Freshworks IPO: Valuation Could Exceed $10 Billion

Freshworks and Toast Increase IPO Price Ranges

TechCrunch recently analyzed the updated initial public offering (IPO) price range for Toast. The U.S.-based software and fintech company has significantly increased its valuation ahead of tomorrow’s pricing and Wednesday’s trading launch. This adjustment wasn't an isolated event.

Freshworks has also announced a higher target IPO price range, as detailed in a new Securities and Exchange Commission (SEC) filing. The customer service software company now anticipates offering shares between $32 and $34 each, an increase from the previously stated $28 to $32 per share.

Potential Valuation of Freshworks

Based on preliminary calculations, Freshworks’ IPO valuation is projected to exceed $10 billion when considering a fully diluted share count. However, simpler IPO valuations currently remain below this level.

Specifically, Freshworks anticipates having 284,283,200 shares outstanding upon becoming a public company, including the underwriters’ option, but excluding shares held in Restricted Stock Units (RSUs) or options. At the revised IPO price range, the company’s value would fall between $9.1 billion and $9.7 billion.

Prior estimates from Renaissance Capital suggested a $9.6 billion valuation at the midpoint of the initial range ($30 per share), using a fully diluted share count. TechCrunch now projects this figure to rise to nearly $11 billion at $34 per share.

Similar to the updated pricing for Toast, this represents a substantial valuation.

Recent Financial Performance

In the most recent quarter, ending June 30, 2021, Freshworks reported revenues of $88.3 million. This reflects an increase from $56.5 million in the same quarter of the previous year, representing growth of over 56%. This growth rate is particularly strong for a company of its size.

This Q2 2021 revenue translates to an annualized run rate of $353.4 million. At the upper end of its simplified IPO valuation, Freshworks is valued at approximately 27.5 times its current revenue run rate. A fully diluted basis increases this multiple to around 31x.

Comparison to Other SaaS Companies

This valuation places Freshworks within the same range as established public SaaS companies like UiPath and Okta, both of which have historically commanded high valuations. Consequently, Freshworks is poised to enter the public market at a valuation considered highly favorable, both for the company and its investors.

Numerous venture capital firms are expected to realize significant returns from the Freshworks IPO.

Market Conditions Favoring IPOs

The current data, alongside Toast’s pricing adjustments, indicates that public markets are exceptionally receptive to technology IPOs, even from companies that are not yet profitable but prioritize growth. This is encouraging news for startups.

While Special Purpose Acquisition Companies (SPACs) have seen a slowdown in recent quarters, the robust traditional IPO market offers a compelling alternative.

Implications for Unicorns

For “unicorn” companies – those with valuations exceeding $1 billion – the positive re-pricing of Toast and Freshworks provides assurance. It suggests that delaying public offerings remains a viable strategy, as public market investors continue to assign substantial premiums to software equity, even without immediate expectations of shareholder returns.

Eventually, industry-wide Price-to-Sales (P/S) multiples resembling historically high Price-to-Earnings (P/E) ratios will either need to normalize or fundamentally alter investment principles. However, for the present, the market conditions remain favorable, and venture capitalists are likely to accelerate their portfolio companies’ IPO preparations.