The idea that growth is better than profits was in-built into Atlassian's proposition to shareholders, ultimately.
The slow and steady mentality is fine, but we see over and over that it isn't what the market wants. A private company or a high risk growth company, those are the two options for a software company.
Either that or they'll be taken over. They're revenue now is just a $2bn, so that "grow grow" mindset from 10 years ago did not work out. In theory, a steady CEO could try to steady at that size with a nice margin. But, actually declaring and pursuing that would mean halving the companies market cap to a "normal" P/E of 20-30X.
At that price (say $20bn) one of the big software companies would just buy them... for their own growth targets.
Moderation has no place in the public markets as a software company. It's remarkable how unstable a stable condition is.
What's wrong with having a small or medium company? Why must a company sell its soul for the chance of becoming a money-printing behemoth in the future?
I understand that being small leaves you vulnerable to the predatory tactics of big players, but I see that as a consequence of lax regulation. There are too many mono/duopolies already, and the bigger they get, the harder it will be to split them apart.
> I understand that being small leaves you vulnerable to the predatory tactics of big players
This, I think, is the core of why. It's not that being a medium sized publicly traded company is immoral or unprofitable - it's that in a public market your stock is priced on future earnings and choosing to be smaller than possible means your tech can be bought for cheap. If you choose to stay smaller than maybe you could be - you're leaving ROI on the table in a lot of peoples' eyes (even if you're right and you'd lose money trying to get huge). So, as your stock price drops off to reflect the expectation that you're not going to get super impressive earning growth, you start to look appealing as an alternative to developing technology for an industry giant. Why spend $5bn over 10 years to develop competing services when you can borrow $5bn today, buy atlassian, get a tax break on the debt and start making a play for market dominance with the atlassian tech?
If you want a small or medium company, staying private is a more sustainable approach.
Well, it is fine to be a small enterprise, but unless you have a huge moat, you run the risk of a different growth-at-all-costs competitor (not necessarily a giant) coming in and vacuuming up all your customers.
Salesforce vs. Siebel being a great example of exactly that.
> Salesforce vs. Siebel being a great example of exactly that.
While I agree with your statement, I had to look that up because it sounds interesting. In 1999, the year Salesforce was founded, Siebel was the dominant player in the CRM field, holding 45% of the market, so not precisely a small company.
More than a budget war against a deal-with-the-devil startup, what killed Siebel was its inertia. Siebel sold expensive in-your-premises software, while Salesforce sold SAAS, and emphasized a cheaper cloud model. Siebel didn't react until 2003(!), when it released its first cloud version. By tht time, the expertise of cloud solutions of Salesforce made Siebel look like an amateur.
Siebel surpassed 1 billion revenue in 2000, while Salesforce did it until 2009. They had their chance.
I still agree that even if a small company did everything right, another one with more money and no fear of heavy losses would eat their lunch even if their product was inferior.
I'm not arguing with you, I just like talking about this, because Siebel himself has engaged in a huge disinformation campaign about what happened (he wanted to save his reputation and eventually launch c3.whatever). I've even personally listened to him bitch about HBS/GSB case studies about Siebel.
>In 1999, the year Salesforce was founded, Siebel was the dominant player in the CRM field, holding 45% of the market, so not precisely a small company.
Sure, but CRM was a new market back then (many argue that Siebel invented CRM) and Siebel was roughly equal in revenue scale to Peoplesoft and c. 10% the revenue scale of Microsoft. It would be very hard for anyone to argue that they ran out of space to grow (vs. choosing to slow down growth for profitability, especially in light of the dot-com crash)
>More than a budget war against a deal-with-the-devil startup, what killed Siebel was its inertia. Siebel sold expensive in-your-premises software
One great way to stop being an expensive piece of software and to grow faster is to lower your prices (but then you run the risk of becoming unprofitable).
Also worth noting that in 2000, Siebel spent c. 33% of revenue on Sales and Marketing, while Salesforce chose to spend 500%+ of revenue in the same period.
>while Salesforce sold SAAS, and emphasized a cheaper cloud model. Siebel didn't react until 2003(!), when it released its first cloud version.
Again, Seibel chose to spend 13% of revenue on product development in 2000. Easy to crush competition, but only if you're willing to spend for it.
>Siebel surpassed 1 billion revenue in 2000, while Salesforce did it until 2009. They had their chance.
Exactly, and choosing to harvest profit out of that $1bn of revenue too early is what did them in (though arguably, they are still probably something like $1-2bn of market cap for Oracle).
Seibel is and always will be the perfect example of disruption/the innovator's dilemma, which ultimately boils down to 'if you're comfortable with your current profits and not worried about growing top-line revenue, you will likely lose both.'
Nothing is wrong with it, I'm just predicting that this isn't a sustainable state for a publicly traded company. I don't think aggressive antitrust is likely and I don't think it would change the above regardless.
Markets pull towards potential, and the potential of Atlassian is valued higher than it's stable state.
It's not just that. The job of the companies is to make the most money using the legally available means, and the job of the government is to create regulation that makes "good" behavior profitable and imposes heavy penalties for disruptive things.
Except the government got addicted to printing money and throwing it around to boost GDP (and taxes) through bullshit business models and bullshit investments. They literally created framework where being an overstaffed money-bleeding behemoth creates higher returns for the shareholders than being a lean-and-mean niche business.
> What's wrong with having a small or medium company? Why must a company sell its soul for the chance of becoming a money-printing behemoth in the future?
If you don't go the unsustainable blitzscaling route you'll be outcompeted by those who do, just as Atlassian did to plenty of smaller, more sustainable competitors.
> I understand that being small leaves you vulnerable to the predatory tactics of big players, but I see that as a consequence of lax regulation.
That's nice, but that doesn't make it go away. Do you have a plan to make the regulation non-lax?
Not necessarily. If your company has strong fundamentals, for example Microsoft, then blitzscaling is not needed because not even a free alternative can compete with you. And if you don't have strong fundamentals, you really shouldn't be taking investor money anyway. Blitzscaling is just an exciting term to align founder and investor incentives (which tend to be at odds with one another)
Take a look at o365. Planner is an identical product to Trello. They're buying GitHub which competes with Bitbucket. Sharepoint & MSoffice are alternatives to Confluence. There might not be an equivalent to Jira but the Microsoft machine is increasingly muscling into their turf.
> but we see over and over that it isn't what the market wants.
What the market wants is short term growth and I firmly believe that is what is destroying our economy and the market.
Instead of building pillars and companies that outlive the founders, we have short term cash grabs. We have VC firms buying up our existing pillars, gutting them of any valuable assets, saddling them with debt, and then selling off the carcass. We have firms buying up real estate and creating or exacerbating scarcity to drive up demand and prices. We have shifts towards subscriptions and quarterly profits.
Perhaps, but I think on this instance... this short-termist mindset has a basis.
What kind of a 100 year future does Atlassian have? Jira certainly isn't a 100 year product. Software is so fast... IDK. The pox is not just a product of greed and malice and nothing.
> What kind of a 100 year future does Atlassian have?
We're talking about a company that produces products that are widely used. JIRA is not the issue, but the company that produced it. 100 years is stretching it, but I would believe that Atlassian outlasts yahoo.
Probably because the valuation is currently 10x revenue, and was previously more like 70x. "Only" is probably because the parent still feels like Atlassian is highly over-valued.
> growing 30% YoY for the last 3~4 years alone. This is unheard of in any other industry/market.
It has been common for the leaders in every other market throughout commercial history, as it pertains to corporations of large size. What you're looking at are presently old industries and comparing them to newer, that's where your mistake rests.
Walmart did it. Sears did it. Kmart did it. Best Buy did it. US Steel and its components did it. The various automobile majors did it. Standard Oil and the other oil majors did it. General Electric did it. Caterpillar did it. Pan Am did it. Many of the railroad companies did it during their time. McDonald's, Starbucks and most large chains do it during their expansion->saturation phase. Coca Cola did it.
It's exceedingly rare to find a large corporation that didn't bang out 30% growth years for a decade or more to get as big as they got.
One day, decades from now, "cloud" will look like a big dead industry too, and people will talk about how it never grows fast. Just ask the people that used to make business software you install onto PCs.
> And has been growing 30% YoY for the last 3~4 years alone.
Growing revenue while still not making a profit is not impressive. If you give me $100 today I can go out a buy $100 a pair of new shoes, and sell it for $70. Give me $200 and I'll go out and by two pairs of shoes and sell them for both $84 (total)! Keep giving me money and you'll continue to see this growth I promise!
> This is unheard of in any other industry/market
Given my example above, that should be a warning, not a sign of success.
I find it mind-boggling that people can really not even grasp that growing revenue with out demonstrating you can transform that revenue into profit doesn't mean all the much.
Grow profits every year by 30% and I'll be impressed.
Atlassian makes zero profits because it reinvests them in growth (hiring, acquisitions). The common sense here is that you return profits to shareholders only if you can't grow fast enough. That's the case for a lot of other industries where you have single digit growth in good years. But if you can grow 30% annually, you bring much more value if you reinvest your profits.
>It is when you’re a software company and the marginal cost of the goods is zero.
$600mm annual sales and marketing isn't cost of goods but the method of accounting that I subscribe to includes such costs as a fundamental cost of production delivery.
> If you give me $100 today I can go out a buy $100 a pair of new shoes, and sell it for $70. Give me $200 and I'll go out and by two pairs of shoes and sell them for both $84 (total)!
Hilarious that you use the analogy of shoes. This is exactly the problem. Great explanation on this concept:
True, but it is not unheard of for a software company. In fact, it's expected. Hence the valuations for software vendors compared to manufacturing, retail, etc.
This phenomenon might to some degree be a function of the board’s veto power over the CEO. A primary reason you typically go public is to grow, so by default at IPO you’re a “growth stock”. But from that point on, its difficult to ever make a transition to a steady, sustainable “dividend stock”, especially as a tech company. If you try to, the stock will tank, all the “growth” investors will get mad and you (the CEO) will probably get fired by the board, and they’ll bring in a new “growth” CEO.
Fundamentally, why would someone buy a stock of a company that doesn’t eventually make a profit or offer some sort of dividend? Seems like Atlassian traded profit for staying power, but can they leverage that staying power to bring value to their investors?
People buy growth stocks because they can sell them for more tomorrow, it's often a bit of greater-fool theory in play.
For the successful companies that do grow into a dividend company, they often have valuations that far outstrip their eventual settling location at some point in the trajectory.
The idea is they'll eventually get purchased, or have a profit and dividends. But if you're growing so fast it makes sense to focus on that over profitablity. Most investors would rather have a 1.40, next year than a dollar today.
Directly related to that, if the expert they hired to the board that led them in this direction was from Great Plains it useful to note that Great Plains exited by being bought by Microsoft.
The slow and steady mentality is fine, but we see over and over that it isn't what the market wants. A private company or a high risk growth company, those are the two options for a software company.
Either that or they'll be taken over. They're revenue now is just a $2bn, so that "grow grow" mindset from 10 years ago did not work out. In theory, a steady CEO could try to steady at that size with a nice margin. But, actually declaring and pursuing that would mean halving the companies market cap to a "normal" P/E of 20-30X.
At that price (say $20bn) one of the big software companies would just buy them... for their own growth targets.
Moderation has no place in the public markets as a software company. It's remarkable how unstable a stable condition is.