Thinking

Freshworks (the “Company”) became the first Indian SaaS company to list on Nasdaq on 22 September, 2021. Its initial public offering of 28,500,000 shares at $34 per share raised over $1 billion, scaling its market valuation to $10 billion. With over $400m in Annual Recurring Revenue (“ARR”) and over 4.000 employees worldwide, the Company has raised rounds every year since 2011 and has been backed by the world’s most renowned investors, including Sequoia, Accel, CapitalG etc. With this latter, the Company has probably benefited from a “Google factor”, playing a big part in building a successful go-to-market playbook – see below. Here are some insights on the Company and considerations on its business model and key unit economics. Founded over a decade ago by Girish Mathrubootham and Shan Krishnasamy, both former employees of Zoho Corp, the Company provides a Software as a Service (SaaS) platform to over 50.000 end customers that enables small and medium-sized businesses to support customers through e-mail, phone, website, and social networks. As such, the Company faces competition from Zoho Corp. as well as from the biggest US players in this industry, such as Salesforce or more traditional incumbents like Oracle or SAP. Functions are covered across three main product lines: Freshdesk for Customer Experience (CE), Freshservice for IT service management (ITSM) and Freshsales for Customer Relationship Management (CRM). The S-1 does not provide a detailed view per product line. The Company plays an SMB (i.e. small and medium businesses) playbook, with SMBs accounting for c.80% of the Company’s client base at Dec.21, while Mid-Market (c.17%) and Enterprise (c.3%) were more marginal. Per the S-1, the Company defines an SMB client as an organization with less than 250 employees, while a Mid-Market customer refers to an organization with less than 5.000 employees. Through this breakdown, we are unable to see the weight of organizations having more than 1.000 employees, which could help reassess the total weight of true SMB and Enterprise customers as per SaaS standards, mixed in the “Mid-Market” segment. Also, it would be interesting to challenge the customer breakdown by introducing in the customer breakdown a reference to Annual Contract Value (“ACV”). Today, the majority of sales are driven by the inbound channel, from the SMB to the Enterprise segment. We understand from the S-1 that the Company’s challenge is to expand its partner network, which remains marginal at Dec.21. The Company’s pricing model is vanilla, with a user-based pricing based on the number of users the customers enable as « agents ». Per the S-1, the Company is at risk as regards to a potential overstatement of users at booking, implying potential downsell for the forward periods. The Company has the typical metrics of a SaaS company, with a constant growth margin of 79% over 2019-2020 and over 95% of its revenue coming from subscriptions. Here the dynamics in terms of recurring revenue are interesting and allow for the Company to stand-out from the crowd: the Company’s expanding product suite seems to have positively impacted its net dollar retention (of 147% in 2020!), meaning that the Company’s growth is mostly fuelled by expanding revenue from its existing customer base. Per its S-1 filing, Freshworks’ 53% revenue growth rate in the first half of 2021 was 38% driven by new customers (20% of its 53% growth rate), while 62% (33% of its 53% growth rate) “was attributable to revenue from existing customers as of June 30, 2020”. In addition to its organic growth, the Company plans to develop a M&A playbook. To date, it has already acquired 13 companies to date including AnswerI1Q, Flint, CanvasFlip, Natero, and Zarget, among others.