India’s Most Important SaaS Venture: Strategic Options Ahead Of Freshdesk

Launched in 2010, Freshdesk is a proud flag bearer of India’s presence in the global cloud CRM space. Six months back, it raised $55 million at a valuation of $700 million. This takes its total funding to $149 million. In a recent interview, founder Girish Mathrubootham has said that he plans to do a multi-billion dollar IPO in two-three years. Freshdesk was incubated at 1Mby1M, and I have a tremendous soft spot for the company. Girish has since emerged as a hero for the Indian entrepreneurs, and Freshdesk is now India’s most celebrated product company, hoping to become India’s first billion dollar SaaS success story. A Unicorn.

Is raising this much money a good idea for the company? Perhaps the best way to answer this would be to compare its journey with that of rival Zendesk.

Zendesk

San Francisco-based Zendesk (NYSE: ZEN) was founded in 2007 in Copenhagen by three friends Mikkel Svane, Alexander Aghassipour, and Morten Primdahl. They wanted to create a user-friendly web-based service that would help companies offer customer support. Their platform received positive reviews from customers and they quit their jobs to grow Zendesk.

It went public in May 2014 and raised $100 million by selling 11.1 million shares at $9.00 each, valuing its IPO at over $900 million. Prior to listing, they had recorded revenue of $72 million in 2013 and raised $85.5 million in funding from GGV Capital, Matrix Partners, Redpoint Ventures, Goldman Sachs, CRV, and Benchmark. But, like several other SaaS players, revenue growth was yet to turn into profits. Zendesk reported losses of $24.4 million in 2012 which narrowed marginally to $22.6 million in 2013.

Before they went public, Zendesk announced the acquisition of Zopim Technologies, a privately held software development firm that offers SaaS-based live chat service for an estimated $30 million. In October 2015, they acquired We Are Cloud, the parent company of BI tool BIME for $45 million. They announced the acquisition of web-based message organizing tool Outbound this month for an undisclosed amount. It enables customer experience and marketing teams to deliver intelligent, behavior-based messages across email, mobile, and web channels. It is expected to expand the product scope and market opportunity of Zendesk’s Connect product, currently in an early access program.

Today, Zendesk has 101,800 paying customers and 1700 employees. For the full year 2016, its revenue had increased 49% to $312 million. GAAP net loss was $103.8 million or $1.11 per share. Non-GAAP net loss was $20.5 million or $0.22 per share. It ended 2016 with a cash balance of $93 million. It aims to reach $1 billion in annual revenues and profitability by 2020. Its stock is trading at $26.72 at a market cap of $2.62 billion. As you can see, Zendesk is still a money-losing enterprise, despite fast growth, which the market gives them abundant credit for.

(Click on image to enlarge)

Freshdesk

Freshdesk, on the other hand, was founded in 2010 as an affordable alternative to Zendesk by CEO Girish Mathrubootham and CTO Shan Krishnasamy in Chennai, India. It has over 100,000 customers and 950 employees. Its enterprise customers include 3M, Sony Motion Pictures, Cisco, SolarCity, and Jaguar Land Rover. Freshdesk helps them manage their customer helpdesks across web, phone, email and social platforms. It has offices in Chennai, San Bruno, London, Sydney, and Berlin.

Although it has some enterprise customers, Freshdesk primarily targets the mid-market segment. Zendesk targets the higher end of the market although Zendesk also has a large number of mid-market customers. By 2012, Freshdesk had crossed $1 million in revenue and were estimated to have grown to a $10 million annual run rate by the end of 2013. Its revenue in 2016 is estimated to be $70 million. Freshdesk is targeting 200,000 customers by the end of 2019. I believe this is an achievable goal.

Let us now look at its funding and valuation trajectory. In April 2011, Freshdesk won a $40,000 grant from Microsoft as the winner of a startup challenge contest. In November 2011, it secured $1 million in Series A funding from venture capital firm Accel Partners with paying customers. It raised another $5 million in April 2012 and $7 million in November 2013 from Tiger Global and Accel Partners. It followed that up with $31 million in June 2014 from Accel Partners and Google Capital at a valuation of $250 million and $50 million in April 2015 at a $500 million valuation. In the latest round in November 2016, it raised $55 million from Sequoia Capital and Accel Partners at an estimated valuation of $700 million.

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Sramana Mitra is the founder of One Million by One Million (1M/1M), a global virtual incubator that aims to help one million entrepreneurs ...

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