share which gives it a market cap of $11.9 Billion.

At current market cap, Freshworks is valued at nearly ~40 times its yearly revenue, Price to Sales multiple of 38.6.

Its closest competitor, Zendesk, is valued at roughly ~13 times Price to Sales. At current stock price, Freshworks seem to be overvalued and doesn’t leave much margin of safety in its price even for a fast growing SaaS company.

8. Conclusion and My Take

Listing of Freshworks represents a significant milestone for the Indian SaaS industry. From its infancy the industry has grown to compete with global giants in less than a decade.

Just like every other Indian SaaS company, Freshworks too has significant competitive advantages given the low employee and operating costs, while developing products for global consumers.

At current price, Freshworks is a pass for me and will remain in my watchlist. The only comfort in current valuation is the high growth in revenue. I will observe the company’s performance for next few quarters to check if it can retain its current revenue growth rates and evaluate the investment case again.

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