Learnings selling SaaS to SMB

Fresh Works just filed their prospectus (S1) to go public. Below we summarize the major points which we found interesting for running your SMB focused business.

Fresh Works is large and growing, and unprofitable. “total revenue was $172.4 million and $249.7 million in the years ended December 31, 2019 and 2020, respectively, representing a year-over-year growth rate of 45% We had approximately 35,800 customers using our Freshdesk family of products as of December 31, 2020. We incurred operating losses of $29.7 million and $56.1 million in the years ended December 31, 2019 and 2020.”

Fresh Works has raised billions, and has been very cash inefficient. $2.bln of net investment but only $249mm of ARR. That’s anemic cash efficiency. Luckily, investors were patient and deep pocketed: Accel, CapitalG, Tiger, Sequoia.

Per user pricing. “Subscriptions are priced primarily based on the number of agents or users. The terms of our subscription agreements are typically either annual or monthly, and we bill for the full term in advance or on a monthly basis, depending on the customer preference. As of December 31, 2019, and December 31, 2020, annual recurring revenue generated from annual subscriptions was 54% and 59%.”

SMB is the focus and retention is excellent. “As of June 30, 2021, 13,326 of our customers contributed more than $5,000 in ARR, demonstrating the broad appeal of our products to customers of all sizes and geographies, and as of December 31, 2020, customers contributing more than $5,000 in ARR represented 82% of total ARR. As of June 30, 2021, our net dollar retention rate was 118%. As of June 30, 2021, customers contributing more than $50,000 in ARR represented approximately 37% of total ARR.”

New products drive upselling. “As of June 30, 2021, approximately 18% of our customers purchased two or more Fresh Works products. These customers represented approximately 45% of our ARR as of June 30, 2021, illustrating the large opportunity we have to sell additional products to our current customer base and drive growth. Our business model is powered by a strong product-led growth (PLG) motion that helps us serve businesses of all sizes. We make it simple and easy for businesses to find our products organically, trial the product to see if it fits the business use case, and quickly onboard users to the product.”

Product, product, product are the three most important things when targeting SMB. “Businesses can also build custom internal applications to extend the capabilities of our products, and to date, businesses have built over 2,900 custom apps to address their specific use cases. In addition, our marketplace provides access to over 1,100 applications developed and published by third parties that businesses can plug into their Fresh Works solution to further extend the product.”

Free trials are the start, and no credit card. “We rely on efficient search marketing and word of mouth to encourage individual users or small teams within an organization to discover, try, and purchase our products. We drive potential customers to our website as the primary channel to learn about our solutions. We maintain a variety of resources on our website to ensure businesses who find Fresh Works organically can quickly determine which solutions best suit their needs. We offer 21-day free trials of our premium tier products to businesses who want to test our solutions before requiring any purchase, giving them flexibility to try before they buy. We do not require businesses to provide payment information to begin a trial, further reducing friction to initial adoption. Our inbound motion is the primary way we sell to organizations, regardless of the organization’s size or industry.”

The customer base is international, and drives a big market. “During the year ended December 31, 2020, 45%, 40%, and 15% of our revenue was derived from customers in North America; Europe, Middle East and Africa; and the rest of the world, respectively. based on our internal data and analysis, we estimate the annual potential market opportunity for our products to be $77 billion.”

India is where the company is really based. “The majority of our workforce, approximately 3,800 employees, is based in India, where most of engineering, product design, sales and marketing, customer support, and general and administrative personnel are located. Our company headquarters are based in San Mateo, California, where most of our executives are located, and our other global offices are primarily focused on regional sales and marketing activities.”

Fresh Works believes the promise of SaaS has failed us. “business software is plagued with complexity, feature bloat, and complicated user interfaces (UI) that often require extensive and ongoing training for users. Users are constantly switching between several software applications with inconsistent interfaces to perform their job, resulting in user dissatisfaction. According to a 2020 User Experience report by Forrester, most employees have to endure bad enterprise user experiences every day, leading to lower employee engagement and motivation, while good user experience leads to employees that are more motivated, engaged and productive.

And software has become too expensive, creating all kinds of hurdles. Legacy SaaS software is often expensive to purchase. It often also requires an army of consultants, significant IT resources, and several months or years to implement and integrate across the IT stack. Legacy SaaS software suffers from lengthy approval, purchasing, and implementation cycles frequently extending over many months or even years. Exacerbating the problem, businesses also need buy-in from a wider group of users to justify the higher costs, further extending approval and onboarding times. Legacy SaaS solutions have effectively left behind most small- and mid-sized organizations on their digital transformation journey and concentrated the benefits to the few that can afford to adopt and maintain these high-priced solutions.”

And they believe software has become overly complex. “Once the software is implemented, users undergo extensive training because the software is complex and cumbersome. Unable to do their job and derive value from the software right away, users often limit their engagement and as a result, businesses are saddled with software that suffers from a prolonged time to value.”

co-founder at Blossom Street Ventures. Email me at sammy@blossomstreetventures.com