BackFreshdesk vs Zendesk: 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
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On 2 December 2012, eight months after Freshdesk Inc., a Chennai-based software as a service (SaaS) product company, started operations, it got into an ugly spat with San Francisco-based Zendesk, now its closest competitor.
The war of words started on Twitter when Ben Kepes, a software analyst and blogger, 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 kind to keep quiet, Girish Mathrubootham, 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."
It got uglier when Mikkel Svane, CEO of Zendesk, called Freshdesk “A Freaking-RIP OFF". 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 got Zendesk, a company five years older than Freshdesk and with revenues at $127 million, all worked up?
Sharad Sharma, co-founder of BrandSigma and a volunteer at iSpirt, a software products think tank, says that 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.
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-envelope calculations indicate that after its last round of funding, it is now valued at $100-150 million. And on the outside, it perhaps rakes in $10 million in revenue. That’s less than a 10th of Zendesk, currently valued at $1 billion.
So why have Google Capital, Accel Partners and Tiger Global pumped $94 million into the company over the last three-and-a-half years? Shekhar Kirani of Accel says: “When we met Freshdesk, it was a team of six in a small 1st floor house in Chennai, with a Beta product and no paying customers…We were sold on the day we met the team and Girish. We were impressed with their insights into the needs and challenges global small and medium business (SMB) helpdesks face. Secondly, the product, even though Beta, had a great finish and road map discussions were very insightful. Knowing that Freshdesk is attacking a huge market and the team has a strong product background was sufficient reason to invest."
This begs another question. What is Freshdesk and why is this animal called SaaS so attractive to investors? Intriguing still is that no company in the 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, SaaS 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. But it is an incredibly crowded market with Godzillas 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. “I don’t believe in MVP. When we put out our first version, we knew we had gotten it right because we know the space."
So where does Mathrubootham’s confidence come from?
Before starting out, he stumbled across an article on Hacker News—a social news website focused on computer science and entrepreneurship. 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 his sleeves up and got down to work to take on the likes of Zendesk. That he has done a reasonably competent job until now explains the irate exchange reproduced earlier.
Starting up was easy. Anybody with a credit card can set up a server and software on Amazon. It is ridiculously affordable as well. So when he announced on Hacker News he was building an alternative to Zendesk, people signed up to try out a beta version of Freshdesk.
A few days after the product was launched, a college in Australia signed up as the first customer. Soon dozens of others 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 just a little less than 43,000 customers. “No Indian software product company has been able achieve this kind of scale," 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
Focus on customer segments and needs. Between Mathrubootham and his team, they knew two things. One, 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. 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 and 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, you bypass building expensive call centres. Instead, Freshdesk created an application called Freshfone. It allowed them to respond to a client from wherever their agents were—like at a coffee shop for instance—and provide the same experience a fully fitted call centre comes with.
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, and a little more, to acquire customers on various digital channels.
“Normally, any company would keep the money in the bank to maximize the runway for the company. But we channelled it into marketing. In fact, we invested $45,000 in advertisements trying everything from Linkedin ad campaigns to banner ads on Google. It resulted in some leads along with plenty of failure as well.
Mathrubootham doesn’t think they were counterintuitive decisions, 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".
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
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 are in the same ballpark.
The issue to deal with then is to convince customers to pay for premium offerings. 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.
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. But if Freshdesk adds more products to its portfolio; it stands the risk of making support and buying more complex. Inherent to that is the risk of alienating its customer base.
#2: Feet on the street
As a thumb rule, this is the kind of business where acquiring the first 1,000 customers is easy. Until now, Mathrubootham has done all the right things and used digital channels to sell. But there comes a point in 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 success executives. Microsoft has a large channel partner network, while others like NetSuite and Workday have alliances with system integrators like Accenture Plc and Wipro Ltd to find customers.
There is no escaping that Freshdesk will have to put feet on the street as well. It has begun by investing selectively in sales teams. As the number of feet goes up, customer acquisition will get expensive. By way of example, Salesforce.com invests as much as 50% in sales and marketing, roughly the same it invests on 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.
#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. The risk in doing this is it can dilute Freshdesk’s current 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 customer to customize as they go along. But if somebody wants us to build something only for them, we say no."
That sounds good on paper. But this is the kind of business littered with corpses of companies. To name just a few, Epiphany Inc., Pivotal CRM, Informatica, BEA Systems and Siebel Systems were once 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 he has a delicate balancing act to perform.
#4: The big fish
Oracle, SAP and Salesforce.com have made a series of acquisition 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 can give SMBs an attractive all-you-can-eat pricing.
Now, Freshdesk has demonstrated it can navigate the early stages of a product start-up well. But the software business is dynamic. It is possible then to imagine a future where Freshdesk hits a point where it finds it difficult to scale. If it comes to that, a safe exit may be to simply sell the business like some of its predecessors have.
But Sharma of BrandSigma is optimistic. Think of Freshdesk as the poster child for Indian software product companies, he says, because it is punching above its weight. For the sake of the Indian ecosystem, he’s hoping it does well.
Anna Abraham contributed to this story.
An unabridged version of this story can be read on www.foundingfuel.com.
C.S. Swaminathan and Charles Assisi are co-founders at Founding Fuel, and Anna Abraham is an intern at its Mumbai office.
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