Freshworks: A Look Inside The IPO Dedicated To Rajinikanth

Girish Mathrubhootham, the founder and CEO of Freshworks, thanked superstar Rajinikanth in the initial public offering documents filed with the Securities and Exchange Commission (SEC).

“The code name for our IPO was Project SuperStar, named after the most successful movie star from Tamil Nadu, Rajinikanth. I want to express my love and gratitude to him for being my maanaseega guru. There is no comparable English word to express what this means. It is a mentor; a role model that lives in your mind, from whom you learn a lot by watching from afar. SuperStar is a man who is loved and worshipped by millions of fans globally. He is immensely successful yet humble and down to earth. Thank you, Thalaivaa!” said Mathrubhootam in the SEC filing.

Freshworks is looking to list on the US public markets and will reportedly be raising US $100 million from investors.

A Meteoric Rise

Like the CEO’s idol, Freshworks has seen a meteoric rise from humble beginnings to become one of the largest software-as-a-service (SaaS) companies from India. Just ten years ago, the company had an aspirational target of hitting a million dollars in revenue. But, in the last twelve months, the company has generated revenues of $308 million. Though the company has made losses since inception, it has generated positive cash flows of $35 million dollars in the last twelve months.

The founders Girish Mathrubhootam and Shan Krishnasamy initially worked for Zoho Corporation. The expertise that the founders gained at Zoho, combined with the same labour cost arbitrage model, became the base for Freshworks. The strategy allowed them to price their products lower than global competitors. Later, Zoho would accuse Freshworks of misusing internal data and the matter is sub-judice.

A Multi-Product Strategy

Starting as Freshdesk Inc., the company began as a customer support software company. Its product “Freshdesk” offers customer service software to businesses worldwide. But, Freshdesk wanted to become a multi-product company right from the beginning. The company was so serious about being a multi-product company that it had even bought 40 domains related to its potential products, right in the beginning.

The company raised a million dollars from Accel in 2011 and began planning its next move into building an IT service product for its customers. The IT service software, “Freshservice”, soon reached a million dollars in revenue within ten months of its launch. The ability to quickly build multiple products and scale the products impressed Freshdesk’s investors.

Several other products have spawned over the past few years - customer relationship management, call centres, customer messaging, human resource management etc. It offers a freemium model wherein potential customers are attracted with free or low price products and then offered the higher priced-packages.

The name change from Freshdesk to Freshworks was also a rebranding effort aimed at changing its identity from a single product company to a multi-product company.

Along with its labour cost arbitrage, Freshwork’s success is a result of its relentless focus on marketing. Right from the beginning, the company has focused on organic and paid advertisements. In a 2011 blog, Mathrubhootam talked about spending around $ 300-450 on ads and receiving around 150 signups. Today, sales and marketing expenses take up more than 50 per cent of its revenues.

Marketing is critical to Freshwork’s success because of the sheer competition in the space. According to Bain and Co., a management consultancy, Zoho and Freshworks were the only Indian players in the SaaS space. But in recent years, several players have entered the market, especially in niche areas. Zoho and Freshworks, who derive a major part of their revenues from the United States of America, also face increasing competition from SaaS companies based out of the USA.

The high marketing expenditure is also a result of the company’s relentless focus on growth rather than profitability. “A significant part of our business strategy and culture is to focus on long-term growth and customer success over short-term financial results. For example, in 2020, we increased our operating expenses to $253.2 million as compared to $165.6 million in 2019, while continuing to generate a net loss of $57.3 million in 2020,” the company said in the SEC filing. A major part of its external funding has been spent on marketing expenses.

Given the ease of accessing capital, Freshworks has managed to grow without having to worry about its profits. Revenues have been growing at a blistering pace. For the six months ended 30 June, Freshworks earned $168 million, a 54 per cent increase from the revenues during the same period last year.

Hiring the Right Talent

Initially, the company incorporated itself in Delaware for easier payments processing. Given the low awareness and price-sensitivity in the Indian markets, Freshworks expected international customers to be its largest customer base.

But in 2019, Mathrubhootam shifted to the USA to leverage the talent base available there. According to him, the only way of realising his vision of building a SaaS company with a billion dollars in revenue is by hiring people who have achieved the feat in the past. It has been hiring top management from companies that made the transition from million dollar companies to billion dollar companies.

The entire executive management base has been recruited from other SaaS companies that made it big. For instance, Jose Morales, who serves as the Chief Revenue Officer, worked with Atlassian Corporation for eight years. Atlassian revenues went from around $ 100 million to $ 1.6 billion during these eight years. Tyler Sloat, the chief financial officer worked at Zuora Inc., while Stacey Epstein, the chief marketing officer, worked at ServiceMax Inc.

Nevertheless, the backend operations have continued from India to take advantage of lower employee costs.

So far, Freshworks has continued to grow at a rapid pace and has added several high-value clients. It has even brought a highly experienced team on board. But, it continues facing competition from behemoths like Salesforce, Zendesk and other firms. Whether it will achieve the aspirational billion-dollar revenue target remains to be seen.