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Episode 47: The Atlassian IPO

Episode 47: The Atlassian IPO

Tue, 07 Nov 2017 00:30

Ben & David venture to the land down under (and reunite in-person!) to tell the story of the granddaddy of all bootstrapped tech success stories, collaboration software company Atlassian. How did two plucky college grads from Sydney, Australia go from just trying to escape working for the man to becoming two of the top 10 wealthiest people in the entire country, all without raising a dollar of venture capital? We dive in.

Topics Covered Include:

  • How Atlassian founders Mike Cannon-Brookes and Scott Farquhar met in college at the University of New South Wales in Sydney, Australia, and their decision to bootstrap a startup as an alternative to finding a “real job” after graduation
  • Atlassian’s “no sales” model, and the resultant efficiency of their sales & marketing spend relative to other SAAS companies
  • Organic product growth and acquisitions over the years, starting with Jira and later adding Confluence, BitBucket, HipChat / Stride, Jira Service Desk and Trello
  • Rapid revenue growth and the decision to continue as a bootstrapped company, only raising secondary capital prior to going public
  • The IPO in November 2015 and subsequent stock performance (spoiler: it’s been good)

The Carve Out:

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The other thing I was thinking about is do we want to do any follow up on Alaska version? Yeah, people hate follow ups. People, yeah, people definitely hate hot takes something they also hate follow ups. Yeah, I don't think we need to. All right. Actually, maybe I'll just use this for the teaser quote. It didn't go well. I'm David Rosenpill. Welcome back to episode 47 of Acquired, the podcast about technology, acquisitions and IPOs. I'm Ben Gilbert. I'm David Rosenpill. And we are your hosts. Today we are covering the Atlassian IPO, and normally we're hesitant to do episodes on such recent news, unless we're actually on the scene, week of, can be one of the first takes you here on it. And otherwise, ultimately, we don't have enough to reflect on, to make a recent IPO or a recent acquisition, something that we should cover on the show. However, there's so much interesting story behind that Atlassian, and there's already been so much data to go off of in the last two years. Two years since the IPO. I believe in the two years. When I was writing this little intro, I was in the last couple quarters since the IPO, but really been two years that we want to talk about it. 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, Ben. Great to be on the show. Most people know at this point we've been doing most shows remotely, because I actually earlier this year moved to San Francisco. I've been living there and working on something new, more to come on that later this year or early next year. But yeah, this is actually our first in-person episode of 2017. Yeah, I mean, it's good to be back. You look very similar to how you looked in 2016. I'm having a day today. I appreciate it. I appreciate it. Well, it's good to be back in person, and I could be back in Seattle, look forward to being back often, and doing more in-person acquired episodes. Sweet. Our presenting sponsor for this episode is not a sponsor, but another podcast that we love and want to recommend called the Founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and Founders, so we knew there's a natural fit. We know the host of Founders. Well, David Senra, hi, David. Hey, Ben, hey, David. Thank you for joining us. Thank you for having me. I like how the group is together, and then they say it's like the best curriculum for Founders and Executives. It really is. We use your show for research a lot. I listened to your episode of the story of Akyo Marita before we did our Sony episodes this incredible primer. You know, he's actually a good example of why people listen to Founders until acquired, because all of his great-sunders and investors they had deep historical knowledge about the work that came before them. So like the founder of Sony, who did he influence? Steve Jobs talked about him over and over again if you do the research to him. But I think this is one of the reasons why people love both of our shows, and there's such good compliments. It's unacquired. We focus on company histories. You tell the histories of the individual people. You're the people version of acquired and where the company version of Founders. Listeners, the other fun thing to note is, David will hit a topic from a bunch of different angles. So I just listened to an episode on Edwin Land from a biography that David did. David, it was the third-fourth time you've done Polaride. I've read five biographies of Edwin Land, and I think I've made eight episodes of them. Because in my opinion, the greatest such primer to ever do it, my favorite entrepreneur personally is Steve Jobs. And if you go back and listen to like a 20-year-old Steve Jobs, he's talking about Edwin Land's My Hero. So the reason I did that is because I want to find out, like, I have My Hero's, who were their heroes? And the beauty of this is the people may die, but the idea's never to. And so Edwin Land had passed away way before the apex of Apple. But Steve was still able to use those ideas, and now he's gone and we can use those ideas. And so I think what Aquarius doing, what Founders trying to do as well, is find the best ideas in history and push them down to generations. Make sure they're not lost history. I love that. Well, listeners, go check out the Founders podcast after this episode. You can search for it in any podcast player. Lots of companies that David covers that we have yet to dive into here on acquired. So for more indulgence on companies and Founders, go check it out. And listeners, if you are not in the Slack, we're about to cross a thousand members. You can go to and in the little sidebar or on mobile down at the bottom. You can join the Slack. David, you ready to take us in? Let's do it. So Atlassian, this has been a much requested episode, pretty much for the whole life of acquired. We're excited as Ben said in the preamble to dive in. And I think this is actually, I was going through all of our episodes in preparation for today. 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. We've certainly covered other bootstrapped companies in the past, but none of them that have gone on to be kind of lasting, independent, large public companies, without taking any venture capital along the way. Yeah, it's pretty crazy. I mean, the, 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. And that's often driven because your competitors are doing that or be some, some timing reason why it needs to grow, grow, grow. But it's kind of funky seeing a company go all the way the old fashioned way. Yeah. And not quite. I mean, there's a, around around the cell. Well, now they did. So Excel invested and T-Roy price invested before they went public. But both of those were only secondary shares sales. So none of those dollars went to the company's balance sheet. The company never sold any shares to investors. It was only individual people, shareholders, both the founders and employees that sold along the way. Wow. So we'll get into it. But this is, I think this is going to be a really interesting counterpoint to sort of the current 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. And here's a Lassian, 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. Amazing. Amazing. So getting into it, Atlassian was founded in 2002 by Mike Cannon Brooks and Scott Farquhar in Sydney, Australia. I'm remembering back to our PA-Semi episode where we were joking about Australia. And I said that because Authentic was founded in Melbourne, Florida, and you thought it was Melbourne, Australia. Uneducated host over here. But it was funny. I was listening to the most recent earnings call today to prepare. And it's just awesome hearing them jump on the phone in the Australian accents. Oh, so good. 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. And indeed it does. There are quite a number of companies in Australia now. And Atlassian really is kind of leading the way. So Mike and Scott, they meet in college at the University of New South Wales in Sydney, where they were classmates in a scholarship program, major. A little different than the US system there. They had a scholarship into a very prestigious major there, which was in business and information technology. And they became close friends. I think they're about 40 or 50 people in their class. They became close friends even though they came from super different backgrounds. So Scott grew up in a very kind of lower middle class family. And Mike actually, I believe his father was the head of city group in the investment bank in Australia. Oh wow. Super cool. So very different. But despite that, they became really good friends. And so they were in university, kind of in the late 90s, early 2000s. It was the dot com, go, go, go years, even in Sydney, Australia. So Mike, he of course, being that time frame and being in business and technology, this prestigious major in Australia, he started a company while he was in school. And it was called the bookmark box. And of course, this was in 1999, 2000. Scott wasn't involved. And so he had an exit. He sold the company to a dot com, fellow dot com startup called Blink dot com. Only back in the late 90s, but this was in the year 2000 before the crash. So he had a successful exit as like, I don't know, sophomore, junior in college. Serial entrepreneur. Serial entrepreneur. So he had this experience. And he and Scott were good friends. And most people in their program would go and work for consulting firms or investment banks, like Mike's dad and other, you know, because they're well paying, you know, prestigious jobs right after graduation. 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. 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. And the going rate apparently very specifically was $48,500 a year in salary. 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. It's funny. I mean, number one, duh, like who doesn't. Number two, I remember making that exact same pact with my business partner. 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. I think I probably talked about this on the show before. 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, in my case, they never got there. 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. Totally. Well, and clearly though, you just didn't stick with it long enough because as it turned out, McKinsey got, they fell pretty far short of their goal. They only paid themselves apparently $15,000 a year for the first two years versus 48. So like just about a quarter. And they financed it on like 10 grand of credit card debt. Yeah, so they didn't raise, as we've said, didn't raise a dollar. They had credit cards. They took out debt. They got to about $10,000 in debt before they were able to turn a profit. But Ben, if you had stuck with Seize 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 kind of top 10 wealthiest people in Australia. I blew it. You totally blew it. But now you're a co-host of acquired. What could you ask for? What more could you ask for? So they decide they're going to start a business. And Mike's case started another business together in pursuit of 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. And so they call the company Atlassian. I like it. I mean, I've liked the name. I've liked the logo. It's a good name. I always wondered. I recently. The logo kind of looks like a man. And apparently it looks like a man. The old logo, not the new logo, but the old logo. I always wondered, what's the deal with this? Apparently it's supposed to be Atlas. Yeah. I mean, all the new branding stuff is really nice and really poppy and really fresh and clean. Their old logo was so clearly identifiable. I hate when companies have a refresh that takes some of the personality away from the brand. Yeah. Yeah. So not a design podcast moving on. Moving on. So they start the company in late 2001, early 2002. And they launched their first product, JIRA, which is still, I think, their biggest product. Beloved by product managers worldwide. Beloved by product managers worldwide. I assume many, if not most folks listening to the podcast right now have used JIRA. Yeah. Maybe using JIRA right now. I used to follow some parody product management, Twitter accounts, and stuff. And I think people just, people know the JIRA interface and they're sleep. And they have both happy dreams and nightmares without filing tickets. So they launched in April 2002, as we're alluding to, 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. But there was just kind of one problem when they launched it, which was that since Mike's first company, 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. And usually the way you do that is you hire sales people. But the thing about sales people is they cost money. And so the way traditionally that you do that and you hire the sales people before you have the money is you raise money from venture capitalists or angels or whatnot. And then you use that to build your sales force. Well, there's no way that any VC was going to give money to these two kids, college kids in Sydney, Australia. And they didn't even try. And not to mention, even if you could do a paper for performance basis. So we had Scott Dorsey on the show for the exact target episode. And he mentioned that a lot of their early sales people were working 100% for commission. You kind of have to have an expensive product to make that work, too. 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. And like, in many cases, it's a little different now, but in many cases, it's just not that expensive. So even if you're paying sales people on a performance basis, still a long road. Yep. Well, and let's not forget what we're talking about dollar-wise in the company right now. Their goal is to pay the two of them $48,000 a year. They only pay themselves $15,000 a year. That means they're making $30,000. Really, how many people are you going to be able to hire if the entire capital balance of the company is $30,000? Yeah, great point. Not a lot. But they're scrappy, and they have to innovate their way out of this. And so what they decide to do is something that was fairly novel at the time, but not 100% novel. They decide to just sell the software on the internet. So rather than having people sell it, anybody can just come and sign up. And it's in the cloud, it's sass. And that's not, like I said, it's sort of a leading edge. But Salesforce is around at this point. The concept of sass exists. They hosted on their website, and you can buy Dura from Atlassian on the internet. And this is a little bit of a flash forward to later in the show. But I was looking through the S1, and the term sass only appears four times in their S1. And I think three, or maybe all four of the four times it refers to external partners. So it's interesting to sort of think about Atlassian doesn't view themselves as a sass company, or at least they don't refer to themselves that way in their communication to investors. I was sort of trying to figure out what is that? Is it that they feel that they pioneered the category? So they don't need to say that they're part of the category, or is that they want to sort of look at their numbers differently than a quote unquote, typical sass company would look at numbers? Or is it, you know, they also have this booming on-prem business where they're installing stuff on servers for companies. They predated the modern era of sass in many ways. They did, but 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 Bluebottle. And we talk about waves of coffee, you know, the first wave of coffee is folders, and the second wave of Starbucks, and the third wave is Bluebottle, and these are Tisnal hipster coffee shops. I think Atlassian is the third wave, was the first company of the third wave of enterprise software. And so if the first wave is kind of, you know, Microsoft and Oracle and SAP, you 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 sales force, and it's really crappy software, honestly, you know. But CIOs buy it and it's a heavy sales process. The second wave is sass, right, and that's Salesforce. And they change the business model to a subscription basis instead of paying up front for the license, and it's delivered via the internet instead of on-prem. But at the end of the day, I mean, let's be honest, right? Anybody who's used Salesforce, like it's still kind of crappy software. And I think, you know, Bluebottle, 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 folders, but it's still pretty crappy coffee. Like, it's all about same product, different means of delivery. Different means of delivery, right? Business model innovation, but the product is still, not that great. And Bluebottle would say, like, what differentiates us is the coffee is really good. And I think it lasts you in 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. There never happened. There are various flavors of people that market and help deliver it, 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. Yeah, that is a really interesting insight that the transition to as a service happens in two steps. And one is the business model and the way that it's build. And then the second is the product actually being very different and the product being delivered as a service. I worked on Office for iPad and Office for Mac. 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 DVD before. 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 was sort of the same thing. And the bigger incumbents are sort of moving toward more true service product as a service rather than the typical old product that is just built as a service. But in thinking about low end disruption theory, that's really where the magic happens of product as a service. The product is fundamentally different than the old sort of products. Yep. You got to remember, these are Scott, Micah, two kids right out of college. I don't think they necessarily planned all this. This was their only option. If they wanted to pay themselves the salary that they wanted, they had to sell their product. And they couldn't afford any salespeople. And even if they could, they're in Sydney, Australia. They're not going to go sell to Ford and Boeing and then Tesla and all their clients now. They have to make a really good product that people are just going to buy themselves over the internet. 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. We just make a really great product. We're not going to go out and take you to a stake dinner to convince the CIO to buy this. It's going to be adopted organically by teams and grow within accounts. Let's put a pin in that stake dinner and come back to it. Put a knife in the stake dinner, a fork in the stake dinner. So that's how they start going to market. And the thing is, it actually works pretty well. So within that first year, 2002, 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. So they do a million dollars in revenue in that first year. Now, of course, they're paying R&D, they're hiring people, they're hiring engineers, they're hiring product folks, and they are doing marketing. They're not doing sales, but they are doing marketing to drive demand and awareness to their website for folks to buy the software. So it does a million dollars in your one. And even today, so this was 2002. If you're a SaaS company and you launch 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. Yeah, let's just say C's the day wasn't there. OK, OK, so maybe you did make the right decision coming to Acquired instead. And it really just, it grows from there. So in 2004, they released their second product, which is called Complewence. And that's a content collaboration software for teams. So sort of similar to SharePoint. You can see they really start to try and build the low end, better product if they will disrupt or do a lot of the Microsoft suite. Yeah, 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. And I remember making a decision in 2008 at Cisco, whether we were going to buy Complewence or whether we were going to just use MediaWiki, and the engine that runs Wikipedia and use that open source piece of tech. And ultimately, there's enough, I remember even in08 as an intern, there was enough value creation from Complewence as a real enterprise grade, professionalized piece of software, where it was worth paying for over the open source MediaWiki. Interesting. So you weren't really comparing it against SharePoint. Now 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. Interesting. And you were at Cisco. Cisco at the time, right? Like, I mean, that's a big company. 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, because of course, those like Cisco, I'm sure is a huge Microsoft and Salesforce customer. Totally. But the intern was making the buying decision on whether we were going to use Complewence because like, it was a self-serve thing. It was below the amounts that, you know, I had to check with lots of authorization for. I just asked my direct manager and he's like, oh yeah, sure, we can, it's really easy to do. It was the first time that employees were really empowered to make their own buying decisions. 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. And for the first time, the buyer and the user of software and the enterprise was actually being coupled. 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 and not good enough for the user. Like you actually did have to start making it good enough for the user. Yeah, and this is a really good point and worth spending a minute on. Steve Jobs had a great quote about this. We'll try and link to it in the show notes at one of the all things D conferences that he did with Cara Switzer and Walt Mossberg. And I think Cara asked him like, hey, you know why, why doesn't Apple do enterprise? Like why do you only do consumer? This is back in 2009, 2010, before Apple did do more in enterprise. 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. So you have to make a good product and people vote kind of with their feet and their wallets either they buy it or they don't and we get that feedback. But in the enterprise, you're taking the CIO to a stake 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. The users are stuck with it and been 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. Total transformation. Total transformation. So, okay, so 2004, they launched Confluence, their second product and they keep growing. A couple of years later, they're on being in Australia, they're on a fiscal year and in June, not in December. So in the fiscal year. Because all the time, times are upside down, seasons are upside down. Yeah, exactly. Got it. Actually, I think most of, I believe most Australian companies do June 30, fiscal year end. Huh. It could be wrong there. Microsoft actually does too, or at least dead when I was there. Yeah, that's right. That's right. I think they still do. 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. Continue growing. 2010, they acquire a product called Bitbucket, which is also very interesting and the parallels between Atlassian and Slack and GitHub as we mentioned are very, very apt and Bitbucket is a competitor to GitHub. So they acquire that, they offer that they add that to their product suite. In 2012, they acquire HipChat. And this is before Slack, but HipChat was really Slack before Slack. Man, man, it's making IRC better, giving it a nice little web interface. Now, of course, the Yammer guys would argue that Yammer was HipChat before HipChat before Slack. Yammer was Facebook and Twitter and they didn't match together for the enterprise. Chats, you know, synchronous communication baby in the future. So they add that to the product portfolio. 2013, they launched another product to your service desk. So this is really for IT departments, another 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. So they really, you know, Atlassian kind of becomes this suite of all of these modern bottoms up enterprise software packages, if you will. And along the way, like as we've said, they just keep growing and growing. In 2010, back in 2010, they do do the first secondary sale that we talked about in the beginning of the show. Excel, the venture capital firm, buys $60 million worth of stock from the founders and employees. None of that goes to the company. Company doesn't issue any shares. Still an amazing investment by Excel. Oh, incredible, an incredible investment. And I believe, if I remember right from the IPO perspective, Excel owned about 15% of the company. Yeah, I've actually got the little graph right here. It was 15.21. 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. The company actually doesn't need any of your dollars to grow right now. Like we're not going to plow that back into the business because everything is humming along so nicely and the growth rates that we want we're getting just without any investment capital. But you can have some of our shares. Yeah. And then the founders talk about this quite a bit. Part of it was getting some liquidity for themselves. But also part of it too was having some sort of signifiers of professionalism on board because they're starting to sell to, again, not sell with salespeople, but be part of and have accounts with large organizations. Yeah. I think like who are these guys? Right. And having Excel, one of the best VC firms and Silicon Valley behind them helped a lot. Yeah, and you have to imagine too, the psychology behind that. Like obviously the founders, so at IPO, the founders, Scott had 39% and Mike had 39% still a ton of skin in the game. So that's not really a concern. But having a bunch of liquidity from all your hard work, the psychology of it, I mean, it has to free you up to think bigger because you're no longer playing not to lose, not that they are playing not to lose before. But like there's very little about you that's playing not to lose. You kind of never have to work again. Your life is good. At this point, it's all about like really go bigger, go home. Like how big can we carry out our vision and stay true to our principles? And it gives them sort of that breathing space to see how big their original vision can become. Yeah, and to your point about incredible investment by Excel, if you do the math on that investment, they valued the company at $400 million. And a few years later, well, five years later in 2015, they'd go public, we'll get to this ultimately, at a four and a half billion dollar. And now it's in North of 10. And now it's at almost $11 billion. So great, great investment by Excel. They do also then raise another almost $200 million from T-Row price in 2014. But again, it's not raising. They were buying, I believe that was mostly from employees. And that was, I believe, T-Row bought about 6% of the company. So that implies that over $3 billion valuation. So again, for Excel, even in just a couple of years, they're getting marked up from $400 million to over $3 billion. But it's merited by the growth of the company. So fiscal year and 2013, so June 30th, 2013, they do just, I have $150 million in revenue. 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. So just incredible growth. 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 marginally profitable. But in that last fiscal year, before they went public, they generated almost $100 million in operating cash flow. I don't know. I don't know what... Private company today is generating $100 million of profit. I mean, I know a lot of private companies that are generating negative $100 million in operating cash flow right now. But really, really impressive. So November 2015, they do file to go public in the US. And really we'll get into narratives here in a minute. But it's really, in a lot of ways, a coming out party for them with the investor community. I mean, they were somewhat under the radar, but these numbers are incredible. 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 perspective. They're only spending about 20% of revenue on sales and marketing to grow that fast. 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. Yeah, I mean, it really speaks to the quality of the product. And it speaks to the audience that they're speaking to. I heard literally three times in the last week, an engineer told me, if I have to pick up the phone and call your sales representative, I'm not buying your service. And it's so funny thinking about how that was just the expected norm for so long. We're seeing a return of it again in a lot of particularly analytics companies that are moving to a more enterprise sales model. But like for this demographic, especially the engineering demographic, that's not how to win them over. Being really easy to integrate with without any human interaction is a really great way to win them. And what's really, you know, for a number of years, especially since Atlassians been public and people have realized, hey, this model of no traditional sales can work, 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, will it work for other demographics? No, you probably still need to do the stake dinners and whatnot. And we're knocking stake dinners here that you know, that can be a very viable way to build a company too. And there is, it is important to build relationships with the people you're selling to. 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. There are no sales reps going around for Slack to the New York Times or whomever is, you know, are their big customers. Yeah, very few. And I think Slack actually may have more than Atlassian, but I think Atlassian still has like actually none. Yeah, pretty crazy. No, one thing that you have is a channel. And I actually don't know if Slack does as well. But the channel is super helpful because some customers, especially large ones, just aren't gonna buy software unless they do have someone they can talk to. And so what Atlassian said is like, okay, great, we're not gonna 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. So they have invested a lot in that. And that does take both marketing dollars and people headcount within Atlassian who help empower the channel to make those sales. So it's unfair to say that there is absolutely zero sales effort, but this is not the same traditional, 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 Salesforce or, you know, any other enterprise or SaaS company does. Yeah, 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 Giro and Confluence. Those are mostly aimed at engineering organizations or product management organizations. 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 a significantly more of your revenue mix from those other products and those don't sell themselves as well as these products do. So I think, you know, the margin that we're seeing from Atlassian probably decreases in the coming years as they have to start adding more of these other products to the mix. Interesting. Well, and certainly their other product lines have more competition than Giro does, which is a big part of it too. And when you have competition, then you may need to sell more or put more effort into sales, so to speak. Well, to wrap up the history in fact, November 2015, as 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. So again, nice return for Excel there. And the founders, you know, are billionaires officially at that point. And then on the first day of trading, they close up at $27.48, so almost $6 billion market cap. Really incredible. And since then, well, a couple things have happened. So one, they've always been an acquisitive company with themselves. They acquired Trello and added that to their product suite in January of 2017. And this is worth pointing out. So they sold about 10% of the company. They raised $462 million in the IPO. They bought Trello for $425 million. Interesting. Interesting. You know, the amount. Now again, they're generating cash though too. So they have really all options at their fingertips. Yeah. Recently in September 2017, we've mentioned Slack quite a bit in HipChat. And HipChat was Slack before Slack, as Alassian would have it. They're actually, they've completely reimagined HipChat. They've renamed it Stride. And they're trying much more directly to compete with Slack. They'll fill from the ground up. They'll fill from the ground up. Yeah. And with more features than Slack, David, did you know you can assign tasks? You can do lightweight project management. There's a... What's this true? That makes sense, given Jira and... Yep....they're 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 gonna switch? Yeah, not to mention that. It's really hard. Of 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 gonna also have... Stride....stried running on... addition. What is it again? Yeah, that's Slack's marketing message right there. What is it again? Try Slack. Yeah. Or you know, stick with Slack. But no, honestly, like I've nine slacks. I'm not gonna have nine slacks in a stride. Yeah, there's no way. You're not gonna 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, were replacing Skype. So, you know. Yeah, well, it's kind of a low blow, right? Like... It goes to Microsoft for Teams. Indeed. Kudos to Microsoft. So despite the struggles in the chat communications, part of their product suite, the company has pretty much killed it. Like Alacia. It continued 50% year-over-year growth. This most recent earnings call that I was just listening to, their stock price jumped 25% after the earnings call. Yeah. Last week, this five days ago. It was a few days ago. And as we said, now the company is valued, their market capitalization is almost $11 billion, which is really incredible. Casual. For, you know, not having to casual. Just casual, you know, at another couple of bees to the bank account, literally, for the founders. But again, zero venture capital. Amazing. Pretty incredible. 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. 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 is built a really innovative new way to sell enterprise software. And I think that's true. Yeah. And to illustrate that, their S1 was incredibly straightforward and did not, there was nothing hiding in there behind, well, we only have to show XYZ, so we're only going to show XYZ. They had a full cohort analysis in their S1. Yeah. 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, but you can see revenue growth by cohorts since their founding date in the S1. And you can see a lot of things in their S1 where they've just got on an organically really great business and they're just telling the story. Yeah. 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? It's quite clear when you read it last year and it's doing great. Yeah. And this is, when I said a minute ago that this is our first narrative, what I meant was it kind of matches up. 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 S1. And in practice over the last two years has played out and compared that versus some of the other ones we've looked at, we haven't covered the Blue Apron IPO, but we covered the SNAP IPO. 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. Yeah. And in opposite direction, we, you know, this IPO happened within a month of the Square IPO. Square also had an incredibly solid fundamental business on their hands. If you go back and listen to that, that Square episode, one of 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, every cohort is revenue churn neutral. So they basically, you know, can just keep spending money getting additional customers and some of those drop out, but the other ones make up for the ones who've spouted out. Yeah, I mean, extremely predictable business. 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, like just didn't pay attention to how solid that business was. And when you look at the ensuing days since that IPO, the couple of years that have gone down by, was a great stock to buy. And the business kept doing exactly what it was doing before the IPO, after the IPO. And yet every story in the press was that the sky was falling. Yeah, and I mean, I know you guys hate follow ups. So this is not an official follow up. But since the square, if a guy uses some survey feedback and he takes it way too far. It's like a way too far. 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. Square has killed it even since the episode. I mean, they're now trading, I think they were up after earnings today. I think close to $35 a share. And remember, the IPO did under 10. Wow. Yeah, crazy. Well, I think that probably does it for narratives. For narratives, yeah. What would have happened otherwise? Yeah, okay, so here's a question. One also that we've talked about on this show quite a bit, is relevant in the tech world right now. So I hesitate even to ask it because I think companies should go public. But why did they go public? They didn't need to. The founders owned the company. Yeah, so the quote that they gave to a news outlet was that at last year, we'll use proceeds from its IPO for corporate purposes, including capital expenditures and potential acquisitions. Link Trello. Like Trello. That many people are speculating they overpaid for. There's a great case to be made for why they bought it. They spent about the same amount of money on Trello that they raised in the IPO. Their cash balance after the IPO was hovering around five to 700 million for the quarters after the IPO. So the IPO did add a material amount of cash to their war chest to do things with. I guess it gave them option value in an increasingly competitive landscape to be a lot more acquisitive. They haven't been as acquisitive as they could have been. And Trello to date hasn't meaningfully added to their business. I mean, it's added a lot of users. I don't know how the cross sell is going. I don't know if they're starting to monetize Trello at all, or more than they were. But I think it bought them option value and it was pretty cheap option value for a little over 10% of the company. Now, again, to play devil's advocate though, now they're a public company. Now they have to report every quarter. 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 retention and behavior and acquisition. If you have a good company, there's kind of nothing to be afraid of of going public, right? Yeah, gosh, I forget who said this. It might have been Zuckerberg. I think it was Mark Zuckerberg. The discipline forced by going public is a really good thing for your business. Yep. And it seems like a last year had their house in order beforehand, but they got the benefits that come with going public and having to report. And that easier to make acquisitions both for cash and stock. Yeah. But I think also, I wonder if listeners that have listened to multiple episodes of ours probably know where we fall on the spectrum here. 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. The stock market is a voting machine, not a weighing machine, and whatnot. But I think if you look at the IPOs that we've covered on this show with the Facebook IPO, the Square IPO, now the Alasian 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. I would say we certainly haven't covered a company yet that is IPO'd 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. Like I will. Square, but I think Square was, the Square IPO was a fault of positioning and really Goldman, as we talked about that. Yeah, but I guess I mean post IPO. Yeah, post IPO, no. You could imagine a scenario where I would say, I don't wanna take my company public because the public markets will lose faith, everything will actually be great at the company. We'll have to do stupid stuff to keep the stock price up. If we wanna have a long view, we won't do the stupid stuff and then our stock price will drop and thus employees will be under compensated, we won't be able to hire well, we won't be able to, we will have all sorts of problems that arise from a low stock price. But we haven't seen it. Well, we haven't covered it yet. We, not to say that it doesn't happen, but we have a number of data points now and including the Amazon IPO. I've been talking about a company that 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. We have a lot of data points on this show that being public to exactly to your point Ben can enforce a discipline and a rigor on companies' and management teams that you're not gonna get otherwise. 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. They had twice as much money in the bank as they raised in the IPO. Question on do they need to be more acquisitive? One thing I was thinking through as I was reading the criticism that at last, the highest selling products are for engineers so they can be sold in the self-serve way. Like, are they saturating the market? Like do they need to branch out because there's not much more growth left in their core businesses? Well, it's interesting. They certainly now position themselves as a company that makes products for teams. Their NASDAQ ticker is team. His team, yes. 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 where they developer tools. And now their teams, because they're trying to expand their market as they've perhaps saturated the developer and product manager market. Well, that's interesting. I mean, they've had these values for a long time and they're S1, they have these values that they state and those are their open company and I'll keep it nice for kids. Open company, no BS, builds with heart and balance. Don't F the customer, play as a team, be the change you seek. None of those are really developer focused. And you know, play as a team, and it's actually nice. It's play comma as a team. So nice. You know, I think this is their vision for a long time. It certainly gets a little rewritten and quite a bit short up over time as every company does. I'm sure Snap wasn't started as a camera company, but I'm on board with it. You're easy fair point though, that it is far from assured that Atlassian will have the kind of success that they've had with Dura as they expand into other market segments too. I just don't know that many people outside of tech that use Atlassian's products. And that's kind of fine because everything's becoming tech and software is eating the world and there's still plenty more. I mean, if you look at what Microsoft sold enterprise software too, Atlassian still has a lot of headroom above it. 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, you know, familiarity who use Slack. I mean, the new, 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. You know, this is not just developers that are doing this. Yeah, it's a great point. You wanna move on to tech trends? Let's do it. Cool, 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 own, good stock to buy. 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. So they're at 37% and working on down from that is Workday, Tableau, Twilio, Box, Zendesk, New Relics, Splunk on down. And a lot of those that are way further down are like intense technology companies. And you never, I mean, at least I never really think about at last scene as boy, they do, they do hardcore tech. Like for Tableau, I'm like, wow, that's a heavy lift to do that data visualization on the server. And you think about Splunk, like analyzing log files and the incredible sort of computer science challenges involved in handling all that data and all the lookups and all the rights and reads. At last scene, must pour a lot of cash into security availability up time because those are called out in a big way and they're S1 as risk to the business. If our customers ever stop trusting our reliability or security, then we're in trouble. And I think they probably pour a lot of into user experience. But I definitely, in preparing for this episode, and I've been trying to figure out like, why is Atlassian spending so much on R&D relative to other seemingly more technical companies? I think they argue and then you listen to them talk about it that this is part of 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 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, 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 the conversion funnel. And tracking it and analyzing it along the way and making sure that because again, there's no human, the way they talk about it is that like when you have a sales force, you're using humans to solve problems about adoption of your product, which is fine, but that's just what you've chosen. They've chosen to use product to solve problems about adoption. 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. Right, right. 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, but in order to sell at the volume that they're selling at, they need to apply to product. Yep, yep. Really what you also need is word of mouth, right? And virality. And part of that's natural, a lot of it, but you have to do a lot in the product to make that happen as well. And so I haven't dug in enough to know or use the product or referred enough people to know, but like are they giving referral bonuses to people if you, which many consumer companies do, right? I mean, that's like kind of the playbook for growth. Yeah, I haven't seen it. I've poked around a lot. Maybe I may have missed it, but yeah, quite honestly, I think it's if 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 aside. So recently for Tont, we launched our alpha, the entire product management and product roadmap for that lived on a gigantic whiteboard. It was a, you know, it's an 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 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? I don't think they need her for all bonuses. I just think they need to provide a good experience for someone once and then they got him for a long time. Well, maybe, you know, in a couple of years when they are in VR become a thing, you can have the best of both worlds. Honestly, I think that's a killer, killer app for VR and AR. Because I think a monitor is just not nearly enough space to visualize work items and tasks. And totally, we 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 and then now we have a whiteboard again. And like, it's night and day, being able to just physically visualize your plans and what you're working on is so different than doing it on a screen. Yeah, I mean, maybe that's the killer, Jira app of the future is AR VR. AR VR, well, we'll leave that to the future. Yeah. I think all my tech themes have been covered as well. Yeah, I got nothing. Should we move on to grading? Let's do it. So our definition of grading on this show is for an acquisition, you know, how beneficial was it to the, how good of a decision was it to the acquire, to acquire the acquire and similarly for IPOs, how good of a decision was it to do the IPO? Would it allow them to do? It allowed them in practice what they've actually done, almost nothing. It gave them option value, it gave them credibility to sell into the enterprise. And they were doing a great job with that before. But on the, you know, what did it cost them? Not much. I mean, it is. They only sold 10, 11% of the company. Lots of people who needed liquidity got liquidity. Like it was a nice reward for lots of employees for presumably Excel. It's not a, let's not forget here too. This company at IPO was 80% of it was owned by the two founders. Founders and decision. I mean, this was a very personal decision. Like, so does that mean they still like, at some point, if they decided to sell a bunch of stock, they have to do that super slowly, right? Because they're, if they ever wanted to liquidate, that would flood the market with supply. Yeah. I'm sure they do it over time in structured sales over time. But I think that's got to be a big reason, right? Because they, and especially Scott who didn't come from a wealthy family, like they were paper billionaires until, until this point. And at some point, you probably want, you know, your billions to be real, not paper. Yeah, I mean, the way I look at it, literally nothing bad happened. Only potential good things could have happened in some good things could did happen, Bb plus. The funny thing is the story behind the company is great and reviewing the company and talking about how well positioned it is and their journey is awesome. The actual IPO itself is like, we have a hard time, I have a hard time grading it because I'm emotionless about it. Yeah, but isn't that like, this is kind of the dream, right? Like this is what, like what your, your teachers in like, you know, IPO and company building school tell you is like, the IPO should be not a big event. I want the cowboy situation though, where, the Facebook, right? You're, you know, you're, you're, you're riding hard into the ground. You need the capital infusion. It happens. You pull the e-break, you turn around, you got all this new cash, you use it and then you ride off into the sunset and this, you know, flame of glory where you're suddenly on, you're king again. Like that's an A, that's an A plus to me. This is, this is, this is like, just, this is being really responsible. It's funny. I was, I was reaching an interview, she, I'm blanking on the name of the guy who's the chairman of the board now was the founder and CEO of Great Plains Software. And he was talking about how, you know, these two kids came to him and this isn't preparing for the IPO and adding to their board and getting, you know, a public company ready board, you know, and asked him to, to be, be on the board and ultimately be the chairperson. And he was like, they're like way more responsible and risk-aversing conservative than I am. I'm supposed to be the adult supervision. I feel like the cowboy. Yeah, I don't know, I'm completed here. Like I agree with you too. Like you, everybody wants to see the, you know, the James Bond movie, right? Like, but, but this is the right way to run a company. Yeah. So I'm gonna give it a day. There you go. Well, that, at last, Ian, is who your parents want you to marry? Yeah, totally. It's not the exciting company. They make developer tools, like they call it team collaboration, but like, let's be real here. It's, you know, developer tools. All right, we'll take that A. I mean, but, you know, it might not be, they're the company your parents want you to marry, but, you know, Mike and Scatter, like, perhaps the wealthiest people in Australia right now. So they're, they're having a pretty good time. That's true. That's true. I do want to go in a little tirade right here. If you're going public, please, God, name your company, name your stock ticker, the name of the company. Like, it is, I get it. Yeah, there's like a trend of this right now of that. I get it, like, Tableau data, like, I get it. You get to make a point about like, this is what we're all about, but like, it's just annoying. This is one of those things that's not gonna age well. Like, this is gonna be like a 2010s thing that, you know, people look back at like ridiculous stuff from the 90s or whatever. Like, this is gonna be one of those things. This and, and, you know, Chest-Length Beards. It's just not gonna age well. No. Anyway, I just wanted to get that out. So carveouts. I feel like I'm behind on this that everyone else read this book last year and that made the rounds and it got raved about, but oh my God, is shoe dog good. Oh, it's so good. It is, it is, for listeners who haven't heard of it, it's the, the Phil Knight book and Phil Knight was the founder of Nike. I have never read a biographical nonfiction. Supposedly it's a business book that was so compelling. Like, thriller type page turning compelling. And read the context around the book, the meta story of, I guess Phil Knight went back to Stanford and took a creative writing class, he audited creative writing after being the CEO of Nike to like write this memoir and he personally researched a lot of the things rather than relying on his memory because he knew they would conflict and he contorted stories over time. So he's, there's points of the book where he says, I remember it like this, but everyone that I've talked to in all the records say it actually happened like this. It's, the meta story is almost as good as the actual story itself, which is glorious and exciting and there's so many, and inspiring and there's so many lessons to be taken. So I don't care what you're interested in, you will find something amazing about this book. So good. You've probably forgotten this was my carve out, like 20 episodes back. No way. Well, okay, so there's, I knew it made the rounds. I told this then, but I'll repeat it now. I'm smiling so much. So my graduation from, from GSB, from Business School at Stanford, Phil Knight was our graduation speaker. And the speech was essentially like the draft of shoe dog. It hadn't come out yet. It came out a year or two later. And he came and gave the speech and it was, it was shoe dog in like 15 minute graduation speech format. It's so good. I should listen to back episodes. So good. Well, I can't top that, but I have a similar carve out. I think on the last episode or two episodes ago, my carve out was a NPR interview with Bruce Springsteen and inspired by that, I am currently reading, not done yet, but his autobiography, Born to Run, really, really good. Very different from shoe dog, but also great. I think what Bruce and Phil Knight, having come in is just like, they were so obsessed with their trade. Like, there was nothing else. 24-7, all they thought about, all they did was, for Bruce, it was being a musician and a songwriter. And for Phil, it was running a shoe company. It was everything to them. And it's really inspiring, inspiring to read. Yeah, there's just this great quote in it. It was Phil says, all I could think about all day, I'm paraphrasing, was my cash, my liabilities, my equity and shoes. That's obsession right there. That is obsession. Well, sure you're up this up. Let's do it. Listeners, thanks for tuning into this one. If you aren't subscribed and you want to hear more, you can subscribe from your favorite podcast client. If you feel so inclined, we would love a review on iTunes. We really appreciate both the feedback and what it does for helping new listeners to discover the show. Tweet about it, we are at acquired FM. And you can join the Slack at I think I'm forgetting, David. I think that's it. All right, you want to go get dinner? Let's do it. Night.electronic music.