Episode 47: The Atlassian IPO

[0] The other thing I was thinking about is do we want to do any follow -up on Alaska Virgin?

[1] Yeah, people hate follow -ups.

[2] Yeah, people definitely hate hot take, I think they also hate follow -ups.

[3] Yeah, I don't think we need to.

[4] All right.

[5] Actually, maybe I'll just use this for the teaser quote.

[6] It didn't go well.

[7] Welcome back to episode 47 of Acquired, the podcast about technology, acquisitions, and IPOs.

[8] I'm Ben Gilbert.

[9] I'm David Rosenthal.

[10] And we are your hosts.

[11] today we are covering the Atlassian IPO and normally we're hesitant to do episodes on such recent news unless we're like actually on the scene week of can like be the you know one of the first takes you hear on it and otherwise ultimately we don't have enough enough to reflect on to make a kind of recent a recent IPO or recent acquisition something that we should cover on the show however there's so much interesting story behind Atlassian and there's already been so much data to go off of in the last what two years two years two years two years two years yeah yeah in fact when I was writing this little intro I was like in the last couple quarters since the IPO but really really been two years that we we want to talk about it and we think we have a good story to tell before we move on with the show David it's great to see you in person yeah it's great to be here then great to be on the show so as I think most people know at this point we've been doing most shows remotely because I actually earlier this year moved to San Francisco and I've been living there and working on something new, more to come on that later this year or early next year.

[12] But yeah, this is actually our first in -person episode of 2017.

[13] It's good to be back.

[14] You look very similar to how you looked in 2016, have an age today.

[15] I appreciate it.

[16] I appreciate Well, it's good to be back in person and good to be back in Seattle.

[17] Look forward to being back often and doing more in -person Acquired episodes.

[18] Sweet.

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[37] David, you ready to take us in?

[38] Let's do it.

[39] Um, so atlasian, this has been a much requested episode, pretty much for the whole life of Acquired.

[40] We're excited, as Ben said in the preamble to dive in.

[41] Um, and I think this is actually, I was going through all of our episodes in preparation for today.

[42] And I think this is the first company that we're going to cover on Acquired that's been bootstrapped and gone quote unquote all the way.

[43] We've certainly covered other bootstrapped companies in the past, but none of them that have gone.

[44] on to be kind of lasting, independent, large public companies without taking any venture capital along the way.

[45] Yeah, it's pretty crazy.

[46] I mean, the, be it for actual necessary reasons or because that's the de facto way that people build companies these days, everyone just takes around every 18 to 24 months.

[47] And that's often driven because your competitors are doing that or be some, some timing reason why it needs to grow, grow, grow.

[48] But it's kind of funky, seeing a company go all the way the old -fashioned way.

[49] Yeah.

[50] And not quite.

[51] I mean, there's a round from Excel.

[52] Well, now they did.

[53] So Excel invested and TROPrice invested before they went public, but both of those were only secondary shares sales.

[54] So none of those dollars went to the company's balance sheet.

[55] The company never sold any shares to investors.

[56] It was only individual people, shareholders, but the founders and employees that sold along the way.

[57] So we'll get into it.

[58] But this is, I think this is going to be a really interesting counterpoint to sort of the current, you know, wave, if you will, of companies that are out there right now in sort of the steroid era of startups with companies raising so much money.

[59] And here's Alassian, which is now almost $11 billion public company, one of the most successful tech IPOs of the last couple of years, and never raised a dollar.

[60] Amazing.

[61] Amazing.

[62] So getting into it, Atlassian was founded in 2002 by Mike Cannon Brooks and Scott Farquhar in Sydney, Australia.

[63] And I'm remembering back to our PA semi -semi episode where we were joking about Australia.

[64] And I said that because Authentic was founded in Melbourne, Florida.

[65] And you thought it was Melbourne, Australia.

[66] Uneducated host over here.

[67] But it was funny.

[68] I was listening to the most recent earnings call today to prepare.

[69] and it's just awesome hearing them jump on the phone and the Australian accents.

[70] Oh, so good.

[71] And I think I commented in response to that, that Melbourne, Australia and all of Australia probably had a much more robust tech scene than Melbourne, Florida.

[72] And indeed it does.

[73] There are quite a number of companies in Australia now.

[74] And Atlassian really is kind of leading the way.

[75] So Mike and Scott, they meet in college at the University of New South Wales.

[76] Wales in Sydney where they were classmates in a in a sort of scholarship program major a little different than the the US system there they were had a scholarship into a very prestigious major there which was in business and information technology and they became close friends I think there were about 40 or 50 people kind of in their class they became close friends even though they came from super different backgrounds so so Scott grew up in a you know very kind of lower middle class family.

[77] And Mike actually, I believe his father was the head of Citigroup in the investment bank in Australia.

[78] Oh, wow.

[79] Super cool.

[80] So very different.

[81] But despite that, they became really good friends.

[82] And so they were in university kind of in the late 90s, early 2000s.

[83] It was the dot com, you know, go, go, go years, even in Sydney, Australia.

[84] So Mike, he of course, being that that timeframe and being in business and technology, you know, this prestigious major in Australia, he started a company while he was in school.

[85] And it was called the bookmark box.

[86] And of course, this was in kind of 1999, 2000.

[87] Scott wasn't involved.

[88] And so he had an exit.

[89] He sold the company to a dot com fellow dot com startup called blink .com.

[90] Only, only back in the late 90s.

[91] But this was in the year 2000, before the crash.

[92] So he had a successful exit as like a, I don't know, a sophomore junior in college.

[93] Serial entrepreneur.

[94] Serial entrepreneur.

[95] So he had this experience and he and Scott were good friends.

[96] And most people in their program, you know, would go and work for consulting firms or investment banks like Mike's dad and other, you know, well -paying, you know, prestigious jobs right after graduation.

[97] And they decided, especially Mike, having had this entrepreneurial experience, this was like the last thing in the world that they wanted to do when they graduated.

[98] So they kind of made a pact and they said, if we can do something that enables us not to have a job like that, but still earn the same amount of money per year.

[99] And the going rate apparently, very specifically was $48 ,500 a year in salary.

[100] If they could earn that and not have to work for the man for McKinsey or whomever, they would be happy for the rest of their lives.

[101] It's funny.

[102] I mean, number one, duh, like, who doesn't?

[103] Number two, I remember making that exact same pact with my business partner.

[104] We made this app in college called Seize the Day, and it was getting a bunch of downloads on the app store, and we were getting revenue from IAD.

[105] I think I've probably talked about this on the show before.

[106] And I remember looking at our numbers and thinking, what multiple of this would it need to be for us to get the same jobs that we would get at, like, a Microsoft or something, and like, you know, in my case, they never got there.

[107] I think we were at like a quarter of what it needed to be or something, and then we both got jobs, but I love that line of thinking.

[108] Totally.

[109] Well, and clearly, though, you just didn't stick with it long enough because as it turned out, Mike and Scott, they fell pretty far short of their goal.

[110] They only paid themselves apparently $15 ,000 a year for the first two years versus versus 48, so like just about a quarter.

[111] And they finance it on like 10 grand of credit card debt, too.

[112] They didn't raise, as we've said, didn't raise a dollar.

[113] They had credit cards.

[114] They took out debt.

[115] They got to about $10 ,000 in debt before they were able to turn a profit.

[116] But, Ben, if you had stuck with C's the day a little longer, so Scott and Mike now are, I don't know if they are the wealthiest, but they are, like, among the, you know, kind of top ten wealthiest people in Australia.

[117] I blew it.

[118] You totally blew it.

[119] But now you're a co -host of acquired, so.

[120] What could you ask for?

[121] What more could you ask for?

[122] so they decide they're going to start a business and Mike's case start another business together in pursuit of this this goal of $48 ,500 per year and they decide on a name for the business they're inspired by the Greek myth the mythical Titan Atlas who holds up the heavens and they take that as inspiration they want to support their customers like Atlas holds up the skies.

[123] And so they call the company Atlassian.

[124] I like it.

[125] I mean, I've liked the name.

[126] I've liked the logo.

[127] It's a good name.

[128] I always wondered like the logo kind of looks like a man and apparently it looks like the old logo, not the new logo, but the old logo.

[129] I always wondered like what is this, what's the deal with this?

[130] Apparently it's supposed to be Alice.

[131] Yeah.

[132] I was, I mean, all the new branding stuff is really nice and really poppy and really, you know, fresh and clean.

[133] Their old logo was like so clearly identifiable.

[134] Like I hate when companies have like a a refresh that takes some of the personality away from the brand.

[135] Yeah, yeah.

[136] Not a design podcast, moving on.

[137] Moving on.

[138] So they start the company in late 2001, early 2002, and they launched their first product, Gira, which is still, I think, their biggest product.

[139] Beloved by product managers worldwide.

[140] Beloved by product managers worldwide.

[141] I assume many, if not most folks listening to the podcast right now have used Dira.

[142] Yeah, there's, I used to.

[143] Or maybe using Gira right now.

[144] I used to follow some, like, parody product management, Twitter accounts and stuff, and I think people just, people, like, know the, the Jira interface in their sleep, and they have, like, both happy dreams and nightmares about filing tickets.

[145] So they launched it in April 2002, as we're alluding to, it's kind of a, it's an issues and bug tracking tool used mostly by software developers and product managers, although it's now expanded to many more use cases than that.

[146] But there was just kind of one problem when they launched it.

[147] which was that since Mike's first company, the dot -com bust had happened, it was now nuclear winter, and here they are two recent college grads in Sydney, Australia, that are starting a software company, an enterprise software company, no less, where they're trying to sell to other businesses.

[148] And usually the way you do that is you hire salespeople, but the thing about salespeople is they cost money.

[149] And so the way traditionally that you do that and you hire the salespeople before you have the money is you raise money from venture capitalists or angels or whatnot.

[150] And then you use that to build your sales force.

[151] Well, there's no way that any VC was going to give money to these two kids, college kids in Sydney, Australia.

[152] And they didn't even try.

[153] And not to mention, you know, even if you could do a pay for performance basis.

[154] So we had Scott Dorsey on the show for the exact target episode.

[155] And he mentioned that a lot of their early salespeople were working 100 % for commission.

[156] You kind of have to have an expensive product to make that work, too.

[157] The thing about Atlassian, and we'll get into this, is super approachable pricing, very generous trial periods, a pay -as -you -go thing, a thing where you sign up with your own credit card, kind of democratization of who's buying and tying the buyer to the user.

[158] And like, in many cases, it's a little different now, but in many cases, it's just not that expensive.

[159] So even if you're paying salespeople on a performance basis, still a long road.

[160] Yep.

[161] Well, and let's not forget what we're talking about dollar -wise in the company right now.

[162] Like, their goal is to pay the two of them, $48 ,000 a year.

[163] They only pay themselves $15 ,000 a year.

[164] That means they're making like $30 ,000.

[165] Like, how many people are you going to be able to hire if the entire, you know, sort of capital balance of the company is $30 ,000?

[166] Yeah, great point.

[167] Not a lot.

[168] But they're scrappy and they have to innovate their way out.

[169] of this.

[170] And so what they decide to do is something that was fairly novel at the time, but not 100 % novel.

[171] They decide to just sell the software on the internet.

[172] So rather than having people sell it, anybody can just come and sign up.

[173] And it's in the cloud.

[174] It's SaaS.

[175] And that's not, you know, like I said, it's sort of leading edge.

[176] But Salesforce is around at this point.

[177] The concept of SaaS exists.

[178] They hosted on their website and you can buy Dira from Atlassian on the internet.

[179] And this is a little bit of a flash forward to later in the show, but I was looking through the S -1, and the term SaaS only appears four times in their S -1, and I think three or maybe all four of the four times, it refers to external partners.

[180] So it's interesting to sort of think about Atlassian doesn't view themselves as a SaaS company, or at least they don't refer to themselves that way in their communication to investors.

[181] I was sort of trying to figure out what is that?

[182] Is it that they feel that they pioneered the category so they don't need to say that they're part of the category?

[183] Or is that they want to sort of look at their numbers differently than a quote unquote typical SaaS company would look at numbers?

[184] Or is it, you know, they also have this booming on -prem business where they're installing stuff on servers for companies.

[185] They predated the modern era of SaaS in many ways.

[186] They did.

[187] They did.

[188] So my hypothesis on this is, I'm going to borrow from our coffee series here, where we did the Starbucks episode, and then our last episode was on Blue Bottle.

[189] And we talk about waves of coffee.

[190] You know, the first wave of coffee is Folgers and the second wave is Starbucks.

[191] And the third wave is blue bottle and these artisanal hipster, you know, coffee shops.

[192] I think Atlassian is the third wave was the first company of the third wave of enterprise software.

[193] And so if the first wave is kind of, you know, Microsoft and Oracle and SAP, you know, know, sort of these big on -prem software selling licenses up front, you know, you come and you install it, and they have a huge Salesforce, and it's really crappy software, honestly, you know, but CIOs buy it, and it's a heavy sales process.

[194] The second wave is SaaS, right?

[195] And that's that's Salesforce.

[196] And they change the business model to a subscription basis instead of paying upfront for the license, and it's delivered via the internet instead of on -prem.

[197] But at the end of day, I mean, let's be honest, right?

[198] Anybody who's used Salesforce, like, it's still kind of crappy software.

[199] And I think, you know, Blue Bottle and the like, the third wave coffee shops, would make the argument that Starbucks, the second wave, like, yeah, you go drink it in the store, you don't make it at home like Folgers, but it's still pretty crappy coffee.

[200] Like, it's all about...

[201] Same product, different means of delivery.

[202] Different means of delivery, right?

[203] Business model innovation, but the product is still not that great.

[204] And Blue Bottle would say like what differentiates us is this the coffee is really good and I think atlasian like their culture and what they've tried to live up to and I think what has led to their success is this product has to sell itself we don't sell the product there are no humans that sell this product they never have been there there various flavors of people that market and help deliver it um especially now that they're much bigger but they don't sell it in a traditional way and that means that the product has to be so good that people will buy it anyway.

[205] Yeah, that is a really interesting insight that the transition to as a service happens in two steps.

[206] And one is the business model and the way that it's built.

[207] And then the second is, you know, the product actually being very different and the product being deliberate as a service.

[208] I worked on Office for iPad and Office for Mac.

[209] And on Office for Mac, we had this big release where we turned it into part of Office 365 so it was office for mac as a service and like literally all that was different was the subscription stuff and i'm like but it's still the same bits that get shipped in a cd or you know DVD before like it's it's still desktop software that now just stops working if you stop paying on a monthly basis and the initial iteration of adobe creative cloud is sort of the same thing and the the bigger incumbents are sort of moving toward more true service you know product as a rather than the typical old product that is just billed as a service.

[210] But, you know, in thinking about sort of low -end disruption theory, that's really where the magic happens of product as a service.

[211] The product is fundamentally different than the old sort of products.

[212] Yep, yep.

[213] You got to remember, these are, you know, Scott Mike or two kids right out of college.

[214] I don't think they necessarily planned all this.

[215] Like, this was their only option, right?

[216] If they wanted to pay themselves the salary that they wanted, they had to sell their product.

[217] and they couldn't afford any salespeople.

[218] And even if they could, they're in, you know, Sydney, Australia.

[219] They're not going to go sell to, you know, Ford and Boeing and Tesla and all their, their clients now.

[220] They have to make a really good product that people are just going to buy themselves over the Internet.

[221] And sort of unwittingly, they really were the first company of this third wave, if you will, of enterprise software that now includes Slack, that now includes GitHub, that have the same selling motion.

[222] We just make a really great product.

[223] we're not going to go out and take you to a steak dinner to convince the CIO to buy this.

[224] It's going to be adopted organically by teams and grow within accounts.

[225] Let's put a pin in that steak dinner and come back to it.

[226] Put a knife in the steak dinner, a fork in the steak dinner.

[227] Yep.

[228] So that's how they start going to market.

[229] And the thing is, it actually works pretty well.

[230] So within that first year, 2002, even though, even though Mike and Scott are only able to take $15 ,000 each out of the business to pay themselves, it actually grows pretty amazingly.

[231] So they do a million dollars in revenue in that first year.

[232] Now, of course, they're paying R &D.

[233] They're hiring people.

[234] They're hiring engineers.

[235] They're hiring product folks.

[236] And they are doing marketing.

[237] They're not doing sales, but they are doing marketing to drive demand and awareness to their website for folks to buy the software.

[238] So it does a million dollars in year one.

[239] And even today, so this was 2002, if you're a SaaS company and you launched the product in the beginning of the year in April, and then you do a million dollars in that year, like, that's pretty darn impressive.

[240] Yeah, let's just say seize the day wasn't there.

[241] Okay, okay.

[242] So maybe you did make the right decision coming to acquired instead.

[243] And it really just, it grows from there.

[244] So in 2004, they released their second product, which is called Confluence, and that's a content collaboration software.

[245] for teams.

[246] So sort of similar to SharePoint.

[247] You can see they really start to try and build the low -end better product if they will disrupt it to a lot of the Microsoft suite.

[248] Yeah.

[249] And in many ways, the thing they were competing with here, and they even referenced this in their investor materials, is they compete with open source.

[250] And I remember making a decision in 2008 at Cisco, whether we were going to buy Confluence or whether we were going to just use MediaWiki and the engine that runs Wikipedia and use that open source piece of tech.

[251] And ultimately, there's enough, I remember even in 08 as an intern, there was enough value creation from Confluence as a real sort of enterprise grade, professionalized piece of software where it was worth paying for over the open source media wiki.

[252] Interesting.

[253] So you weren't really comparing it against SharePoint.

[254] No, we didn't think it was going to be a thing we were going to pay for at first, and then it was just so much better than the free stuff we were evaluating that we did it.

[255] Interesting.

[256] And you were at Cisco at the time, right?

[257] Like, I mean, that's a big company.

[258] And what's super interesting and is interesting about Atlassian and their whole sales model is they don't have to compete head on with the sales forces and the oracles and the Microsofts.

[259] Because, of course, you know, those like Cisco, I'm sure, is a huge Microsoft and Salesforce customer.

[260] Totally.

[261] But the intern was making the buying decision on whether we were going to use Confluence because, Like, it was a self -served thing.

[262] It was below the amounts that, you know, I had to check with lots of authorization for.

[263] I just asked my direct manager, and he's like, oh, yeah, sure.

[264] We can, it's really easy to do.

[265] It was the first time that employees were really empowered to make their own buying decisions.

[266] And we'll get to this in tech themes, but this is when sort of BYOD, the bring your own device era was coming into full swing.

[267] And for the first time, the buyer and the user of software and the enterprise was actually being coupled.

[268] So this old era of, yeah, you know, if you're making B2B software, you just have to make it good enough for the buyer or not good enough for the user, like you actually did have to start making it good enough for the user.

[269] Yeah, and this is a really good point.

[270] It's worth spending a minute on.

[271] Steve Jobs had a great quote about this.

[272] We'll try and link to it in the show notes at one of the all things D conferences that he did with Kara Switzer and Walt Mossberg.

[273] and I think Kara asked him like, hey, you know, why, why doesn't Apple do enterprise?

[274] Like, why do you only do consumer?

[275] This is back in 2009, 2010, before Apple did do more in enterprise.

[276] And Steve says, you know, this is the thing about, like, in consumer, it's the quality of the product that wins because each individual person is making their own buying decision and they are the user.

[277] So you have to make a good product and people vote kind of with their feet and their wallets.

[278] either they buy it or they don't and we get that feedback.

[279] But in the enterprise, you're taking the CIO to a steak dinner, you know, and convincing him to buy this whole suite of software, but, or him or her, but they don't use the product.

[280] The users are stuck with it.

[281] And Ben, what you're identifying and what Atlassian really latched onto is software got so cheap and distributed so easily that it was individual users who are now making the decisions.

[282] Total transformation.

[283] Total transformation.

[284] So, okay.

[285] so 2004 they launch confluence their second product and they keep growing a couple years later they're on being in australia they're on a fiscal year end in june not in december um so in the it's because all the times it's like you know times are upside down seasons are upside down yeah exactly got it actually i think i think uh most if i believe most australian companies do june 30 fiscal year end huh i could be wrong there Microsoft actually does too or at least did when i was there Yeah, that's right, that's right.

[286] I think they still do.

[287] And so by fiscal year end, June 2006, so four years after the company's founded, they're doing 15 million in revenue, which is really nice scaling.

[288] Continue growing.

[289] 2010, they acquire products called Bitbucket, which is also very interesting.

[290] And the parallels between Atlassian and Slack and GitHub, as we mentioned, are very, very apt and Bitbucket is a competitor to GitHub.

[291] So they acquire that.

[292] They offer, they add that to their product suite.

[293] In 2012, they acquire HipChat.

[294] This is before Slack, but HipChat was really Slack before Slack.

[295] Man, man, it's making IRC better, giving it a nice little web interface.

[296] Now, of course, the Yammer guys would argue that Yammer was hip chat before hip chat before Slack.

[297] Yammer was Facebook and Twitter mashed together for the enterprise.

[298] Like, this is chat's, you know, synchronous communication baby it's the way of the future so they add that that to the product portfolio 2013 they launched another product to your service desk so this is really for IT departments and other service oriented groups that are taking in tickets and responding to them and this is like a zen desk or a help scout or something like that um so they really you know atlasian kind of becomes this suite of all of these modern you know bottoms up enterprise software packages if you well.

[299] And along the way, as we've said, they just keep growing and growing.

[300] In 2010, back in 2010, they do do the first secondary sale that we talked about in the beginning of the show.

[301] Excel, the venture capital firm, buys $60 million worth of stock from the founders and employees.

[302] None of that goes to the company.

[303] Company doesn't issue any shares.

[304] Still an amazing investment by Excel.

[305] Oh, incredible, an incredible investment.

[306] I believe, if I remember right from the IPO prospectus, Excel owned about 15 % of the company.

[307] Yeah, it's, I've actually got the little graph right here.

[308] It was 15 .21.

[309] Just thinking about what that means, the company is doing so well that it puts the founders in a position where they can say, look, we would love to give you some shares.

[310] The company actually doesn't need any of your dollars to grow right now.

[311] like we're not going to plow that back into the business because everything is humming along so nicely and the growth rates that that we want were getting just without any, you know, investment capital.

[312] But you can have some of our shares.

[313] Yeah.

[314] And then the founders, you know, talk about this quite a bit.

[315] You know, part of it was was getting some liquidity for for themselves, but also part of it too was having some sort of signifiers of professionalism on board as they're starting to sell to, again, not sell with salespeople, but be part of and have account.

[316] with large organizations, thinking like, who are these guys?

[317] Right.

[318] And, you know, having Excel, one of the, you know, best VC firms in Silicon Valley behind them helped a lot.

[319] Yeah.

[320] And you have to imagine, too, the psychology behind that.

[321] Like, obviously the founders, so at IPO, the founders, Scott had 39 percent and Mike had 39 percent.

[322] Still a ton of skin in the game.

[323] So that's not really a concern.

[324] But having a bunch of liquidity from all your hard work, the psychology, you know, the psychology of it, I mean, it has to free you up to think bigger because you're no longer playing not to lose.

[325] Not that they were playing not to lose before, but like there's very little about you that's playing not to lose.

[326] You kind of never have to work again.

[327] Your life is good.

[328] At this point, it's all about like really go bigger, go home.

[329] Like how big can we carry out our vision and stay true to our principles?

[330] And it gives them sort of that breathing space to, you know, see how big their original vision can become.

[331] Yeah.

[332] And, you know, to your point about it, incredible investment by Excel.

[333] If you do the math on that investment, they valued the company at $400 million.

[334] And a few years later, well, five years later, in 2015, they'd go public.

[335] We'll get to this ultimately at a $4 .5 billion.

[336] And now it's north of 10.

[337] And now it's at almost $11 billion.

[338] So great, great investment by Excel.

[339] They do also then raise another almost $200 million from TRO price in 2014.

[340] But again, it's not raising.

[341] They were buying, I believe that was mostly from employees.

[342] And that was, I believe, Tiro bought about 6 % of the company.

[343] So that implies an over $3 billion valuation.

[344] So again, for Excel, even in just a couple of years, they're getting marked up from $400 million to over $3 billion.

[345] But it's merited by the growth of the company.

[346] So fiscal year end 2013, so June 30th, 2013.

[347] They do just shy of $150 million in revenue.

[348] the next year, $215 million in revenue, and then 2015, so the fiscal year ending right before they go public, they do over $300 million in revenue, $320 million.

[349] So just incredible growth.

[350] The flip side of that, which is interesting because you just so rarely see this in Silicon Valley companies these days, but I think is really a heritage of how the company was built and grew, they were profitable and not just like marginally profitable.

[351] But in that last fiscal year, before they went public, they generated almost $100 million in operating cash flow.

[352] I mean, I don't know any.

[353] What private company today is generating $100 million of profit?

[354] I mean, I know a lot of private companies that are generating negative $100 million in operating cash flow right now.

[355] But really, really impressive.

[356] So November 2015, they do file to go public in the U .S. and really we'll get into narratives here at a minute, but it's really in a lot of ways a coming out party for them with the investor community.

[357] I mean, they were somewhat under the radar, but these numbers are incredible.

[358] And even more so, again, because of the heritage of the company and their sales model, they're only spending, when all this comes out in their IPO prospectus, they're only spending about 20 % of revenue on sales and marketing to grow, that fast.

[359] I mean, your average SaaS company is spending anywhere from 50 to over 100 % of annual revenue on sales and marketing, just trying to grow not even as fast.

[360] Yeah, I mean, it really speaks to the quality of the product.

[361] And it speaks to the audience that they're speaking to.

[362] I heard literally three times in the last week, an engineer tell me, if I have to pick up the phone and call your sales representative, I'm not buying your service.

[363] And, It's so funny thinking about how that was just the expected norm for so long.

[364] We're seeing a return of it again in a lot of particularly analytics companies that are moving to a more enterprise sales model.

[365] But like for this demographic, you know, especially the engineering demographic, like that's not how to win them over.

[366] Being really easy to integrate with without any human interaction is a really great way to win them over.

[367] And what's really, you know, for a number of years, especially since Atlassian's been public and people, have realized, hey, this model of no traditional sales can work.

[368] Part of the knock on it by people who are advocates of a traditional sales model is, well, exactly what you said, Ben, like this works for this demographic.

[369] Will it work for other demographics?

[370] No, you probably still need to do the steak dinners and whatnot.

[371] And we're knocking steak dinners here.

[372] That can be a very viable way to build a company too.

[373] And it is important to build relationships with the people you're selling to.

[374] But with Slack emerging in the last few years and Slack penetrating teams of all types in every type of organization, you know, they have the Alassian type sales model here.

[375] There are no sales reps going around for Slack to the New York Times or whomever is, you know, are their big customers.

[376] Yeah, very few.

[377] In fact, I think Slack actually may have more than Atlassian, but I think Atlassian still has like actually.

[378] none.

[379] Now, one thing they do have is a channel.

[380] And I actually don't know if Slack does as well.

[381] But the channel is super helpful because some customers, especially large ones, just aren't going to buy software unless they do have someone they can talk to.

[382] And so what Atlassian said is like, okay, great, we're not going to do that ourselves, but we will work with third -party value -added resellers who can effectively be that synthetic sales touchpoint for buyers who need that.

[383] So they have invested a lot in that.

[384] And that does take both marketing dollars and people headcount within Atlassian who help empower the channel to make those sales.

[385] So it's unfair to say that there is absolutely zero sales effort.

[386] But it's just not the same traditional.

[387] Like we have a sales force with, you know, territory managers and reps and a VP of sales in the same way that, you know, Oracle or sales force or, you know, any other enterprise or SaaS company does.

[388] Yeah.

[389] If I had to foreshadow a little bit later of my sort of open questions, I think it's a risk to the business that, I mean, most of their revenue comes from Jira and Confluence.

[390] Those are mostly aimed at engineering organizations or product management organizations.

[391] You know, there's probably a saturation point on those where you have to start trying to sell all the suite of other products that integrate really well and generate significantly more of your revenue mix from those other products.

[392] And those don't sell them.

[393] as well as these products do.

[394] So I think, you know, the margin that we're seeing from, from Atlassian probably decreases in the coming years as they have to start adding more of these other products to the mix.

[395] Interesting.

[396] Well, and certainly their other product lines have more competition than Jira does, which is a big part of it too.

[397] And when you have competition, then you may need to sell more.

[398] Yep.

[399] Or put more effort into sales, so to speak.

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[448] Well, to wrap up the history and facts, November 2015, as well, we said they file to go public, December 10th, they price their IPO at $21 a share or just about $4 .4 billion market cap that translates to.

[449] So again, nice return for Excel there.

[450] And the founders, you know, are billionaires officially at that point.

[451] And then on the first day of trading, they close up at $27 .48.

[452] So almost $6 billion market cap.

[453] Really incredible.

[454] And since then, Well, a couple things have happened.

[455] So, one, they've always been an acquisitive company themselves.

[456] They acquired Trello and added that to their product suite in January of 2017.

[457] And this is worth pointing out, so they sold about 10 % of the company.

[458] They raised $462 million in the IPO.

[459] They bought Trello for $425 million.

[460] Interesting, you know.

[461] Now, again, they're generating cash, though, too.

[462] So, like, they have really all options at their fingertips.

[463] Yep.

[464] Recently, in September 2017, you know, we've mentioned Slack quite a bit and HipChat, and HipChat was Slack before Slack, as the Alassian would have it.

[465] They're actually, they've completely reimagined Hip Chat.

[466] They've renamed it Stride, and they're trying much more directly to compete with Slack.

[467] Built from the ground up.

[468] Built from the ground up.

[469] And with more features than Slack, David, did you know you can assign tasks, you can do lightweight project management there's uh there's it makes sense given jira and yep of their heritage it is attractive but on the other hand like the stickiness for these products like how many teams who have started on slack now are going to switch like yeah not to mention network effects of uh non like outside your organization it's super easy for me now to add another slack to my life there's zero chance i'm going to also have what does it stride stride running on in addition like what is it again i have nine yeah that's that's that's that's that's marketing message right there what is it again try slack yeah or you you know stick with slack but no honestly like i've i've i've nine slacks i'm not going to have a nine slacks in a stride yeah there's no way you're not going to keep another app open also can we get more creative on the names like five letters starting with s and i mean slack's guilty of it too because they in many ways we're replacing Skype.

[470] So, you know.

[471] Yeah, well, it's kind of a low blow, right?

[472] Kudos to Microsoft for Teams.

[473] Indeed.

[474] Kudos to Microsoft.

[475] So despite the struggles in the chat communications, part of their product suite, the company has pretty much killed it, like Alassian.

[476] Continued 50 % year over your growth.

[477] This most recent earnings call that I was just listening to, their stock price jumped 25 % after the earnings call last week.

[478] It was a few days ago.

[479] It was a few days ago.

[480] And as we said, now the company is valued, their market capitalization is almost $11 billion, which is really incredible.

[481] Casual.

[482] For, you know, not having casual, just casual, you know, add another couple Bs to the bank account, literally for the founders.

[483] But again, zero venture capital.

[484] Amazing.

[485] Pretty incredible.

[486] Well, I think we've talked about the narrative around the IPO or at least alluded to it quite a bit, but to switch to that.

[487] I think this is our first narrative section where I would argue that the narrative when the company went public was like, wow, here's this pretty amazing company in Australia that is showing up all these venture -backed companies in Silicon Valley and has built a really innovative new way to sell enterprise software.

[488] and I think that's true.

[489] Yeah, and to illustrate that, their S -1 was incredibly straightforward and did not, there was nothing hiding in there behind, well, we only have to show X, Y, Z, so we're only going to show X, Y, Z. They had a full cohort analysis in their S -1.

[490] And that, I mean, that's not, the cohort analysis is like a newer way to evaluate businesses, and that's not mandated by the SEC.

[491] but you can see revenue growth by cohorts since their founding date in the S -1.

[492] And you can see a lot of things in their S -1 where they've just got an organically really great business and they're just telling the story.

[493] And honestly, I think you look at Blue Apron and you look at some other IPOs recently, it's a little confusing reading the IPO because you're not actually sure even after you read 50, 60 pages about the business, including risks and including all their financials, how is the business doing?

[494] it's quite clear when you read Atlassians.

[495] It's doing great.

[496] Yeah.

[497] And this is, you know, when I said a minute ago that this is our first narrative.

[498] What I meant was it kind of matches up.

[499] Like what Atlassian was telling people was the same thing that people in the press and in the investor community were believing when they read the S -1.

[500] And in practice, over the last two years has played out.

[501] And compare that versus some of the other ones we've looked at.

[502] We haven't covered the Blue Apron IPO, but we covered the SNAP IPO.

[503] And the jury is still out, but there was a huge disconnect between Snap positioning themselves as a quote -unquote camera company, that being their narrative, and the investor community saying, wait a minute, Instagram just kneecapped your growth.

[504] Yeah.

[505] And in the opposite direction, we, you know, this is, this IPO happened within a month of the Square IPO.

[506] Square also had an incredibly solid, fundamental business on their hands.

[507] If you look at, if you go back and listen to that, that Square episode, one of the, the insights, that David and I sort of uncovered from talking to some friends there is Square has a 30 % return on marketing spend basically on every single cohort.

[508] Every cohort is revenue churn neutral.

[509] So they basically can just keep spending money, getting additional customers, and some of those drop out, but the other ones make up for the ones who dropped out.

[510] Yeah, I mean, extremely predictable business.

[511] And the story that was spun in the press about, that IPO, about it being a down round, about a lot of the external factors of the business, just didn't pay attention to how solid that business was.

[512] And when you look at the ensuing days since that IPO, the couple of years that have gone down by, it was a great stock to buy.

[513] And the business kept doing exactly what it was doing before the IPO, after the IPO.

[514] And yet every story in the press was that the sky was falling.

[515] Yeah.

[516] And I mean, I know you guys hate hate follow -ups, so this is not an official follow -up, but since the square - You give a guy some survey feedback, and he takes it way too far.

[517] He takes it way too far.

[518] But since we did our episode on the Square IPO, which is still one of my favorites, because this dichotomy between the narrative at the time of the sky is falling for Square and the reality that it was a great business is, it's like the opposite of what you would expect.

[519] Square has killed it even since the episode.

[520] I mean, they're now trading, I think they're up after earnings today.

[521] I think close to $35 a share.

[522] And remember, they IPOed at under 10.

[523] Wow.

[524] Yeah, crazy.

[525] Well, I think that probably does it for narratives.

[526] What would have happened otherwise?

[527] Yeah.

[528] Okay, so, well, here's a question.

[529] One also that we've talked about on this show quite a bit is relevant in the tech world right now.

[530] So I hesitate even to ask it because I think companies should go public.

[531] But why did they go public.

[532] They didn't need to.

[533] The founders owned the company.

[534] Yeah.

[535] So the quote that they gave to a news outlet was that Atlassian will use proceeds from its IPO for corporate purposes, including capital expenditures and potential acquisitions.

[536] Like Trello.

[537] Like Trello.

[538] That many people are speculating they overpaid for.

[539] There's a great case to be made for why they bought it.

[540] They spent about the same amount of money on Trello that they raised in the IPO.

[541] Their cash balance after the IPO was hovering around 5 to 700 million for the quarters after the IPO.

[542] So, you know, the IPO did add a material amount of cash to their war chest to do things with.

[543] I guess it gave them option value in an increasingly competitive landscape to be a lot more acquisitive.

[544] They haven't been as acquisitive as they could have been.

[545] And Trello to date hasn't meaningfully added to their business.

[546] I mean, it's added a lot of users.

[547] I don't know how the cross -sell is going.

[548] I don't know if they're starting to monetize Trello at all, or more than they were.

[549] But I think it bought them option value, and it was pretty cheap option value for, you know, a little over 10 % of the company.

[550] Yep.

[551] Now, again, to play devil's advocate, though, now they're a public company.

[552] Now they have to report every quarter.

[553] But I do think, like, as we've been saying all episode, this is a really good company with very solid fundamentals and very predictable growth and customer, you know, retention and behavior and acquisition.

[554] If you have a good company, there's kind of nothing to be afraid of of going public, right?

[555] Yeah.

[556] Gosh, I forget who said this.

[557] It might have been Zuckerberg.

[558] I think it was Mark Zuckerberg.

[559] The discipline forced by going public is a really good thing for your business.

[560] Yep.

[561] Yep.

[562] And it seems like at lastine had their house in order beforehand, but they got the benefits that come with going public and having to report.

[563] And that easier to make acquisitions, both for cash and stock.

[564] But I think also, like, there's, you know, I wonder if in listeners that have listened to multiple episodes of ours probably know where we fall on the spectrum here.

[565] But people in Silicon Valley recently over the last few years have been very, very negative about the public markets saying it's all short -term focused, you know, the stock market It is a voting machine, not a weighing machine, and whatnot.

[566] But I think if you look at, you know, the IPOs that we've covered on this show, the Facebook IPO, the Square IPO, now the Alassian IPO, and on the other side of the ledger, the Snap IPO, I think you could make a strong argument that the public markets are actually a weighing machine for tech companies in a way that the private markets right now seem to be a voting machine.

[567] I would say we certainly haven't covered a company yet that has IPOed where the short -term outlook of the public markets shot down their share price and hurt the company without the company's product having the majority of the blame there.

[568] Well, Square, but I think Square was the Square IPO was a fault of positioning.

[569] positioning and really Goldman, as we talked about.

[570] Yeah, yeah.

[571] But I guess I mean post -IPO, no. You could imagine a scenario where I would say, I don't want to take my company public because the public markets will lose faith.

[572] Everything will actually be great at the company.

[573] We'll have to do stupid stuff to keep the stock price up.

[574] If we want to have a long view, we won't do the stupid stuff, and then our stock price will drop.

[575] And thus, employees will be undercompensated.

[576] We won't be able to, you know, hire well, we won't be able to, we will have, you know, all sorts of problems that arise from a low stock price.

[577] But we haven't seen it.

[578] Well, we haven't covered it yet.

[579] Not to say that it doesn't happen, but, you know, we have a number of data points now, including the Amazon IPO.

[580] I mean, talk about a company that, you know, was able to innovate probably arguably more so than any other company in history as a public company and be very long -term focused for years and years not generating a profit.

[581] We have a lot of data points on this show that being public, exactly to your point, Ben, can enforce a discipline and a rigor on companies and management teams that you're not going to get otherwise.

[582] Yeah, I think the only thing that would have happened otherwise is maybe they wouldn't have bought Trello, but I still think they probably would have.

[583] They had twice as much money in the bank as they raised in the IPO.

[584] Question on do they need to be more acquisitive?

[585] One thing I was thinking through as I was reading the criticism that Atlassian's highest selling products are for engineers so they can be sold in the self -serve way.

[586] Like are they saturating the market?

[587] Like do they need to branch out because there's not much more growth left in their core businesses?

[588] Well, it's interesting.

[589] They certainly now position themselves.

[590] as a company that makes products for teams.

[591] Their NASDAQtickers team.

[592] Is team, yes.

[593] And what I don't know, didn't research enough and is hard to tell on the surface, is whether that's always been their positioning or in the past were they developer tools.

[594] And now they're teams, because they're trying to expand their market as they've perhaps saturated the developer and product manager market.

[595] Well, that's interesting.

[596] I mean, they've had these values for a long time.

[597] And their S -1, they have these values that they state.

[598] And those are their open company, and I'll keep it nice for kids.

[599] Open company, no BS.

[600] Dills with heart and balance.

[601] Don't F the customer.

[602] Play as a team.

[603] Be the change you seek.

[604] None of those are really developer -focused.

[605] Nope.

[606] And, you know, play as a team.

[607] And it's actually, it's a nice little, it's play comma as a team.

[608] Nice.

[609] You know, I think this is their vision for a long time.

[610] It certainly gets a little rewritten and quite a bit short up over time, as every company's does.

[611] I'm sure Snap wasn't started as a camera company, but I'm on board with it.

[612] You raise a fair point, though, that it is far from assured that Alassian will have the kind of success that they've had with Dira as they expand into other market segments too.

[613] I just don't know that many people outside of tech that use Atlassian's products.

[614] and that's kind of fine because everything's becoming tech and software is eating the world and there's still plenty more if you look at what Microsoft sold enterprise software to atlasian still has a lot of headroom above it um very true but this is kind of the thing about Slack though right like there are people of all types and all levels of technological um you know uh familiarity who use Slack I mean the New York famously one of Slack's first you know, real first customers that really made at least the investor community take notice about this might be something really special and different was the New York Times Newsroom started using Slack.

[615] You know, this is not just developers that are doing this.

[616] Yeah, it's a great point.

[617] You want to move on to Tech Trends?

[618] Let's do it.

[619] Cool.

[620] Before we start diving into these, I think we've covered a lot of them, there was one chart that was really interesting to me. And they have this great deck on their investor site where you can kind of look at what their general positioning is to investors and why they're a good stock to buy.

[621] And one of them is that their R &D as a percentage of revenue is like head and shoulders above a bunch of their competitors.

[622] So they're at 37%.

[623] And working on down from that is workday, tableau, Twilio, box, Zendesk, new relics, Splunk, on down.

[624] And a lot of those that are way further down are like intense technology companies.

[625] And you never, I mean, at least I never really think about Atlassian as, boy they do they do hardcore tech like for tableau i'm like wow that that's a heavy lift to do that data visualization and on the server and you think about um you know splunk like analyzing log files and the the incredible sort of computer science challenges involved and handling all that data and all the lookups and all the rights and reads atlasian must pour a lot of cash into like security availability uptime because those are called out in a big way in their s1 as risk to the business, you know, if our customers ever stop trusting our reliability or security, then we're in trouble.

[626] And I think they probably pour a lot of into user experience.

[627] But I definitely, in preparing for this episode, you know, I've been trying to figure out, like, why is, why is Atlassian spending so much on R &D relative to other seemingly more technical companies?

[628] I think they argue, and when you listen to them talk about it, that this is part the nature of their model like they're not spending on sales they don't have a sales force and what that means and what the founders and um other folks in the company talk about in practice that means that the sales force of the company is the product itself and the product um not just that the product has to be good but it also it does but also the product has to literally sell itself like there has to be a lot of thought and effort and work put into, you know, the conversion funnel and tracking it and analyzing it along the way and making sure that because, again, there's no, there's no human.

[629] The way they talk about it is that like when you, when you have a sales force, you are using humans to solve problems about adoption of your product, which is fine, but that's just what you've chosen.

[630] They've chosen to use product to solve problems about adoption.

[631] And so I think that they would argue that all of the R &D that they're spending is sort of what they have to do because they don't have a sales force.

[632] Right, right.

[633] It's like if you're not spending on sales, then either you're applying it toward product or you're actually just applying it toward your margin.

[634] But in order to sell at the volume that they're selling at, they need to apply to product.

[635] Yep.

[636] Yeah.

[637] Really, what you also need is word of mouth, right?

[638] And virality.

[639] And part of that's natural, a lot of it.

[640] but you have to do a lot in the product to make that happen as well.

[641] And so I haven't dug in enough to know or use the product or referred enough people to know.

[642] But like, are they giving referral bonuses to people, you know, if you, which many consumer companies do, right?

[643] I mean, that's like kind of the playbook for growth.

[644] Yeah.

[645] I haven't seen it.

[646] I've poked around a lot.

[647] Maybe I may have missed it.

[648] But yeah, quite honestly, I think it's if you.

[649] you get used to one of these types of systems and then you're starting a new software project on a new team or going to a new company like it is a big mental switching cost to learn a new system a little little aside so uh recently for taunt we launched our alpha the entire product management and and uh product roadmap for that lived on a gigantic whiteboard it was a you know it's a eight foot tall by probably 16 feet wide thing that we taped off with swim lanes and we had hundreds and hundreds and hundreds of sticky notes and it's an incredible way to do project management like to be able to visualize every moving part all at once outside of a monitor is like the best thing ever but unfortunately you have to grow up at some point and you have to scale at some point you have to actually start estimating hours and doing triage and putting things to buckets and when the decision comes to to decide as a team what are we going to use you almost never pick a new tool it's always what does somebody know really well, and it's usually what does the person who's going to be spending the most time in it do really well?

[650] I don't think they need referral bonuses.

[651] I just think they need to provide a good experience for someone once, and then they got them for a long time.

[652] Well, maybe, you know, in a couple years when AR and VR become a thing, you can have the best of both worlds.

[653] Honestly, I think that's a killer, killer app for VR and AR.

[654] Because I think a monitor is just not nearly enough space to visualize work items and tasks.

[655] I'm totally, totally, we, you know, I went through a period in my new venture where we had a whiteboard and then, unfortunately, we moved offices and then we didn't have a whiteboard.

[656] And then now we have a whiteboard again.

[657] And like, it's night and day.

[658] Being able to just physically visualize your plans and what you're working on is so different than doing it on a screen.

[659] Mm -hmm.

[660] Yeah, I mean, maybe that's, maybe that's the killer Jira app of the future is ARVRM -A