Daybreak - Freshworks is shedding its employee-first DNA to reach its $1 billion dream

Episode Date: February 9, 2024

The results for the latest quarter for Freshworks are out and the US-based Saas company has beaten Wall Street estimates. It posted a revenue of nearly $600 million for FY 2023. Its losses, meanwhile, have narrowed by over 40%.Just a year ago, the story was slightly different. In the same quarter in 2023, the company saw a decline in its net dollar retention rate. Even though the free cash flow was healthy and the revenue climbed 20%, it looked like the comapny was struggling to retain its customers.Now of course, things have changed and this turnaround is all thanks to the rising demand for FreshWorks' AI-powered customer support and IT services products.But there’s more to it. And it has to do with the company’s employee-first approach.Tune in.Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

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Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. 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. This is what an employee of Fresh Works, a US-based SaaS company told us about G.

Gyrish Matrabutum, the CEO of the company. And one of the reasons why Matrabutum stands out compared to other Indian entrepreneurs is his product market intuition, of course, but also for his employee first approach. From $1 million in ARR or annual recurring revenue in 2010, Fresh Works hit $100 million in just five years. Now, around 60,000 companies, mostly small and medium businesses across the world, fresh works suite of more than a dozen products. Among them, some are to manage IT or information technology issues of employees and others are for sales and customer complaints. So a few years ago

after achieving the $100 million in ARR, Matrabutum laid out a plan for his employees. The challenge was to grow to $1 billion in ARR by 2023-24. He said that the company would celebrate it at the fancy Udepur Palace in Rajasthan. But the tech sector slowdown happened and the company has only managed to reach halfway towards that goal. In December 2020, it posted a revenue of about $500 million. In the quarter after that, the company saw a decline in its net dollar retention rate. Even though the free cash flow was healthy and the revenue climbed by 20%, it looked like

the company was struggling to retain its customers. But the results for the latest quarter are out and FreshWorks has beaten Wall Street estimates and posted a revenue of nearly $600 million. Its losses, meanwhile, have narrowed by over 40%. Now, of course, this turnaround is all thanks to the demand for FreshWorks, AI-powered customer support and IT service products. But there is more to it. And it has to do with the company's employee-first approach.

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 Friday, the 9th of February. 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 that point. $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. Fresh Desk 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 a 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 fresh works. 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 FreshWorks' 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 products is also partly due to a hurried rebranding exercise that was carried out between 2019 and 2021. This was just before the company's IP.

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 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 teenage 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

of 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 Matrabutum 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. always 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 Matra Bhutam himself is taking the lead in this. People who work with him say that he's 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.

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I am Snigda Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.