Freshworks IPO: Analyzing the Initial Price Range

Freshworks and Toast IPO Price Ranges Announced

This morning saw two significant private technology firms reveal their anticipated IPO price ranges. Toast is aiming for a market capitalization of almost $18 billion at the upper limit of its projected range.

Freshworks, conversely, intends to offer its shares at a price point between $28 and $32 each.

Freshworks Valuation Analysis

According to TechCrunch’s calculations, Freshworks could be valued at approximately $8.9 billion if priced at $32 per share, based on a non-fully diluted share count.

However, Renaissance Capital indicates that factoring in fully vested options and similar shares, Freshworks’ valuation could potentially climb to $9.6 billion.

Business Model Comparison

A key distinction exists between the two companies. While Toast derives revenue from a diverse portfolio of four separate products, Freshworks operates as a more conventional software business.

This streamlined structure allows for a more in-depth analysis of its valuation metrics.

Examining Freshworks’ IPO Valuation

Therefore, we will now delve into the methodology Freshworks is utilizing to determine its IPO valuation within the current price range.

We will also consider comparable companies in the market to arrive at a conclusion regarding the likelihood of Freshworks increasing its valuation prior to its public offering.

The analysis will involve examining market comparables and assessing whether the unicorn is likely to adjust its valuation expectations before the IPO takes place.

Revenue Multiples: Examining the Numbers

To begin, let's revisit Freshworks' financial performance. During the first two quarters of 2021 (Q1 and Q2), the company reported revenues totaling $168.9 million. This extrapolates to an annualized revenue of $337.9 million, accounting for standard rounding practices.

Considering a valuation of $9.6 billion – it’s important to note that initial IPO valuations and lower share price points resulted in more conservative multiples compared to the figures we'll analyze – Freshworks was trading at approximately 28.4 times its current revenue run rate as of H1 2021.

Let's delve deeper into understanding this multiple:

• The 28.4x revenue run rate multiple for Freshworks aligns closely with the performance of companies in the top quartile of all publicly traded SaaS businesses, according to Bessemer’s data.
• The company’s year-over-year revenue growth (comparing H1 2020 to H1 2021) stood at 53%, exceeding the growth rate observed in the top quartile of public SaaS companies.

Based on this relatively straightforward assessment, Freshworks appears to be priced fairly within its current valuation range.

However, our analysis isn't complete. We must also consider historical pricing data. In 2019, Freshworks generated $172.4 million in revenue, a figure marginally higher than that of the first half of 2021. Furthermore, a Series H funding round led by Sequoia and Accel in November of that year valued the company at $3.55 billion, as per Crunchbase information. This represents a substantial return on investment for those firms.

Is this return excessive? The debate surrounding IPO "pops" – whether they are beneficial, detrimental, or a combination of both – is ongoing. But the return for private capital invested in Freshworks is a more compelling metric to examine.

While risk is always a factor, was Freshworks demonstrably a riskier investment in 2019 than it was less than two years later, following its final private funding round? A reasonable assessment would suggest not, or at least not significantly. Yet, in 2019, the company was valued at just over 20 times its revenues, a lower multiple than its current worth. Therefore, its early investors are benefiting not only from subsequent growth – which they partially facilitated – but also from a shift in the market’s valuation of software companies.

I am attempting to demonstrate why Freshworks made a prudent decision by selling equity to private investors in 2019 rather than taking on debt, which would have been a less expensive financing option. This is a frequent point of contention with venture capitalists who seek substantial returns on their investments in late-stage software companies and then express concern over IPO price increases. However, there's more to the story.

In conclusion, the Freshworks IPO appears reasonably priced at its current level, although an increase in the price range is possible if public investors become more optimistic about its future growth. However, we do not anticipate substantial upward potential.