Daybreak - $1 billion or employee-first ? Freshworks confronts a choice

Episode Date: May 10, 2023

Freshworks, one of the most successful SaaS companies that was listed on Nasdaq in 2021, wanted to hit $1 billion in annualised revenue by 2023. What made it stand out was also its employee-first approach.That it took the company just 5 years to climb from $1 million in ARR in 2010 hit $100 million indicated that the target could've been achieved. but it's 2023, and Freshworks is only halfway towards the goal.How is the company planning to pursue its profit goals?Tune in to fine out.Recommended reading: How Freshworks is going from being a ‘people-first’ to a ‘profits-first’ companySubscribe to The Ken for more exclusive, deeply-reported, analytical business stories.

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G is generally seen as the good guy. He's always been that way. We've been the kind of company that would hold hands and say all as well. That was what an employee of Fresh Works, a US-based SaaS company told us about G, Gerish Matrabutam, the CEO of the company. One of the reasons why Mathur Bhutan stands out compared to other Indian entrepreneurs is his product market intuition, of course, but also for being employee first. From $1 million in annual recurring revenue or ARR in 2010, FreshWorks hit $100 million in just five years.

Now, 60,000 companies, mostly small and medium businesses from around the world, use FreshWorks suite of overrun. a dozen products. Among them, some are to manage IT issues of employees and others are for sales and customer complaints. So a few years ago, after achieving the $100 million mark in ARR, Motham laid out a plan for his employees. The challenge was to hit $1 billion by 2023. He said that Fresh Works would celebrate this at the Udaipur Palace in Rajasthan. But it's 2023 already. The tech sector is seeing a slowdown and the company has only managed to reach halfway towards that goal. In December 2020, it posted a revenue of about $500 million. And in the next quarter, the results for which were declared just last week,

the company saw a decline in its net dollar retention rate. And what does that mean? That means that even though free cash flow was healthy and the revenue climbed by 20%, it seems that the company is struggling to retain its customers. The company that would usually celebrate every revenue milestone with a party celebrated the $500 million mark with just a cake. So what is Fresh Works doing to reach that goal now? It is changing its employee-first culture.

Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nick Da Sharma, and I Don't Chase the News Cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Wednesday, the 10th of May. It was FreshWorks expertise in marketing that actually helped get it from $1 million to $10 million in ERR. But to go from that point to $100 million, it had to expand both longitudinally and latitudinally. So what was earlier known as Freshdesk transformed from a single product company to

Freshworks. It now offered a full suite of enterprise solutions to customers. But now, of these dozen products, there are only two that are bringing in the most revenue. One of course is Fresh Desk, which is FreshWorks flagship product of 12 years. It is essentially a help desk for small and medium businesses that helps them sort out customer issues. The second one is called Fresh Service, which helps mid-market companies deal with IT-related complaints from their employees. FreshDest, pulls in nearly half of the revenue. But its growth rate slowed down for the first time in 2021. This was around the time of the company's IPO.

But even through 2022, the growth rate of fresh desk continued falling. Most of the company's growth is now coming from fresh service, which is growing at 40 to 50% year on year. And that is purely because of the type of product that it is. People usually like to stick to the same company. when it comes to resolving something like IT-related complaints from employees, which is why retention is higher. In fact, fresh service is turning out to be a big success for Freshworks.

It is doing so well that it might even exceed Fresh Desk revenue this year. But it is not the same for all the other products. Stay tuned to find out more. Between 2016 and 2018, a bunch of new products targeted at small and medium businesses were started. customer relationship management through fresh sales, customer messaging through fresh chat, a call center through fresh caller, human resources management through fresh team and project management through fresh release. Some like Fresh Team have been taken back. And others like Fresh Release and Fresh Marketer have been integrated with other products. But none of these have grown

at the scale of the flagship products. For example, if Fresh Desk got 10,000 customers in three and a half years, Fresh service got it in just two years. But the other products are yet to reach this milestone. Employees say that FreshWork's lack of sector-specific solutions came in the way of its growth rate. A former Senior FreshWorks executive told us, and I'm quoting, to sell to telecom companies, you need to have experts who understand its use cases and make the case.

That is how those like Salesforce have grown. End quote. The slowing growth rate of these other problems, is also partly due to a hurried rebranding exercise that was carried out between 2019 and 2021. This was just before the company's IPO. The idea was to achieve better search engine optimization. You see, FreshWorks is known for giving a lot of weightage to Google Ads and online marketing to show up right on top of search queries.

So it invests in this quite aggressively. The company also spends more than half of its revenue on sales. sales and marketing to get as many inbound leads. And that is because it generates a big part of its sales through inbound requests. Coming up next, we talk about how FreshWorks is planning to fix these problems and pursue the path to profitability. In March, at the All Hands meeting, Matra Bhutum signaled a shift in the company's usual business approach. He put up a picture of his two teenied sons and said that running the company is quite like raising teenagers. He told the employees gathered there that the company is going through a teenage-like phase of

growth and that it is harder to manage a teenager than a toddler. This meant that the company was moving towards a more performance-driven culture. So what was the first thing that it did? It laid off 90 people and then another 114 people three months later. It even hinted that it could be more if growth targets were not met. A fellow SaaS founder who did not want to be named told us that they should have laid off as many people as needed in one go. He said that it was the founder's good guy mindset getting in the way. A FreshWorks employee told us that Matry Bhutam has also changed his language to reflect his intent to take the company to profitability.

They said that he spoke of things like the rule of 40 and the difference between a public-funded company and a VC-funded one. Another employee told us that more people were being put on performance improvement plans. He said traditionally this was not a part of the company's DNA. The company is becoming more serious and the tolerance for error is reducing. Productivity metrics are also changing. For example, the partner channel's team used to be responsible for getting resellers to sell Fresh Work products. But now, their job is only to generate the pipeline

while the sales team is taking care of the lead conversion and closure. Because of this, many employees think that they might be shown the door soon. A SaaS founder gave us some perspective. He said, and I'm quoting, Freshworks is trying to scale in a time compression mode. Not everyone has the privilege of growing like Zoho. So it needs talent who can show how to execute. End quote. And it looks like Matrabutam himself is taking the lead in this.

People who work with him say that he is personally walking to customers' offices to sell. It seems like it is just a matter of time until his employees get used to this new approach. Daybreak is produced from the Newsroom of the Ken

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