As team captain, I need to field the best one to win: Freshworks CEO Girish Mathrubootham

Girish Mathrubootham, CEO Freshworks

The year 2023 was truly a roller-coaster ride for the software industry. Fed rates went up, demand slowed down, investors aggressively pushed for efficiency and profitability, and layoffs were undertaken. Girish Mathrubootham’s role as the CEO of Nasdaq-listed Freshworks has been as thrilling as it has been challenging.

Seated in his office in San Mateo, with the background filled with vibrant posters of Tamil film industry superstar Rajinikanth, whom he idolises as an inspiration, he said, “Not every day is an IPO day where we will be celebrated; the hard-training phase is as important and that’s where we are now…to get ready for our next milestone”.

It was an important year for Freshworks, as the firm reported its first-ever full year of Non-GAAP operating profit since listing on the Nasdaq back in 2021 at $44.5 million. In 2022, the company had posted an operating loss of $22.3 million.

There have been a slew of management changes within the SaaS firm. In Q4, the firm’s Chief Revenue Officer Pradeep Rathinam left the firm and Abe Smith was appointed as the global field operations leader. Other recent appointments include Mika Yamamoto as its first Chief Customer and Marketing Officer (CCMO), and Johanna Jackman as the new Chief People Officer (CPO).

In a candid interview with Moneycontrol, Mathrubootham said that the company is maturing, and as the team leader, he needs to field the best one to win, speaking about the management changes within the firm.  He also spoke about taking Freshworks to revenue of $1 billion, reaching GAAP profitability, ESOP buybacks, and the impact of AI on the SaaS industry.

Edited Excerpts:

Freshworks reported a healthy revenue growth of 20 percent in 2023 despite a lot of macroeconomic pressure and demand slowdown, what were your growth drivers?

While there were some challenges globally, I think what drove our outperformance was, clearly our refinements and our go-to-markets helped us focus and win more mid-market enterprise deals. We closed a record number of 100k plus deals in the mid-market and 30k plus deals in the SMB (Small and Medium Businesses) market. So, that was a big positive for the field sales. Freshservice continues to do well. We saw a lot of excitement from customers wanting to get their hands on Freddy self-service and Freddy Co-pilot, which we launched. The other thing is, while we beat our revenue estimates and grew, we also did it efficiently for the whole year, we produced $78 million of free cash flow in 2023. So, that's something that we are proud of.

This is your first full year of non-GAAP operating profit, what led to this?

From a non-GAAP operating margin standpoint, we are profitable this year. From a free cash flow standpoint, we did even better. So, in 2022, we were using cash for operations, however in 2023 we were generating $78 million of free cash flow. Efficiency played a key role here.

What is your next milestone, can you share your path to GAAP operating profitability?

We have outlined this many times publicly. We start with free cash flow positive and that has happened towards the end of 2022. And then we said, this will be followed by non-GAAP operating profit, which we demonstrated in 2023, which will now be followed by GAAP operating profit, which we expect to happen pretty soon. I don't have an exact quarter to specify. We are on the right track to achieving GAAP profitability as well.

Have you monetised your AI offerings?

The Freddy Self Service, we started monetising late last year in the second half. Freddy CoPilot was in beta mode.  A lot of customers, when they saw and used the beta version, they were excited, and it helped us in closing some of the deals in Q4.It’s been two years since you went for a US listing, how different is the world now for Freshworks?

If you're playing a game, the rules of the game and the game itself is very different. In a VC-funded start-up game, it's a game where you're just focused on growth and not on profitability. However, for a public company, the rules of the game are different.  You have to have solid unit economics, you have to show the path to profitability to your investors. If you look at the last two years, if you compare what we said during the IPO, and what we have delivered, now, you can see how we have been very consistent in showing investors that, 'hey, we started with our inbound model only with predominantly SMB customers, but we are moving more and more upmarket'.  Today, mid-market and enterprise customers contribute 60 percent of our revenue, we said we will work on our profitability margin and show that path and we have delivered on this as well. And today we are close to becoming a rule of 40 company, which we expect to happen sometime soon.

And you know, the rule of 40 is the sum of your growth and your free cash flow margins. And also, if you look at every quarter, since going public, we have guided public investors to where we think the business will go and we have come in there. Our CFO Tyler has been very consistent in calling it as we see it. And we have consistently outperformed every single quarter since going public.

Yes, it is a lot more hard work and challenges and struggles. But I will go back to what I said at the IPO. I said, 'hey, I feel like an Indian athlete has won the Olympic gold. We all know that an athlete will be celebrated for that big success, but the training and the work that an athlete has to do every day, every week, every quarter is hard.'  So, the big celebration will happen when we hit more milestones. But we have to go through the rigor of hard training now. And I think we are going through that. And I'm super proud of what our teams have accomplished so far.

You have announced making a lot of investments in AI, how much did it help in generating revenue for Freshworks in the past year?

So the first thing, if you look at Freshworks, we have been working on our Freddy AI since 2016, and we launched it in 2018. Gen AI is a leapfrog moment in AI. But, we have been on this path. We saw this early and we made the investments. And we have been offering Freddy AI to our customers since 2018. So in that sense, like we know what is happening in our industry, and with Gen AI and ChatGPT, we saw the power that could come in.

Some of our customers are using our Freddy Self-Service and Copilot and they have already reported deflection rates of anywhere between 30 to 50 percent. And over a 50 percent reduction in agent ticket resolution times.

Many also believe that AI will disrupt the SaaS industry, making some SaaS applications irrelevant. Your thoughts?

Many of the AI applications today are still delivered as a SaaS application. So it's not right to say that AI will destroy SaaS. But will AI disrupt the traditional workflow-based SaaS applications? The answer is probably yes, some of them could go away. But I think AI is like any other technology. See, the workflows are going to be there, and the business value drivers are going to be there, but companies have to reinvent themselves to use AI, to solve the same business challenges that they've been solving for. So, SaaS as a delivery model is not going to be killed. However, the new-age applications will leverage generative AI to destroy some of the old artifacts.

There is going to be a lot of transformation within the way traditional workflow-based SaaS applications operate. But SaaS itself, as a delivery model, is going to stay.

Several SaaS players are also working on building their Large Language Models (LLMs). Your competitor Zoho has announced the development of their own LLM. Will Freshworks come up with an LLM too?

We are not building a ChatGPT or a Sarvam.AI kind of large language model (LLM). But we are building our model. What we are building, has several numerical models to help salespeople score leads or close deals. We have other models that are like, let's say, account-specific models for our customers. But it's not a large language model trying to compete with  ChatGPT typically.

Can you tell us how much were ESOP buy-backs by Freshworks in 2023 and are you planning to buy back more in 2024 as well?

The technical term is called net settle for ESOP buy-backs. So what is happening is as employees vest their shares, instead of releasing those shares to the market where they have to pay taxes, what we are doing is that the company is buying up those shares and settling the taxes for employees to the government. So in Q4, we spent $16 million on buying back and for the full year of 2023 we purchased $68 million through net settlement. And if you look since our IPO, we have used $239 million in net settlement of vested equity. For 2024, we expect to use $80 million and for Q1 we think it will be $21 million.

How is the overall macro environment now compared to the beginning of 2023?

I believe we are going into the year in a strong position. We are seeing good traction from mid-market and enterprise customers. Companies are still consolidating their spend. We heard from the Fed that they're not going to reduce or they're not sure if they want to reduce interest rates. So the SMB market is still a little bit more challenging. But we are seeing  large number of expansion deals on the customer experience (CX) side, we are also seeing strong field execution within mid-market enterprise deals and there is a lot of early renewal activity as well. So, I feel that we are in a strong position as we enter 2024.

We heard the firm shut down one of its Australia operations. What was the reason behind it and were there any layoffs?

So we had two offices in Australia, one in Sydney and one in Melbourne. And from a business and customer standpoint, Sydney is where most of the business operations are. So we made a business decision to centralise in Sydney, and we offered all the employees in Melbourne the option to move to Sydney and many of the employees moved. I don't have the exact count of how many employees did not move. So yeah, it was more like an office consolidation between Melbourne and Sydney and it was not a cost-reduction move.

The firm has been undertaking a lot of management changes. Give us a sense of what’s happening and will we see more changes in the coming months?

There were some management changes within but my broader answer to your question is that it's not this year, this happens every year. So as a captain of the team, I need to make sure I'm fielding the best team to win, right? And sometimes, players have to be replaced. Sometimes players choose to leave. So both of these have happened, specifically this quarter, the change that we're announcing is that our CRO Paddy Rathinam will be departing Freshworks and we have hired Abe Smith as the worldwide global fields operations leader.

Paddy joined us in 2020 through an acquisition, he was the CEO of a start-up that we acquired, called AnswerIQ. He's had a phenomenal career spanning four years at Freshworks,  He was the first Chief Customer Officer at Freshworks, and then when we needed him to step into the role of CRO where he helped us stabilise our sales operations.

Will the CRO role be filled by Abe Smith? And please elaborate more on this management rejig.

Let me give you the business context. So, you know that our operations has an SMB commercial business, which is predominantly closed from India, and it's predominantly marketing-led. So the demand generation activities for that business are all marketing-led. And there is our field business, the mid-market enterprise customers, the demand generation for that predominantly is outbound activities and field sales. So, as our company matured, we figured that, it's better to manage these two businesses separately because the activities involved are very different.

We want to bring proven leaders who have done this in the past because as we scale from $600 million to take the company to billions of dollars, we want to hire leaders who have been there, done that, and proven.

So what we are doing is, we are moving SMB commercial sales under Mika Yamamoto, who's our Chief Customer and Marketing Officer, so she will be now responsible not just for overall marketing, but also for SMB and commercial sales teams. And, Abe Smith, who's coming in, has 25 years of experience in global field sales roles in companies like Zoom, Oracle and Cisco. So he will be leading our worldwide field operations.

So in effect, we are dividing that CRO role into two separate revenue responsibilities under two proven leaders. Paddy (Pradeep Rathinam) has decided to move on and his aspiration has always been to be a CEO. I wish him all the best.

The management changes, as we see it from the outside, seem to be now filled with US industry executives. There is only one more Indian executive on the board apart from yourself at present. Is this a conscious choice?

We don’t think this is what it is. There is no discrimination based on nationality, religion, age, or sex. You always want to have the best person for the job, right? So, even IPL teams have foreigners as captains. We interview candidates, we always go through a search process and we find the best candidate for the job.

The current trend within the Indian start-up ecosystem system is that many are flipping back to India to list here. Freshworks had a Nasdaq listing in 2021, so do you have any second thoughts at all?

When the markets corrected at the end of 2021, the IPO window closed in the US. There has not been a single IPO in 2022. A lot of start-ups are trying to flip back to India because the India IPO window is wide open. And there is a lot of pent-up demand from India capital, wanting to get into start-ups so that is probably the reason why you're seeing a lot of companies wanting to flip back to India.

So I wouldn't change a thing. I think Freshworks has been global from day one and our dream was always to be the first Indian start-up to go and list in the US markets and we accomplished that. We are super happy and proud and I don't think I see myself having any second thoughts about it.

As an investor, what are your thoughts on why there aren’t many SaaS start-ups going public, either in India or in the US? What are you advising your portfolio companies?

I think at the end of the day, exit is important, people following an IPO window is a very normal thing. And wherever you list, the core is you creating liquidity for early investors. Are you creating liquidity for early employees who have spent years toiling for the company as you are going on that next journey as a public company.

US markets used to be much more lucrative in terms of valuation, you could be unprofitable and go public in the US. However, in India, most of the time, you cannot list unless you're a profitable company. So we are seeing that IPO window open in India now and more start-ups are going public.

With my VC hat on I think exits are good for investors and employees. So, if it means exiting through the UK stock market or the Australian stock market, any investor will take it.

What will be your key focus areas for 2024 to drive revenue and profit?

We generated $78 million of free cash flow for 2023 and we are guiding to generate $110 million of free cash flow in 2024. So I think we are expecting a non-GAAP profit of around $52  million to $60 million this year. Our focus will be on product innovation, gaining larger customers and deals, cross-selling and expansion, and doing everything efficiently. So, those are the four pillars that I outlined last year, and we are executing our growth targets along those four pillars.