Freshworks fiasco: Top VC says Indian founders should see it as a 'cautionary tale'

Leading SaaS start-up Freshworks, which became the poster child of Indian tech IPOs when it listed on NASDAQ last year, has run into trouble in the US. The India-born and California-headquartered start-up is being sued by US-based law firms, Scott+Scott and The Schall Law Firm, for misleading investors during its IPO. The company has also been charged with “violations of the federal securities laws”.

While Freshworks listed at a premium of 21 per cent over its IPO price of $36 per share, the stock has lost almost 75 per cent of its value this year amidst volatile market conditions and plummeting tech stocks in the US. FRSH is currently trading at $12.32, down from its listing price of $43.50 in September 2021.

Leading venture capitalist Rehan Yar Khan, who serves as the Managing Partner of early-stage fund Orios Venture Partners, called this “a cautionary tale of why Indian founders should incorporate in India and look to list in India”. Even though a NASDAQ listing might appear more “glamorous” and desirable, the idea that a foreign IPO will fare better may not always be the reality.

In a LinkedIn post, Khan elaborated, “All regulatory business environments are equally challenging. Each has its pros and cons. For example, each US state has its own taxes and those working cross-state need to file in multiple states. For founders who are from India, they understand India and are in a better position to navigate the regulations here. Freshworks' lawsuit possibly shows they are a victim of this.”

Contrary to public perception, market listing conditions in India may actually be more favourable than those in the US. “IPOs in India can happen at lower toplines than in the US. Even at $300 ARR, a US SaaS company, valued between $2-3 billion is a small cap, and will struggle for a great IPO reception and subsequent coverage. That is because the markets there are very large. In India, a $50-$100 million topline company can expect a good reception and good continuation coverage on the public markets,” Khan explained.

He added, “Capital availability is high in India, there are many domestic and overseas funds operating here. Debt is also highly accessible. There is no need to incorporate overseas to access capital.”

Freshworks, founded in 2010 in Chennai, moved its base to San Mateo, California in 2019. More than 40 per cent of its revenues then came from the North American region. At the time of listing, Freshworks Founder & CEO Girish Mathrubootham (an early employee of rival SaaS major Zoho), said, “Today is a dream come true for me - from humble beginnings in #Trichy to ringing the bell at@Nasdaq for the Freshworks IPO. Thank you to our employees, customers, partners, and investors for believing in this dream.”

The Freshworks IPO created a windfall for early employees of the company (earlier known as Freshdesk), with over 500 of them turning crorepatis. The founder’s net worth was estimated at $700 million post the listing, which valued the company at ~$13 billion.

About the ongoing lawsuit, Freshworks responded to Business Today's queries by saying that it doesn’t “comment on pending litigation and intends to defend this and any similar case vigorously”.

Also read: Freshworks not so fresh anymore? Firm faces lawsuits in the US for misleading investors

Also read: NASDAQ-listed Freshworks prunes Q3 losses, records 37% revenue growth