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.

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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.

Freshdesk’s Acquisitions

Over the past two years, Freshdesk has made seven acquisitions for undisclosed amounts.

Bangalore-based Pipemonk was acquired in January 2017. It is a data integration platform founded in 2014. Formerly known as ZapStitch, it had secured seed funding of $2.1 million from Helion Venture Partners, Orios Venture Partners, and Anupam Mittal. It claims to serve more than 400 clients across the world. All the thirteen employees will be joining Freshdesk, essentially giving it an in-house data integration team. You could call this an acquihire scenario, since the product itself is not necessarily synergistic with Freshdesk’s core mission. There is a lot of product level integration opportunity within the Freshdesk product portfolio, as well as with other third party products. Such integrations create long term exit-barriers, and are worth establishing.

Bangalore-based Chatimity was acquired in October 2016. It is a social chat platform founded in 2011 and was bootstrapped with less than 10 employees. Itstarted out as a social chat application aimed at helping people discover others based on locality and interests and grew to over 3 million users across various platforms. Later, it started catering to enterprise use cases like sales and support and started to build chatbots specialized in verticals like travel and e-commerce. This company has core technology that is of interest to Freshdesk, although bulk of its consumer user base is of not much relevance.

New Delhi-based Airwoot was acquired in April 2016. It was founded in 2012 and had received angel funding from Kae Capital and angel investors like Rajan Anandan, Sunil Kalra and Samir Sood. With less than 10 employees, it was estimated to have annual revenue of $10 million. It was acquired in February 2016 primarily for its Artificial Intelligence technology following Zendesk’s release of the Satisfaction Prediction feature in March 2016. Artificial Intelligence is, globally, one of the hottest areas of software these days. For a customer support software provider, AI is of paramount importance because the holy grail of that industry is to automate ALL customer support, instead of simply providing software to empower support agents to perform better, and for management to manage them. In fact, if Freshdesk can crack this nut, it would become the single most defensible asset for the company in the long run. Competition will be huge. ALL related companies are looking at this particular problem with utmost seriousness.

Pune-based Framebench Technologies was acquired in February 2016. It was also founded in 2012 and had raised seed capital from Blume Ventures and Anand Ladsariya. It had over 17,000 registered customers and its clients included HBO, Unilever, Isentia, and Scancafe. With 6-20 employees, its revenue was less than INR 10 lakh (~$16,000) and was acquired for its file collaboration technology. Is that core to Freshdesk’s product roadmap? I don’t think so.

Chennai-based Konotor was acquired in December 2015. It is an in-app customer support offering founded in 2013. It had raised $155,000 in seed capital from Accel Partners, Qualcomm Ventures, and Target Accelerator. It claims that its platform supports more than 40 million users and has customers such as Zomato, BankBazaar.com, and Faasos Food Services Pvt. Ltd. Konotor will continue to exist independently and serve its existing customers. This is clearly a good fit from a product portfolio point of view.

Chennai-based Frilp was acquired in October 2015. It was founded in 2012 and had raised $500,000 in funding from angel investors, including Freshdesk CEO Girish Mathrubootham in August 2014 and an undisclosed venture round with Microsoft Accelerator. Over 100,000 users have used its platform to get references and hand out recommendations. It had 19 employees who joined Freshdesk. This could be a reasonable extension to the product roadmap of Freshdesk.

Bangalore-based 1CLICK.io was acquired in August 2015. It is a cloud-based video collaboration platform founded in 2012. It had raised undisclosed seed funding from Blume Ventures and The Chennai Angels in 2014. This could be core to the product roadmap of Freshdesk.

Overall, acquiring more small Indian companies that have interesting technology and talent and finding up-sell opportunities for some of those products within its customer base is a very reasonable strategy for now. Freshdesk’s high profile stature in India makes them a desirable exit path for Indian startups, and Girish is widely accepted as a strong leader in that ecosystem. Besides, Indian startups are craving an exit path in many cases, and having a home-grown company comfortable with the culture, and credible enough to create reasonable financial outcomes would be the answer to their prayers.

Acquiring companies abroad would require going outside of this core comfort zone. Freshdesk, despite its stature in the Indian eco-system, is still a relatively small fish in the global software pond. As it grows though, it is very likely that opportunities for acquiring interesting adjacent products outside of India would arise. So developing skills and management around this strategy may be a good idea over the next 2-3 years.

Acquiring larger companies with significant revenue abroad (there aren’t many such companies to acquire in India) would be totally outside this comfort zone. Each CEO who has built $75-$150 million in revenue is a contestant for the CEO position, and this would be more of a roll-up, rather than Freshdesk acquiring companies. Investors who would bankroll such a strategy would also probably ask for an experienced CEO who knows how to integrate multiple sizable companies. I would rule out this option for the foreseeable future.

As comparables, two companies come to mind: Cadence and Cisco. Cadence stitched together its billion dollar revenue trajectory with 27 acquisitions under the leadership of Joe Costello. Cisco built a much larger company with rampant acquisitions under John Chambers. No one yet has taken advantage of all the energy bubbling India, so if Girish can pull off something similar with this unfair advantage, it would also be a defensible strategy.

Over time, Freshdesk can also expand the portfolio beyond the customer support core, and embrace a broader CRM strategy. They’ve already started exploring this dimension. And longer term, they may even go broader. But for now, they need to remain focused and execute on the core strategy.

Freshdesk’s Management Changes

In March this year, COO Nishant Rao who worked out of the Chennai office resigned from the company, apparently, for personal reasons. He will be shifting base to Delhi where his family stays and would help Sequoia Capital as an advisor. He had joined Freshdesk in October 2015 and prior to it was the MD of LinkedIn India. Just one month prior to his resignation, in this feature from Fortune, he had said that his mission for 2017 would be to fix the finance function, including hiring a CFO.

Even though Freshdesk has notionally relocated its headquarters to San Francisco, CEO Girish Mathrubootham continues to operate from Chennai. As such, the center of gravity of the company remains Chennai, India. This works well for the company, as its cost structure remains far more attractive than most Silicon Valley software companies. Also, because Freshdesk has received enormous publicity and support from the Indian media, they are a desirable employer for Indian talent.

Also, because Freshdesk has a strategic focus on the mid-market customers, its customer acquisition strategy is largely remote through web and phone. While enterprise software companies need to operate direct sales channels in the US, Freshdesk can sell to global customers from India. This is a huge plus. And as a matter of fact, mid-market facing SaaS companies out of India are all trying to replicate this strategy at scale.

Going forward, Freshdesk has some management structure decisions to make: where is the long term center of gravity of the company going to be?

My take: Freshdesk should do its scaling from India. If they were an enterprise-focused company, I would have a different take. But given that their global sales channel is primarily remote, and given the CEO’s comfort zone is very dramatically India-centric, they should scale from India. I don’t see any particular advantage for the company to operate out of Silicon Valley. An office here is fine. But since both product and marketing/sales can be done out of India, competing in the Valley’s talent war environment would be unnecessary.

IPO Plans, Further Fundraising

Freshdesk expects to cross $100 million in revenue soon and be a Billion Dollar Unicorn before going public within the next two years. Accel Partners and Google believe Indian SaaS startups will be worth $50 billion and will earn $10 billion in revenue by 2025. It would probably be very easy for Freshdesk to raise more money at a billion dollar valuation if they wish to. If it raises more money at a significantly higher valuation, however, the exit options become fewer. The IPO market has been tough for overvalued private companies of which there have been many in the industry lately. And acquisitions are fewer when price tag expectations move higher.

Also, the thing to avoid at this point is liquidation preferences in further fund-raising, a disease that has plagued the venture capital business over the last 2-3 years. At the very beginning of their journey, I helped Girish negotiate out liquidation preferences from the Series A term sheet. At the time, I don’t think Girish realized how critical that factor was, but now, he is much more mature. I do not know if any of the term sheets for post-Series A rounds have liquidation preferences. I hope not. Also, given the market position of the company, there is absolutely no reason whatsoever to clutter any further fund-raising with liquidation preferences. Conservative valuations is a much better option. [For readers trying to understand liquidation preferences, here is a little tutorial video.]

Freshdesk can afford to be strong in fundamentals before going public, and remaining private for another couple of years seems like a reasonable strategy. In fact, ideally, if they go public AFTER achieving profitability, that would be terrific. If Freshdesk can get to 200,000 customers and increase the average sale price per customer by 50-100% using their acquired portfolio (or through organic development efforts, as Zoho, Girish’s former employer has done very effectively), and achieve profitability by 2020, a successful and sustainable IPO should be perfectly viable.

Do I recommend that Freshdesk ought to raise more money? If you know my work, you already know that I am not a big fan of raising huge amounts of VC money. The industry is littered with Death by Overfunding stories, and it would break my heart to have to write a similar story about Freshdesk. However, there is one scenario in which it may make sense for Freshdesk to raise more money: to delay its IPO such that it can become profitable while still private. That, I believe, is worth shooting for, especially if a post-IPO fumble can be avoided by doing so. Also, a first-time CEO should surround himself with experienced people on the Board who have done this kind of scaling before, including as a public entity.

It would mean a great deal not just to Girish and Shan, but to all well-wishers of the Indian startup ecosystem who are rooting for a REAL Unicorn to emerge in India, not a PSEUDO Unicorn, as Flipkart is threatening to become.

It would mean a great deal to those of us who have worked relentlessly to move India from a body shopping driven mediocre services focused IT industry to a product-focused, mature, cutting edge eco-system.

The Indian IT Services industry is currently facing its greatest existential threat. I wrote a Forbes column called Death of Indian Outsourcing in February 2008. Well, a decade later, that prediction is materializing. Indian IT players have announced 200,000 lay-offs in the short range. Infosys plans to hire 10,000 US citizens in America. The cost advantage has disappeared more or less, and Trump’s protectionism is accelerating the demise of whatever advantage was left.

I also wrote prolifically for years on India’s need to focus on building products, and that cultural shift has also now gained momentum. Many, many people have worked tirelessly for all this to happen for many years.

Freshdesk’s successful, sustainable IPO is a milestone that we’re all looking forward to in 2020.