Two major private tech companies announced IPO price ranges this morning, with Toast targeting a market value of nearly $18 billion at the top end of its range and Freshworks looking to price its equity between $28 and $32 per share. TechCrunch calculates that the company would be worth around $8.9 billion at $32 per share, not employing a fully diluted share count.
Inclusive of shares represented by fully vested options and the like, Freshworks’ valuation could reach $9.6 billion, Renaissance Capital reports.
Unlike Toast, with a revenue mix including four distinct products, Freshworks is a more straightforward software company. That means we can do much more interesting work to understand its valuation. So, this morning, let’s unpack how Freshworks is considering valuing itself in its IPO at its present range, look at some market comps and come to a conclusion regarding whether we expect the unicorn to raise its valuation before it floats.
Lies, damned lies and revenue multiples
As a refresher, in the first half of 2021 (Q1 and Q2), Freshworks posted revenues of $168.9 million. That annualizes to $337.9 million, thanks to numerical rounding.
At a valuation of $9.6 billion — recall that simple IPO valuations for the company and lower share-price points from its IPO range generate lower valuations and therefore more conservative multiples than what we’ll be discussing here — Freshworks would be worth 28.4x its current revenue run rate, set during H1 2021.
To better understand the company’s multiple:
- The 28.4x run rate multiple for Freshworks is roughly on par with the top quartile for all public SaaS companies, per Bessemer data.
- The company’s revenue growth rate (H1 2020 versus H1 2021) of 53% is slightly better than the top quartile of public SaaS companies.
From this simple — nigh simplistic — analysis, it appears that Freshworks is pretty reasonably priced in its current range.
Our work is not over, however. Let’s talk historical pricing. Back in 2019, Freshworks generated revenues of $172.4 million, or just a hair more than it managed in the first half of 2021. And in November of that year, per Crunchbase data, Freshworks was valued at $3.55 billion in a Series H round of capital that was led by Sequoia and Accel. They are going to do well on that investment, it’s obvious at this juncture.
Too well? We spend a lot of time noodling on whether IPO pops are bad or good or merely partially good or partially bad. But fuck an IPO pop; check the implied return for the private capital in Freshworks!
Risk comes into play here, but was Freshworks really a wildly riskier bet in 2019 than it is a little under two years after its final private round? I would say no, or at least mostly no. And yet back in 2019, the company was valued just over 20x its revenues, a lower multiple than it is worth today. So not only are its final private backers getting paid for later growth that — to be fair — they did help fund to some degree, but also from the market’s changing valuation perspective on software companies.
I am sitting here trying to make an argument for why Freshworks was well served by selling a block of shares to private investors back in 2019 instead of raising debt, which would have been cheaper capital. This is a recurring issue I have with venture investors demanding outsized upside for their capital invested into later-stage software companies and who whine about IPO pops. Yeah, but.
Regardless, it appears that the Freshworks IPO is pretty reasonably priced as is, though a boost to its price range is not out of the question if public market investors decide that they are bullish on its future growth prospects. We just don’t see dramatic upside.