India’s best known SaaS startup Freshworks announced its acquisition of two-year-old Zarget, another company selling software-as-a-service, today.
This could seem like a marriage made at birth. But Freshworks’ founder Girish Mathrubootham explains the hard business logic of it to Tech in Asia in a candid chat. It offers a glimpse into the challenges a young SaaS company can face even when it is well-funded and acquiring lots of customers. And an insight into the acquisition strategy of an established player with committed customers at scale.
First, the backstory.
Mathrubootham was the product head at pioneering SaaS company Zoho in Chennai when he interviewed a spunky engineering grad, fresh out of college – Arvind Parthiban. “I learned nothing in college,” Parthiban told his interviewer brashly because in his mind, Zoho was just a stopover until he found a job abroad. Mathrubootham laughed and gave him the job.
Parthiban learned the ropes of software development, marketing, and SaaS at Zoho, and was hooked. Just as Mathrubootham was, who quit to start Freshdesk, which recently rebranded as Freshworks. Parthiban knew he too would follow suit.
“I told Girish back then that I will start a company some time soon. That’s why I didn’t join Freshdesk right away,” Parthiban told me when we first spoke early last year.
When Parthiban and his friends from Zoho – Naveen Venkat and Santosh Kumar – started Zarget in 2015, Mathrubootham and some of his teammates at Freshdesk were the angels who gave them funds to get off the ground. By then, Freshdesk was the best-known face of Indian SaaS and was well-funded by Accel Partners, Tiger Global, CapitalG (earlier known as Google Capital), and Sequoia Capital. Mathrubootham’s vote of confidence was enough to pique the interest of top investors who were eager to know more about Zarget.
Parthiban was reluctant to talk to investors before he even had a product. “Not now, maybe later,” he recalled telling Mathrubootham. But within two months of its inception, in April 2015, Zarget signed term sheets with Accel Partners and Matrix Partners for seed funding of US$1.5 million. It just had a prototype of its marketing toolkit ready back then. A few months later, Sequoia too joined Accel and Matrix to pump another US$6 million into Zarget.
“We exited the startup but didn’t make any money in the deal as I didn’t want any conflict of interest whatsoever. We only received our initial investment, without covering the cost of legal fees and so on because we didn’t want to risk our reputation in any way,” Mathrubootham told Tech in Asia, in response to a question on whether an exit had been planned at an early stage of Zarget.
“The only reason we invested in Zarget was because we believed in the founders’ ability to build a great product,” he said. “And they did it. The fact that Zarget managed to get over 400 customers within eight months of launching its product is proof.”
Why the acquisition, then?
Zarget’s cloud-based marketing software suite combines a set of tools like A/B testing, heatmaps, funnel analysis, polls, and feedback loops to help businesses increase the chances of visitors becoming customers or taking some desired action – conversion rate optimization, in tech jargon.
Zarget is the ninth startup that Freshworks acquired for an undisclosed amount.
“From the day we launched Zarget, we are seeing 200 percent growth month-on-month. Zarget has over 1,000 clients in 12 countries around the world,” Parthiban told me, while announcing Zarget’s funding round of US$6 million in November last year.
Here’s when it ran into its first big hurdle – the business challenge of retaining a customer or the churn rate. This is one of the biggest problems for SaaS products.
There might not be a dearth of customers who sign up for trials and subscribe to the software, but a chunk of them leave after trying out the product for some time. The churn rate or the rate of attrition is the percentage of subscribers who discontinue the subscriptions within a time period.
Marketing software has a higher propensity for churn, especially at the lower end of the category where ticket sizes are smaller but customer acquisition costs are not, Mathrubootham said. So while Zarget was acquiring more and more customers by the front door, there were many who were leaving by the back door after spending a few hundred dollars on the software for some time.
Even a five percent monthly churn rate can be detrimental for a business. “Having five percent monthly churn means if you started January with 100 customers, you’d have 54 customers left at the end of December,” analyst Lincoln Murphy explains.
Zarget had a couple of options on the table. It could build another product that would complement its marketing suite as it had enough money in the bank to do that after raising a total of US$7.5 million from marquee investors. It had already built a good product, was acquiring customers, and its investors hadn’t lost faith in the team’s abilities.
The other option was to take the acquisition route.
“It made better sense to join Freshworks, which already has over 120,000 paying customers,” Mathrubootham explained.
“A growing number of our customers have been asking us to help them in their marketing initiatives. Today, our software powers customer engagement across every aspect of the customer journey, from customer acquisition to customer support. Acquiring Zarget will enable Freshworks to support customers with the pre-acquisition journey as well,” Mathrubootham said.
Currently, Freshworks has four products: Freshdesk, Freshservice, Freshsales, and Freshcaller – all designed to “work together to increase collaboration and help teams better connect and communicate with their customers and co-workers.”
No martech apocalypse
In the first half of 2016 alone, there were more than 204 mergers and acquisitions worth a total of close to US$7 billion in the marketing software industry.
While there’s a lot of doom-and-gloom talk about the crowded marketing SaaS space, it is far from “martech apocalypse,” argues Scott Brinker, president and CTO of conversion optimization software-maker Ion Interactive.
“There are a significant number of martech companies that have taken large amounts of VC funding, their burn rate is much greater than their revenue, and the exponential growth curve that their VCs expected of them is flattening out,” he says, adding: “Many of them are great companies, with amazing products and happy customers, continuing to grow. But not at the pace that supports the VC math of a 10X return.”
According to him, winter is not coming for martech but only for martech VCs.
In the case of Zarget, “all institutional investors will get Freshworks shares in lieu of their Zarget shares,” Freshworks spokesperson Roopesh Balakrishna told Tech in Asia. The valuation at which this will be done has not been disclosed.
9 acquisitions in 2 years
Freshworks did not disclose how much it has spent to acquire Zarget. The company has raised venture capital of US$94 million in total.
Zarget is the ninth startup that Freshworks acquired for an undisclosed amount. Its other acquisitions are:
- Joe Hukum
“The co-browsing feature that we acquired 1Click.io for has been integrated. The Airwoot machine learning tech has been integrated into Freshdesk and will be launched before the end of the year. Konotor has been relaunched as Hotline. The chat infrastructure from Chatimity and the NLP tech have been integrated into our chat product,” Balakrishna told Tech in Asia, citing those as examples of how Freshworks’ earlier acquisitions have turned out.
Zarget’s acquisition will not affect its customers, says Freshworks. “There will be no impact on their services and Freshworks will continue to support them.”