Mini-Salesforce puts mighty multiple in $9 bln IPO

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A man points at a computer screen showing stock information in this illustration photo taken in Bordeaux, France, March 30, 2016. REUTERS/Regis Duvignau/File Photo

NEW YORK, Sept 13 (Reuters Breakingviews) - Marc Benioff’s $252 billion (CRM.N) is a giant among giants. But the initial public offering of Freshworks, a much smaller software firm seeking a $9 billion market capitalization in an upcoming float, might be bigger in one way: its valuation. It shows how small things can pack a mighty punch.

Freshworks, like Salesforce, helps businesses manage customers as a so-called software as a service company. Smaller organizations, like the Los Angeles Community College District, are its bread and butter. But helping salespeople keep track of leads is a valuable proposition for companies of all sizes, and Freshworks is supercharging its expansion by making inroads among bigger clients like Sotheby’s.

Revenue grew 53% in the first half of 2021, compared with the same period the previous year, to $169 million. The company is also churning out cash despite its expansion, an important but unusual quality. In the first half of the year, cash from operations was $8.7 million, resulting in free cash flow of $3.7 million after capital investment.

Even more encouraging is that revenue is growing faster than the number of paying customers, which grew just over 20% in 2020. It suggests that customers that try software from Freshworks tend to get hooked and sign up for more. The percentage of annual recurring revenue from customers paying over $5,000 is steadily rising, indicating the company is landing larger clients, too. That could supercharge growth for some time.

Assume Freshworks keeps growing at a 50% clip over the next four quarters, not a wild assumption given these characteristics. Its sales would be closing in on $500 million by this time next year. At the top of the company’s IPO range, it would be worth about 17 times sales, after netting out cash. Sure that’s twice the multiple attached to Salesforce, according to Refinitiv, yet Freshworks is projected to grow twice as fast.

The irony is that Salesforce might have offered not only a road map for Freshworks but opened up the market to a competitor, too. A some point customers might stop choosing the little guy over the established firm. But with Freshwork’s sales at about 1% of those at Salesforce, there is still plenty of business to go around.

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- Freshworks plans to sell 28.5 million shares priced at between $28 and $32 each, based on a prospectus filed on Sept. 13. The enterprise customer management software company would have a market capitalization of about $9 billion at the top of its indicated range based on shares outstanding, assuming underwriters exercise their option to sell additional shares.

- The company was founded by Rathna Girish Mathrubootham and Shanmugam Krishnasamy in the South Indian city of Chennai in 2010, but is now headquartered in San Mateo, California.

- Freshworks had revenue of $169 million in the first six months of the year, which is an increase of 53% from the same period in 2020.

Editing by Lauren Silva Laughlin and Marjorie Backman

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