Cloud Infrastructure — DevOps (Part III) — Case Study of the Largest DevOps Company

Part I & II of this III-part series presented an overview of DevOps, my key theses regarding the evolution of DevOps and why the DevOps landscape in Asia is booming. You may access it here and here. In Part III of this series, I will discuss the case study of the largest developer-led company globally, which happens to be from Asia.

I am of course talking about Atlassian, the company behind the ubiquitous software product, Jira. Atlassian was founded in 2002 in Australia when college friends Mike Cannon-Brookes and Scott Farquhar created a project management tool, Jira to serve their own needs as developers. Soon enough, they pivoted to selling Jira to developers globally and the rest is history. In the quarter ending June 2022, Atlassian achieving $3 billion of run-rate revenue. With a market capitalization of $58 billion currently, Atlassian is one of the largest software companies on the planet. For those of you interested in learning more about the history of Atlassian, I would recommend this blogpost.

So what has been the drivers of success for Atlassian and what can founders & investors learn from it? Let’s dive in!

Why Has Atlassian Been So Successful?

#1: Jira Software is the System-of-record For Software Teams

“Jira, or it didn’t happen”

The above phrase characterizes Jira Software’s place in the software delivery lifecycle. Jira Software is the system-of-record for the work accomplished by software engineering teams. It is as mission critical for software engineering teams as Microsoft Excel is for financial analysts, Salesforce CRM for sales professionals and SAP is for accountants. Jira Software is a best-in-breed planning and project management product — it has a very high degree of customizability and a large feature set making it compelling for teams of all sizes doing a wide variety of software development work. As Jira Software becomes more entrenched (we estimate Jira has a market share of ~75% in the “Plan” phase of software delivery lifecycle, see Okta and JetBrains survey results below), its moats get stronger as any competing software will have to be substantially better for enterprises to go through the hassle of switching from Jira Software in their mission critical workflows and engineering managers to go through a new learning curve.

In recent times, with trends towards remote work, Jira Software’s moats have accentuated further as it has become the de-facto mode of communication between engineering managers and their remote developer teams. A developer would be assigned tasks as Jira tickets by his/her manager and his/her KPIs would be to resolve the tickets. Rolling it one level up, leaders would track performance of various teams using Jira Software’s reporting. As such, Jira Software is an indispensable tool for engineering leaders (software developers must use it, whether they like it or not), a fact which protects Jira Software from technological obsolescence that is not uncommon among developer-led companies.

As a result, Jira Software enjoys strong pricing power; in fact, Atlassian has raised prices over time at much higher rates than inflation (see table below). Strong pricing power is the hallmark of a great business. Despite high penetration, I believe that Jira Software still has significant growth ahead given 1) secular tailwinds of increasing developer seats at its customers, 2) upsell motion of customers upgrading to the premium tier and 3) increase in unit prices.

“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”

Warren Buffett

Jira Software has further entrenched itself by embracing what it calls Open DevOps, enabling support and integrations with over 3,000 developer tools as well as other third-party apps. This ensures that Jira Software still remains the system-of-record regardless of the developer teams’ preferred toolkit instead of forcing the developer to choose between Jira Software or their preferred tool (GitHub, as an example). This approach is at the expense of Atlassian’s other products such as BitBucket (code repository) and Bamboo (CI/CD) which do not have significantly better integrations with Jira Software than their competitors. Atlassian’s management considers Jira Software as the golden goose (land product) which lays golden eggs (expand with upsell and cross-sell), and prioritizes Jira Software reaching in the hands of as many developers as possible via a very broad top-of-the-funnel.

#2: A Highly Product-focused & Innovation-led Organization

Since inception, Atlassian has been a highly customer-centric organization, developing or acquiring new products to fill the gaps in its offering and entrenching itself into the customer’s workflows. Atlassian’s culture encourages constant experimentation and accepts risk of failures, prodding leaders to ship new products & features to customers to test for product-market fit. Once PMF is established, the firm invests necessary resources to scale the product. Successful new products include Confluence, Bitbucket and Jira Service Management, while failures include Stride (Slack competitor). This is in contrast with many other software companies that were unable to scale beyond their initial product. The product mindset is reflected in Atlassian’s high R&D spend versus peers.

Furthermore, Atlassian has an internal R&D program called ‘Point A’ program which works with customers such as Canva to create new products to solve their problems before releasing it to the broader market. Some of the new products released just in 2022 include Atlas, Compass and Jira Product Discovery.

#3: Go-To-Market (“GTM”) Motion — Pioneer in ‘Product-led Growth’ & Symbiotic Relationship with Channel Partners

Atlassian pioneered the product-led go-to-market motion which has since been adopted and refined by start-ups of the 2010s such as Dropbox, Slack and Zoom. Atlassian’s GTM motion has roots in its origins in the aftermath of the dotcom crash and being based in Australia with a lack of venture capital funding to build an enterprise sales team. Atlassian’s founders put out detailed specifications of Jira Software on the internet and made it frictionless for individual development teams to download the software, try it for free for 30 days and pay using a credit card if they find value. The enterprise sales team, which was only set-up in the mid-2010s, then reaches out to the enterprise customer to pitch them consolidating their Atlassian portfolio, implementing Jira Software wall-to-wall within the enterprise and further upsell & cross-sell. Atlassian is one of the earliest examples of software companies that were able to take a bottoms-up sales motion and go upmarket into enterprises.

This GTM approach provided a wide sales funnel, frictionless customer experience and allowed Atlassian to grow in a capital efficient manner. In 2020, Atlassian further doubled down on the strategy by introducing a Free edition of its products, where potential customers can start using the cloud version for free without the need for a credit card making the experience frictionless. The strategy immediately bore fruit with the number of sign-ups for the product increased 10x.

Furthermore, the role of solution partners can’t be understated in Atlassian’s growth story. Typically, as enterprises embark on the digital transformation journey, they put out RFPs to bring in solution partners who are experts at implementing Agile at scale. The solution partners often provide business consulting, advice on cultural transformation, recommend the right collaboration tools and help install & manage these tools (historically on-premise, less relevant for cloud). Atlassian has invested heavily in these solution partners by helping them become experts in Atlassian’s products, get trained for customer success and learn the upsell & cross-sell motion. Atlassian has effectively outsourced its sales team to the solution partners thereby reducing its S&M spend. The solution partners base is global and helps Atlassian maintain a lean enterprise sales team with the bar for local campaigns being very high. Furthermore, enterprises often require custom solutions and the solution partners will create these custom solutions and put them for sale on the Atlassian Marketplace for Atlassian’s other users, thereby creating strong network effects. However, it is a delicate balance, as Atlassian loses control of the direct customer relationship, the marketing pitch around its products and the service revenues. Nonetheless, Atlassian has perfected this balance and today, the 700 solution partners account for 40% of Atlassian’s revenues.

The GTM motion described above has allowed Atlassian to maintain the lowest S&M % among its peers and an ability to reinvest the excess cash flows in R&D as described above. The R&D expense goes into the product making it better by adding new features (which helps with upsell) and developing new products (which helps with cross-sell). Given Atlassian can spread its CAC across a wide range of products, it has the lowest CAC payback among peers.

#4: Atlassian Ecosystem

Atlassian’s sprawling product suite is complemented by its robust ecosystem consisting of Atlassian Marketplace, third-party integrations, global network of channel partners and community, all of which make Atlassian’s product stickier.

Atlassian Marketplace was launched in 2012 to formalize what was occurring in a gray market — internal developer teams of customers and solution partners were writing & selling custom add-ons & apps for Atlassian’s products. Today, Atlassian Marketplace contains 5,600 add-ons & apps with contributions from over 25,000 developers designed to provide additional features, customizations and solve unique problems, for free or for customers to purchase. Atlassian Marketplace GMV to-date has been $2 billion. Atlassian has reported that 60% of its customers use at least one app or integration in Jira Software and for these customers, dollar churn reduces by approximately 50%. With every new integration or app, Atlassian products get more embedded into the customer’s workflows thereby making them stickier.

The role of the global network of solution partners in Atlassian's success story has been discussed above. Solution partners assist Atlassian in maintaining a lean enterprise sales force, assist Atlassian’s customers with more complex cultural & technical migrations and upsell & cross-sell Atlassian’s products.

Furthermore, Atlassian has a strong community of over 4.3 million members, 167 community groups and has had in excess of 4,000 community events over the years. Communities are primarily a way for Atlassian product users to ask questions, provide answers, become product experts and meet like-minded people.

Lastly, Atlassian also launched Atlassian Ventures in 2020 with the goal of strengthening its ecosystem. Atlassian Ventures has invested $110 million in 30 companies in 13 countries, investing in companies such as code security start-up, Snyk and feature flags start-up, Split.io.

#5: Industry Tailwinds

Atlassian has been “at right place, at right time”, and benefitted from three large tailwinds:

Tailwind #1: Shift to Agile & DevOps

As discussed prior posts in this series, the Agile movement started in the early 2000s, coinciding with Jira Software’s launch when it was dubbed as “by developers, for the developers”. Jira Software came out as the winner in the project management & agile planning category over peers such as Microsoft Project and Rally. Atlassian expanded successfully into other products to meet the needs of developers during the DevOps movement of the 2010s.

Tailwind #2: Digital Transformation

Software has been eating the world for the last decade. Software’s role in enterprises has evolved from merely a functional tool to the primary means of engaging with customers, managing day-to-day operations and driving actionable business insights. Companies in every industry are exploring ways to reimagine their business through technology. Increasingly, enterprises are also looking to break silos between IT teams and business teams such that there is more collaboration and innovation. Atlassian has benefitted from the increasingly important role of its core customer, the software developer in the enterprise as well as from the strong growth in the number of developers globally (see chart below).

Tailwind #3: Remote Work / Distributed Software Teams

Software teams were already adopting remote work prior to the COVID-19 pandemic and the trend has accelerated post-COVID. In a remote work environment, Atlassian’s products become even more important as they become the primary system-of-record for work planning and monitoring for software teams.

#6: Management Quality & Alignment with Shareholders

The founders of Atlassian, Mike Cannon-Brookes and Scott Farquhar, are still co-CEOs of Atlassian after 20 years of leading the company and making it into a $3 billion ARR behemoth in the software industry. They each own roughly 21% (combined 42%) of Atlassian’s stock and the dual share class structure gives them control of the Company. They are proven operators and capital allocators, and I admire the following about them:

• Innovation in product and go-to-market motion
• Astute capital allocation, be it via acquisitions (see M&A track record below) or investing in R&D (e.g., Jira Service Management)
• Ability to make hard decisions such as forcing users to migrate from on-premise to cloud and selling messaging app, Stride to Slack (in return of Slack’s equity)
• Fostering strong culture as evidenced from Glassdoor reviews (see below)

What Can Founders Learn from Atlassian’s Success?

#1 Find an unsolved problem or a poorly solved problem, preferably one that you faced yourself, that you are uniquely suited to solve

This advice is more relevant for early stage founders. The co-founders of Atlassian studied computer science in college and created Jira to log software development issues & work collaboratively while running their third-party support services start-up. They were dissatisfied with using email and personal productivity tools to track their software projects. Soon enough, they realized that they had created a product that was relevant to the broader market and started selling it on the best distribution channel they could find— the internet.

#2 Out-innovate your competitors

Atlassian was founded in 2002, much before the secular shift to the cloud commenced in earnest in the 2010s. While many legacy businesses have found it challenging to compete against cloud-first best-in-breed competitors (think Oracle), Atlassian has invested heavily in R&D in recent years to pay-off its technical debt and have a cloud-first architecture. It has also shipped features at a rapid pace, allowing it to keep ahead of rivals such as Asana, Linear and ClickUp.

#3 Get your products in the hands of as many users as possible first, then think about monetizing

Atlassian management’s #1 priority is to increase the top-of-the-funnel and by extension, the number of customers. The Company first did it with introduction of a free trial & frictionless self-checkout in 2002 when such a model for selling enterprise software was unknown, and doubled down in early 2020 with the launch of Free edition where certain number of seats at a customer can use the products for free indefinitely (Jira Software ~10 seats, Jira Service Management ~3 IT agents). With the latter, the number of sign-ups for Atlassian’s products grew 10x.

#4 Once you have a ‘land’ product, figure other customer problems that you can solve (‘expand’ products)

Atlassian’s expansion into IT Service Management has curious origins. In 2013, Atlassian realized that 40% of its user base had configured Jira Software to use it as a ticketing tool for IT operations, resulting in the release of Jira Service Desk. Jira Service Desk found strong traction among mid-market enterprises given ServiceNow’s focus on the large enterprises, and Atlassian invested more resources into the product eventually acquiring start-ups such as Opsgenie, Statuspage, Halp, Mindville, Thinktilt and Percep.ai to launch Jira Service Management (“JSM”) in November 2020. JSM has since won accolades from industry research bodies such as Gartner and Forrester, and has become the key cross-selling growth engine for Atlassian with over 40k customers as of June 2022.

#5 Platform strategy & creating an ecosystem around your product

This advice is more relevant for late stage founders. Once a product has scaled well, it is important build moats around the product by pursuing the platform strategy. One of the key ways Atlassian accomplished this was via the Atlassian Marketplace, with over 5,000 apps from over 25,000 third-party developers. A platform strategy allows the company to outsource the shipping of niche features (and related revenue) that it may not have the bandwidth for. The advantage comes in the form of higher customer retention and lock-in. Other ways of strengthening the ecosystem include investing in channel partners, community and making strategic minority investments.

#6 Location is no bar for global success

This advice is more relevant to founders in Asia. The world is a lot more flat today than it was in 2002 when Atlassian was founded. Yet Atlassian found global success despite being based 10,000 miles from its target market, the U.S. In fact, very early in its life, Atlassian opened a New York office to be closer to its customers but had to close it down in 2004 when the leadership realized that the firm had over-extended. The lesson here is that the most important thing is to have a great product that solves a large-enough problem better than any other product in the market and get it in the hands of potential customers through a frictionless buying experience (“software must be bought, not sold”).

If you are still yearning for more, I would recommend checking out the lessons from the horse’s mouth — 20 years of Atlassian, 20 lessons learned.

Conclusion

In conclusion of this III-part series, the DevOps space has seen a Cambrian explosion of companies given the secular demand-side trends of digital transformation of enterprises and supply-side trends of ease of starting up due to lower upfront costs and availability of funding. Asia is particularly well positioned to fill the supply given structural advantages such as availability of high-quality developer talent and lower costs. Atlassian, the largest global player in the market, originated from Asia and has important lessons that founders can emulate.

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