Episode 47: The Atlassian IPO

In episode 47 of Acquired, hosts Ben Gilbert and David Rosenthal dissect Atlassian's IPO, a company that has impressively scaled without traditional sales tactics, relying instead on product-led growth. Atlassian, co-founded by Mike Cannon-Brooks and Scott Farquhar, bootstrapped its way to success, focusing on software for technology teams with products like Jira and Confluence. Despite its tech-centric customer base, Atlassian has broadened its positioning to serve all kinds of teams. The company's IPO in 2015 was a strategic move that provided liquidity and option value, enabling acquisitions like Trello. Atlassian's unique go-to-market strategy, which avoids traditional sales in favor of a compelling product that sells itself, has been a key driver in its journey to an $11 billion valuation.

• Mention of potentially doing a follow-up on "Alaska Virgin" but quickly dismissed.
• Hosts joke about people disliking follow-ups and hot takes.
• Decision made not to pursue the follow-up.
• Use of a teaser quote contemplated.

"The other thing I was thinking about is, do we want to do any follow up on Alaska Virgin?" "Yeah, people hate follow ups." "Yeah, people. Yeah, people definitely hate hot takes."

• Hosts acknowledge that follow-ups and hot takes are generally unpopular with their audience.
• They decide against doing a follow-up on Alaska Virgin.

• Episode 47 of the Acquired podcast is introduced.
• Hosts Ben Gilbert and David Rosenthal introduce themselves.
• Atlassian IPO is the subject of the episode.
• Hosts express their usual hesitation to cover recent IPOs but make an exception for Atlassian due to its interesting backstory and sufficient data over the past two years.

"Welcome back to episode 47 of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert." "I'm David Rosenthal, 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, like, actually on the scene."

• Hosts introduce themselves and the podcast's focus.
• They explain their general approach to covering recent IPOs and acquisitions and their rationale for covering Atlassian despite this.

• David Rosenthal mentions his move to San Francisco and hints at working on something new.
• The episode marks the first in-person recording of 2017, highlighting the significance of the occasion.
• Hosts share pleasantries about seeing each other in person after a period of remote interactions.

"David, it's great to see you in person." "Yeah, it's great to be here, Ben. Great to be on the show."

• Hosts express their pleasure in meeting in person for the podcast recording.
• The move to San Francisco and personal updates are briefly discussed.

• Statsig is introduced as a sponsor, with a discussion of its impressive growth and capabilities.
• Statsig's data processing capacity and customer base are highlighted.
• The ad emphasizes Statsig's evolution into a full-fledged product understanding platform.
• Special onboarding for Acquired listeners is mentioned.

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• Atlassian's bootstrap journey is a primary focus.
• The uniqueness of Atlassian's growth without venture capital is emphasized.
• Atlassian's founders Mike Cannon-Brooks and Scott Farquhar are introduced, with a brief background on their meeting at the University of New South Wales.
• The founders' goal to avoid traditional employment by earning $48,500 a year through their venture is discussed.
• Atlassian's decision to sell software directly online, bypassing traditional sales methods, is highlighted.

"So, Atlassian, this has been a much requested episode pretty much for the whole life of acquired." "This is the first company that we're going to cover on acquired that's been bootstrapped and gone, quote, unquote, all the way."

• Atlassian's bootstrap journey is highlighted as a unique case study for the podcast.
• The company's growth without venture capital investment is contrasted with the current startup funding climate.

• Atlassian's founding by Mike Cannon-Brooks and Scott Farquhar is detailed.
• The company's name origin, inspired by the Greek titan Atlas, is explained.
• Atlassian's first product, Jira, and its role in the market are introduced.
• The challenges of starting an enterprise software company during the dot-com bust are outlined.
• Atlassian's innovative approach to selling software online without a sales force is discussed.

"Atlassian was founded in 2002 by Mike Cannon-Brooks and Scott Farquhar in Sydney, Australia." "They decided to just sell the software on the Internet."

• Atlassian's founding story and the challenges they faced are described.
• The decision to sell Jira online is presented as an innovative solution for a startup with limited resources.

• Atlassian's approach to pricing and sales is examined, noting its accessibility and self-service model.
• The company's revenue growth, despite low initial salaries for the founders and reliance on credit card debt, is mentioned.
• Atlassian's eventual success and the wealth of its founders are discussed.
• The company's business model is contrasted with typical venture-backed startups.

"The company never sold any shares to investors. It was only individual people, shareholders, both the founders and employees that sold along the way." "Here's Atlassian, which is now almost an $11 billion public company, one of the most successful tech IPOs of the last couple of years, and never raised a dollar."

• Atlassian's financial discipline and unique path to success are emphasized.
• The company's substantial valuation and public market success are highlighted as outcomes of their bootstrap approach.

• The podcast compares the evolution of enterprise software to waves of coffee, with Atlassian representing the third wave.
• First wave: Large companies like Microsoft, Oracle, and SAP selling on-premises software with upfront licenses and heavy sales processes.
• Second wave: Software as a Service (SaaS) model exemplified by Salesforce, with subscription-based pricing and internet delivery, but still criticized for product quality.
• Third wave: Atlassian and similar companies focus on product quality and organic growth without traditional salesforce, aligning with artisanal coffee shops like Blue Bottle.

"I think Atlassian is the third wave, was the first company of the third wave of enterprise software."

• Atlassian is considered a pioneer in the third wave of enterprise software, emphasizing product quality over sales tactics.

"The second wave is SaaS and that's Salesforce. 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."

• Salesforce represents the second wave with its subscription model and internet delivery, although the product quality is still questioned.

"We don't sell the product. There are no humans that sell this product. There never have been."

• Atlassian's unique approach involves not using a traditional salesforce, relying on the product's inherent quality to drive sales.

• Atlassian's no-sales model meant the product had to be exceptional to sell itself.
• The company achieved impressive growth, hitting $1 million in revenue in its first year (2002) without a traditional sales team.
• Atlassian's second product, Confluence, was released in 2004, targeting the content collaboration space as a disruptor to Microsoft's suite.
• The company's strategy included competing with open-source solutions by offering superior value.

"They couldn't afford any salespeople... They have to make a really good product that people are just going to buy themselves over the Internet."

• Atlassian's strategy was born out of necessity, focusing on product quality due to budget constraints and geographical location.

"So they do a million dollars in revenue in that first year."

• Despite not having a sales team, Atlassian's revenue in the first year was a significant achievement, indicating strong market demand for their product.

"In 2004 they released their second product which is called Confluence."

• Atlassian expanded its product line with Confluence, further establishing its presence in the enterprise software market.

• Atlassian continued to grow, releasing Confluence in 2004 and acquiring BitBucket in 2010 to compete with GitHub.
• The acquisition of Hipchat in 2012, before Slack's rise, showed Atlassian's foresight in the communication space.
• Jira Service Desk was launched in 2013, targeting IT departments and service-oriented teams, competing with Zendesk and Help Scout.
• Atlassian's suite of products represented a new era of enterprise software that was adopted organically within companies.

"In 2010, they acquire a product called BitBucket, which is also very interesting."

• Atlassian's acquisition of BitBucket positioned them as a competitor in the version control space alongside GitHub.

"In 2012, they acquire Hipchat. And this is before Slack."

• Atlassian's acquisition of Hipchat indicated their early entry into the team communication market, pre-dating Slack's dominance.

"2013, they launch another product, Jira service desk."

• Atlassian continued to diversify its product offerings with Jira Service Desk, addressing the needs of IT departments and service teams.

• Atlassian's financial success was marked by profitability and strong revenue growth, with $15 million in revenue by 2006 and over $300 million by 2015.
• The company's IPO in 2015 valued it at $4.5 billion, with a notable low spend on sales and marketing compared to other SaaS companies.
• Atlassian's efficient growth model, high-quality product, and low customer acquisition costs set a new standard for enterprise software companies.

"They valued the company at $400 million. And a few years later... they'd go public... at a four and a half billion dollar north of ten."

• Atlassian's valuation grew significantly from its early funding rounds to its IPO, reflecting its success and market impact.

"They're only spending about 20% of revenue on sales and marketing. To grow that fast."

• Atlassian's low sales and marketing spend relative to its rapid growth rate was highly unusual and indicative of the effectiveness of its product-led growth strategy.

"They were profitable, and not just like marginally profitable, but in that last fiscal year before they went public, they generated almost $100 million in operating cash flow."

• Atlassian's profitability before its IPO was exceptional, especially in the context of the tech industry where many companies operate at a loss to fuel growth.

• Atlassian operates with minimal sales efforts compared to traditional enterprise or SaaS companies.
• They utilize third-party value-added resellers to provide a synthetic sales touchpoint for large customers who require it.
• Atlassian invests marketing dollars and personnel to empower these channels to make sales.
• This approach is not equivalent to having a traditional sales force with territory managers and a VP of sales.

"So it's unfair to say that there is absolutely zero sales effort, but it's just not the same traditional we have a sales force with territory managers and reps and a VP of sales in the same way that Oracle or Salesforce or any other enterprise or SaaS company does."

• Atlassian's sales model is unique in that it does not follow the traditional enterprise sales structure with a dedicated sales team, but rather relies on partnerships and indirect sales channels.

• Atlassian's revenue is heavily reliant on Jira and Confluence, which are primarily aimed at engineering and product management organizations.
• There is a potential risk of saturation for these products, necessitating the sale of other products in their suite.
• Selling additional products may not be as effortless as Jira and Confluence, potentially leading to decreased margins in the future.
• The company faces more competition in other product lines, which may require increased sales efforts.

"There's probably a saturation point on those where you have to start trying to sell this suite of other products that integrate really well and generate significantly more of your revenue mix from those other products, and those don't sell themselves as well as these products do."

• The quote highlights the risk of over-reliance on a few key products and the need for diversification of revenue streams through other products in Atlassian's suite.

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• Atlassian went public in December 2015, with an IPO pricing at $21 per share, resulting in a market cap of approximately $4.4 billion.
• The company has a history of acquisitions, including Trello in January 2017.
• Atlassian's IPO allowed them to raise capital and provided the option value in a competitive landscape, enabling potential acquisitions.
• Post-IPO, Atlassian's stock price and market capitalization have significantly increased, reflecting strong business performance.
• The founders maintained significant ownership, and the company has continued to grow without venture capital investment.

"November 2015, as we said, they file to go public December 10. They price their IPO at $21 a share, or just about $4.4 billion market cap."

• This quote summarizes the initial public offering of Atlassian, indicating a successful entry into the public market with a substantial market capitalization.

• Atlassian acquired Trello for $425 million, which was roughly the amount raised in the IPO.
• The acquisition of Trello was a strategic move to enhance Atlassian's product suite and user base.
• Atlassian reimagined Hipchat as Stride to compete directly with Slack but faced challenges with user stickiness and market competition.
• Atlassian's growth and stock performance have been strong, with continued year-over-year growth and a significant increase in stock price after earnings calls.

"They've completely reimagined Hipchat. They've renamed it Stride and are trying much more directly to compete with Slack."

• Atlassian's attempt to rebrand and compete in the chat communications market with Stride is part of their strategy to expand and strengthen their product offerings.

• Atlassian's narrative at the time of going public was positive, highlighting their innovative approach to selling enterprise software.
• Their S-1 filing was straightforward, providing clear and detailed information about the company's financials and growth.
• Atlassian's transparency and solid fundamentals were well-received by the press and investor community.
• Comparatively, other tech companies' IPOs, such as Snap and Blue Apron, faced scrutiny and confusion over their financials and business outlook.

"They had a full cohort analysis in their S-1. And that, I mean, that's not the cohort analysis like a newer way to evaluate businesses, and that's not mandated by the SEC."

• Atlassian's S-1 filing included a cohort analysis, which is not required but provided a clear view of the company's revenue growth and customer retention, demonstrating their strong business fundamentals.

• Atlassian went public to raise capital for corporate purposes, including capital expenditures and potential acquisitions.
• The IPO provided Atlassian with additional cash for strategic moves in a competitive market, such as the acquisition of Trello.
• Being a public company also introduced new disciplines and reporting requirements, which can be beneficial for a well-structured company.
• The public markets are perceived as a weighing machine for tech companies, rewarding those with solid fundamentals and predictable growth.

"Atlassian will use proceeds from its IPO for corporate purposes, including capital expenditures and potential acquisitions."

• The quote explains the intended use of the funds raised from Atlassian's IPO, highlighting their strategic approach to growth and market competition.

• Public companies face the challenge of maintaining innovation while also being subject to market pressures.
• Amazon is cited as an example of a public company that has innovated significantly while being long-term focused without immediate profits.
• Public status can enforce discipline and rigor that may not be present in private companies.

"We have a lot of data points on this show that being public... can enforce a discipline and a rigor on companies and management teams that you're not going to get otherwise."

• Public companies are under scrutiny which can lead to a more disciplined approach to business management and innovation.

• Atlassian's products, primarily used by engineers, may be approaching market saturation.
• The company has positioned itself as a provider for teams, not just developers, potentially to expand their market.
• Atlassian's core values, such as teamwork and customer focus, are not developer-specific, indicating a broader vision.

"Their Nasdaq ticker is team... 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 and now they're teams because they're trying to expand their market as they've perhaps saturated the developer and product manager market."

• Atlassian's rebranding from developer tools to team collaboration may be a strategic move to penetrate new markets due to potential saturation in their core developer market.

"They've had these values for a long time in their s one... Open company, no b's. Build 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."

• Atlassian's long-standing company values reflect a broader, team-oriented vision, which is not limited to developers, suggesting a strategic alignment with market expansion goals.

• Atlassian's R&D spending is significantly higher than many of its competitors.
• The company likely invests heavily in security, availability, uptime, and user experience.
• Atlassian's lack of a sales force means the product must sell itself, requiring substantial investment in the product and user experience.

"They have this great deck on their investor site where you can look at what their general positioning is to investors and why they're a good stock to buy. One of them is that their R&D as a percentage of revenue is head and shoulders above a bunch of their competitors."

• Atlassian's high R&D spending is a key selling point to investors, indicating a strong commitment to product development and innovation.

"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."

• The substantial R&D expenditure is justified by the company's reliance on the product itself to drive sales, compensating for the absence of a traditional sales force.

• Atlassian relies on product quality and user experience for adoption rather than sales teams or referral bonuses.
• Familiarity with Atlassian's systems leads to a high mental switching cost, which can drive long-term customer loyalty.
• The company's products may become even more relevant as all industries increasingly rely on technology.

"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, it is a big mental switching cost to learn a new system."

• Atlassian benefits from the high switching costs associated with their products, leading to sustained usage and customer retention.

• There is a discussion about the potential for augmented reality (AR) and virtual reality (VR) to improve work visualization.
• The limitations of monitors for project management are acknowledged, and AR/VR could offer a more expansive space for visualizing tasks.

"Honestly, I think that's a killer, killer app for, for VR and AR because I think a monitor is just not nearly enough space to visualize work items and tasks."

• AR and VR technologies are seen as potentially transformative tools for project management, offering a more effective way to visualize and manage work.

• The discussion evaluates Atlassian's IPO in terms of its benefits to the company.
• The IPO provided option value and credibility, particularly in selling to enterprise customers.
• The IPO did not significantly dilute ownership, providing liquidity for employees and investors.

"So, our definition of grading on this show is, for an acquisition, how beneficial was it to the acquirer to acquire the acquiree? And similarly for IPOs, how good of a decision was it to do the IPO, what it allowed them to do?"

• The grading framework assesses the strategic value and outcomes of Atlassian's IPO, emphasizing the benefits and costs associated with going public.

"Literally nothing bad happened. Only potential good things could have happened, and some good things did happen."

• The IPO is viewed positively as it did not have negative consequences and created opportunities for growth and credibility.

• A personal opinion is expressed that companies should name their stock tickers after the company name for simplicity.
• The trend of creative stock ticker names is critiqued as potentially not aging well.

"If you're going public, please, God, name your company. Name your stock ticker, the name of the company."

• The preference is expressed for straightforward stock ticker names that directly represent the company name for clarity and ease of identification.

• Personal book recommendations are shared, highlighting "Shoe Dog" by Phil Knight and "Born to Run" by Bruce Springsteen.
• Both books are praised for their compelling narratives and insights into the authors' obsessive dedication to their work.

"Oh my God, is shoe dog good?"

• "Shoe Dog" is highly recommended for its engaging storytelling and business insights.

"I am currently reading, not done yet, but his autobiography, Born to run, really, really good."

• Bruce Springsteen's autobiography is recommended for its portrayal of the artist's passion and commitment to music.