Everybody loves a good fight

To build an Indian software product company from Chennai is tough. Freshdesk did it. And it is now taking the fight to its US rival Zendesk.

Founding Fuel

[Photograph by Nathan G of Mint]

By: C S Swaminathan & Charles Assisi

On December 2, 2012, eight months after Freshdesk, a Chennai-based software as a service (Saas) product company that specializes in customer support software started operations, it got into an ugly spat with the San Francisco-based Zendesk, now its closest competitor.

The war of words started on Twitter when a software analyst and blogger Ben Kepes tweeted: "Seems to me that #Freshdesk is an unethical troll trying to cash in on #Zendesk's good name. But that could be just me…."

Not the kinds to keep quiet, Girish Mathrubootham, the CEO of Freshdesk, tweeted back: "….Have you tried Freshdesk. An obj (sic) review will help all."

The conversation then turned nasty. A representative of the Cloud Group called Freshdesk a "bunch of Indian cowboys" on Twitter. To which Mathrubootham replied, "Making an unsolicited attack on our nationality reflects badly on u, not us. We're Indian and we’re proud of that."

The spat got uglier still when Mikkel Svane, the CEO of Zendesk, called Freshdesk "A Freaking-RIP OFF". Quick to the draw, Mathrubootham grabbed the opportunity to get all of those listening in on a now public conversation to sign up for a free trial of Freshdesk for 30 days.

The exchange came to a close when Mathrubootham concluded on www.ripoffornot.org, "….Ben Kepes is a paid blogger for Zendesk…But with all the customers who have been switching over from Zendesk and our recent funding from Accel Partners, they probably realize we are not going to go away anytime soon. So they came up with this brilliant, half-baked social strategy of bad-mouthing us on Twitter."

So what is it that got Zendesk, a company five years older than Freshdesk and with revenues at $127 million, all worked up? By way of analogy, Sharad Sharma, co-founder of BrandSigma and a volunteer at iSpirt, a software think tank says, if Zendesk is a sedan like Honda City, then Freshdesk is a hatchback like Hyundai’s i10. Both cater to different segments. But Freshdesk is working at building capabilities to create a sedan out of India. And Zendesk doesn’t like it one bit. When coupled with the build-in-India model, Freshdesk gets a clear cost advantage of 30-40% that translates into a cheaper product for the consumer. Although it has recently moved its head office to San Francisco, Freshdesk remains committed to do most of its work from India.

Then there is the attention Freshdesk is receiving from investors. It just raised $50 million from Accel Partners in Series E funding. Since the time it started out in 2012, it has managed to raise $94 million until now.

Freshdesk does not share numbers. But back of the envelop calculations after the latest round of funding indicate that it is valued at $150-200 million. And on the outside, the company perhaps rakes in around $10 million in revenue. Less than a tenth of what Zendesk brings in, which is currently valued at $1 billion and which reported a 76% growth rate last year.

So why have investors like Google Capital, Accel Partners, and Tiger Global pumped $94 million into the company over the last three-and-a-half years?

Shekar Kirani, a partner at Accel, says: "When Accel met Freshdesk, it was a team of six in a small first floor house in Chennai, with a beta product and no paying customers. The team was led by Girish Mathrubootham, a strong product-lead entrepreneur. We were sold on the day we met the team and Girish. We were very much impressed about their deep insight into global small and medium business (SMB) helpdesk needs and challenges. Secondly, the product, even though beta, had a great finish and roadmap discussions were very insightful. For us, knowing that Freshdesk is attacking a huge market and the team has a strong product background was sufficient to invest into Freshdesk."

This begs another question. What is Freshdesk all about and why is this animal called SaaS so attractive to venture capital investors? Also intriguing is that no company in this space—Zendesk, or the big daddy of them all, Salesforce.com, now valued at $40 billion—has turned in a penny in profits. Everybody, Freshdesk included, is focused on acquiring customers.

The answer is simple. From a venture capitalist's perspective, being in the SaaS space is cool. This is a software distribution model in which applications are hosted by a vendor or service provider and made available to customers, typically enterprises, over a network like the internet. However, this is an incredibly crowded market with Godzilla's like Oracle, Google, Microsoft and Adobe having their fingers in there. All of them want to scale this part of their business and high-growth companies like Freshdesk are attractive propositions to buy out at some point.

That perhaps explains why Mathrubootham doesn't think much of contemporary phrases in the entrepreneurial dictionary like "Minimum Viable Product" (MVP), "Lean StartUp" and "Product Market Fit".

"I have a contrarian view here," says Mathrubootham. "In the business-to-business (B2B) space, I don’t believe in the concept of MVP… We did not carve out a very small product that we could put out and test and get the product market. We skipped it completely. When we put out our first version, we knew we had gotten it right because we know the space."

In the B2B space, I don’t believe in the concept of minimum viable product.

"The concept of MVP has its pros and cons," he adds. "If you’re resource constrained, like a Silicon Valley startup that may have one or two expensive developers, to stand out to attract venture capital and media attention, you need to differentiate. That is why a lot of Silicon Valley companies just build something unique and differentiated, get some traction and then build out the entire feature set."

So where does Mathrubootham's confidence come from?

To begin with, from the realization that the growth of digital channels has empowered customers, allowing them to share their brand experiences—good and bad—with the world. At the same time, organizations are ill equipped to respond to critical feedback. If their response is sloppy, the bad publicity gets worse. Take for example United Airways' response to a customer whose guitar was damaged in transit. The story goes that United Airways refused to compensate the artist for the damaged guitar. The artist composed a song about the ill treatment and posted it on Youtube.com. The video titled ‘United Breaks Guitars’ went viral. United Airways was unaware of this till the mainstream media started reporting it. United Airways then called the artist, apologized and compensated him for the damage. But by then their reputation had already taken a big hit.

Mathrubootham had a similar experience when his TV suffered damage in transit. Despite repeated follow-ups, he could not get the insurance company to pay up. As a last resort he used social media to air his grievance. This caught the attention of the president of the insurance company, who quickly helped him settle the claim.

This got Mathrubootham thinking. Customer support, a mundane business process handled by low-paid employees, had suddenly become a very important process to manage and preserve an brand’s reputation. He thought if could get a good set of software to help companies manage customer complaints proactively, it could present a big market opportunity.

He had worked with customer support software most of his life. He had managed customer support processes for companies, built software for cloud products major Zoho. He had spent close to a decade at Zoho, building a product line where he orchestrated the engineering and also managed the marketing and sales, getting customers to pay. This experience bolstered his confidence to quit his job and start building a product along with five others.

The use of SaaS was growing. Salesforce.com, an upstart in the SaaS market, was leading the charge in making organizations buy software differently by making the product easy to use and accessible on the browser from anywhere in the world. Organizations could pay a recurring subscription fee instead of an upfront installation charge. This was a compelling proposition for organizations, as it meant that they could cut valuable time in implementing software, giving them the flexibility to respond to rapidly changing customer expectations. Most importantly, they could choose such software without interference from IT teams that were usually gatekeepers for such technologies.

Mathrubootham quickly recognized that SaaS adoption would only grow. So he set to work on building the first prototype of the customer service and support product.

The team that he brought together was familiar with each other as they had worked together in the past, mainly at Zoho. The team focused on the key differentiating factors that would make the product stand out. According to their analysis there were more than 600 products broadly targeting customer service. Mathrubootham steered the team to focus on getting the basics right—a good ticketing system, addressing customer needs proactively and one-to-many communication. The social channel was important, but was not considered in the initial product release.

The mix had to be right: customers would need all the key functionalities to make their work happen seamlessly. At the same time, it had to be simple so they could deploy and train their agents fast. Anything less or more would have an exponential negative impact on customer adoption.

Meanwhile, an article on Hacker News—a social news website focused on computer science and entrepreneurship—caught his attention. It spoke of how customers were up in arms against Zendesk because it had ratcheted up prices. Mathrubootham reckoned if he could elbow his way in there with a good product, he could snag the irate ones looking for affordable options. He rolled up his sleeves and got down to work to take on the likes of Zendesk. That he has done a reasonably competent job until now perhaps explains the irate exchange reproduced earlier.

Getting started was easy. Anybody with a credit card can set up a server and software on Amazon. It is ridiculously affordable. Meanwhile, he was getting popular on Hacker News as a valuable contributor. When he announced there that he was building an alternative to Zendesk, people signed up to try out a beta version of Freshdesk.

Anybody with a credit card can set up a server and software on Amazon. It is ridiculously affordable

A few days after the product was launched, a college in Australia signed up as the first customer. Soon dozens more signed up. No chats, no phones calls, nothing. People were signing up much like they would for a new email account. In two months, Freshdesk had 70 customers. It now has a little less than 43,000 customers. "No Indian software product company has been able to until now," points out Sharma.

That is why there are a few lessons for entrepreneurs of all kinds to learn from Mathrubootham and Freshdesk.

Lesson #1: Focus

This may sound clichéd, but focus on customer segments and needs. Between Mathrubootham and his team, they knew two things. One, the small and medium-sized business (SMB) customers were underserved. Traditional software providers like Oracle and SAP had their eyes on large organizations. Two, how people are buying has changed. They search online, if they find something interesting, they sign up and start using it. Such discovery was difficult a few years ago.

How people are buying has changed. They search online, if they find something interesting, they start using it.

Freshdesk used social media channels to reach customers cost effectively. This is not to say Freshdesk isn't relevant to larger organizations. Some found the product met their requirements. So when Cisco or a 3M signed up, it provided the validation SMBs needed.

Lesson #2: Think disruption

"Even today, as we speak, most traditional companies have in-house systems where their email and phone support teams wait for calls and their marketing teams handle online channels," says Mathrubootham.

But, he points out, few people paid attention to how deep cellular phones have percolated. When thought through and coupled with the right kind of software deployment, you can bypass building an expensive call centre—a pain point for SMBs. To get around that, Freshdesk created an application called Freshfone. It allows SMBs to respond to a client from wherever you are—like a coffee shop for instance—and provide the same experience a fully fitted call centre comes with. This is the kind of solution that allows SMBs to take on their larger competitors.

Lesson #3: Spend like a maniac

When Freshdesk participated in Bizsparks, a Microsoft initiative to identify and reward promising start-ups, it won $40,000. Mathrubootham spent all of that, and a little more, to acquire customers through various digital channels.

"Normally, any company would keep the money in the bank to maximize the runway for the company. But we channeled all of it into marketing," he says. "In fact, we invested $45,000 dollars in advertisements trying everything from LinkedIn ad campaigns to banner ads on Google and tested out everything. It resulted in some leads along with plenty of failure as well."

Mathrubootham doesn't think that was a counterintuitive decision "but an intuitive way to do what we’ve always done. I spent 10 years at Zoho and my biggest contribution there was to discover a business model we could market from India and build an online lead generation model."

His point is, product companies that have acquired customers via the more expensive sales route will eventually have to go digital to cut costs. But to cut those costs, you have to invest all you have in digital first. That is why, when compared to competitors, Freshdesk uses content to market their products. They write on blogs, popular communities, and make sure Freshdesk has top-of-mind recall on the platforms that matter.

Product companies that have acquired customers via the more expensive sales route will have to go digital to cut costs.

As much as it has been a great ride for Freshdesk, there are potholes it is likely to face along the way. Consider the following.

#1: The revenue model

Freshdesk’s close competitor Zendesk claims it has 98,000 customers of which 52,000 pay for the product. While Freshdesk did not disclose the ratio of customers who pay to those who opt for the free version, it is safe to assume both companies will be in the same ballpark.

The question then is the ability to compel customers to eventually put money on the table. This is critical because SMBs are limited by the size of their operations. A bulk of them may never need more than a handful of customer support seats to handle their operations. Zendesk gets it and has a plan in place to go after customers currently serviced by Salesforce.com and Oracle.

Add to this the fact that SMBs are finicky and price sensitive. The moment Freshdesk adds more products to its portfolio, it risks making support and buying more complex. Inherent to that is the risk of alienating its customer base.

 #2Feet on street

As a thumb rule, this is the kind of business where acquiring the first 1,000 customers is easy. After that the plod begins. Until now, Mathrubootham has done all the right things and used digital to sell. But there comes a time when the old fashioned feet-on-street selling approach kicks in. That explains why Salesforce.com has invested in a large sales team and customer service executives. Microsoft has a large channel partner network while companies in the SaaS space like Netsuite and Workday have strong partnership alliances with system integrators like Accenture and Wipro to find customers.

This is the kind of business where acquiring the first 1,000 customers is easy. After that the plod begins.

There is no escaping the fact that Freshdesk will have to put feet on the street as well. It has already begun by investing selectively in sales teams. As the number of sales people goes up, customer acquisition costs begin to get expensive. For example, market leader Salesforce.com invests as much as 50 percent in sales and marketing - roughly the same that it invests in product development. If these are any indications to go by, it is safe to assume a significant part of the investments Freshdesk has garnered will go into acquiring new customers. There is only so far you can go with digital.

#3: Scaling up

Can Freshdesk continue to grow by selling only to SMBs? There are some examples of companies like Intuit that have done that and been successful. But to do that, Freshdesk must have a larger product portfolio so that customers don't have to deal with multiple vendors. The risk in doing this is it can dilute Freshdesk's current laser-like focus.

As Mathrubootham puts it, "We have one rule. We won't do any customization for our customers … We have a product called Freshplugs that allows customers to customize as they go along. But if somebody wants us to build something only for them, we say no."

That sounds good in theory, but this is the kind of business space that is littered with corpses of companies. To name just a few, Epiphany Inc, Pivotal CRM, Informatica, BEA Systems and Siebel Systems. All of them were spoken of in the same tone as Freshdesk is spoken of now. But at various inflection points, they gave in and were acquired.

The least that can be said for Mathrubootham now is that he has a delicate balancing act to perform.

#4: The big fish

Oracle, SAP and Salesforce.com have made a series of acquisitions to address the SMB and the SaaS opportunity. For instance, Oracle acquired RightNow and rebranded it as Oracle Service Cloud. It is going aggressively after all customer segments including SMBs. Since these vendors have a large portfolio, they could give SMBs a very attractive all-you-can-eat pricing.

Sure, Freshdesk has shown it can navigate the early stages of a product start-up well. It has acquired a niche fan following and marquee investors to back it. But the software business is dynamic—it is constantly changing and the next challenge or opportunity is never far away. It is possible then to imagine a future where Freshdesk hits an inflection point and finds it difficult to scale. If it comes to that, a safe exit may be to simply sell the business to an entity that can pump cash to sustain the business.

Sharad Sharma is optimistic though. He reckons Freshdesk is the poster child for software product companies in India because it is punching above its weight. For the sake of the Indian ecosystem, he’s hoping it does well.

(Additional reporting by Anna Abraham)

[An abridged version of this article was concurrently published in Mint.]

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