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3 Ways Finance Helped Freshworks Rise to a $10 Billion IPO

Freshworks, a relative newcomer in the customer engagement and service SaaS industry, has captured the attention of many in the tech world.

The company aimed for a $9 billion valuation for its initial public offering in September 2021 but ended up surpassing that with a valuation of $10.13 billion. Market turmoil has put a damper on the company’s performance on Wall Street, but the company continues to grow despite the heavily-competitive market it’s in.

Freshworks was founded in India by Girish Mathrubootham in 2010 with a team of six and, after gaining interest from investors early, it became the country’s first tech unicorn. In 2018, the company relocated its headquarters to San Mateo, California, and now employs over 4,400 employees. Freshworks’ focuses on customer experience automation, providing businesses with the ability to have their own contact center, CRM, IT service management platform, and more.

Freshworks’ competitive SaaS pricing strategy has helped it drive consistent revenue growth with small- and mid-sized businesses. And the company's dedication to long-term growth and financial automation will continue to be key drivers in increasing revenue and scalability. Here are the 3 ways that finance helped propel them to this point:

1) Start With a Healthy Gross Profit Margin

Freshworks' gross profit margin is exceptionally healthy for an IT startup, thanks to strategic decisions taken by the company's leadership in terms of workforce and other efficiencies. Freshworks' Chief Financial Officer Tyler Sloat reported on the company's most recent earnings call that non-GAAP gross margins were a little over 83 percent in the third quarter. According to Openview, SaaS companies that went public in 2020 had an average gross margin of 76.6 %.

“Our business model is supported by an efficient financial framework that allows us to continue investing for growth while making incremental improvements to drive operating leverage in the business,” Sloat said. “This provides us the flexibility to invest and double down on key areas of our business while maintaining a healthy margin structure. Starting with cost of revenue and gross margins, we're running at really healthy levels.”

According to analysts at Oakoff Investments, Freshworks has been able to maintain a high gross margin by retaining the majority of its workforce in India, where wages are substantially cheaper than in the United States. Freshworks, on the other hand, isn't only keeping its workforce in India for the sake of saving money.

The company was the first Indian SaaS company to go public, and it takes pleasure in the fact that it was designed in India. According to one study, around 88 % of its employees, including engineering, product design, customer support, and sales and marketing, are based there.

“Looking at our operating expenses, we managed our sales and marketing spend through a number of internal efficiency metrics, comparing our sales and marketing costs to our incremental revenue,” Sloat said, adding that the company regularly compares its efficiency metrics to its competitors. “And because we're able to attract top technical talent in areas like Chennai, we can invest in a meaningful yet efficient manner.”

2) Center On Product-Led Growth

Freshworks' product-led growth approach has aided the company's performance tremendously. The company has shown effectiveness in attracting new clients, but it is in customer retention that they have set themselves apart. Sloat reported that overall net revenue retention was 114 % in the fourth quarter of 2021, which was consistent with previous quarters.

That product-led growth, coupled with efficient expense management, has fueled Freshworks’ growth curve. Freshworks reported revenue of $172.38 million in 2019 and $249.66 million in 2020, an increase of roughly 45 %. This is due to its more than 50,000 customers, the majority of which are small and medium-sized businesses.

“Today, we have a strong balance sheet to support the growth of our business,” Sloat said. He attributes the company's success in these areas to product-led growth and easy-to-use platforms.

In addition to increasing revenue, the company is acquiring more high-spending accounts, and its customers are opting to spend more with it as the company expands its service offerings. The number of customers that contribute at least $5,000 in ARR annually went from 10,723 in 2020 to 14,079 in 2021 (as of September 30, 2021).

3) Mitigate the Possibility of Errors in Financials

The number one priority for any CFO, according to Sloat, is 100% predictability. Leadership teams look to their CFOs and finance teams for crucial advice, and that predictability includes knowing where financial errors may arise. Financial experts must be aware of which errors are critical and which are acceptable, as each company's situation is unique.

In one interview, Sloat said, "Every CFO should always be concerned that there’s errors lurking in your financial data." “In fact, I know there’s errors in financial data — there’s errors in every single balance sheet, income statement, cash flow I look at — not just our company but any other company, so that is about materiality and how significant are those errors.”

For CFOs, it’s key to set up systems of controls for their teams and the processes they use that get them to a level of comfort that allows them to feel their financial data is being recorded the way it should be, he said.

“Being able to use automation and tie together your accounting and finance systems can help businesses look forward and let teams focus on becoming more efficient as an organization,” Sloat said.

Companies that do this process manually in spreadsheets run the danger of typos, misaligned rows, missed cells, and copy/paste errors, all of which can lead to reporting inaccuracies. Automating the data collection and consolidation processes — not just from finance and accounting systems, but also from your CRM and HRIS — greatly minimizes risk and makes it simpler to trust the numbers. It also frees up your team's time to focus on generating strategic growth rather than double-checking numbers.

Finance Teams Are Your Strategic Partner

Despite being in an industry with a lot of significant competitors and a lot of change, Freshworks has been able to differentiate itself thanks to the wise decisions made by its leadership team.

Sloat recognizes that finance teams are strategic partners on that team, regardless of industry, and that executives rely significantly on them for guidance and insight. Financial teams must be able to undertake analyses and forecast future outcomes based on reliable financial data and modeling in order to assist a company in operating efficiently and accelerating growth.

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