4 Awesome Lessons That Will Make Your Small Business Escape Cash Crunches and Grow with Sturdy Cash Flow
Atlassian was a bootstrapping company, meaning it grew without venture capital. It had to generate positive cash flow from operations even before it scaled, which covered all its growth expenses. This is a very difficult thing to do, but the result is rewarding. Even though the market capitalization of Atlassian is 1/6th of the cash-requiring business Netflix, both of Atlassian’s founders have more than twice the net worth of Netflix founder Reed Hastings.
The funders prevented stock dilution by making the company a cash generator.
Atlassian is a SaaS company. Users subscribe to its software services. The main software is Jira, a project management tool for software developers.
It’s like a scheduling calendar that project teams can share to see progress in real time. It has very useful features for software developers (which I don’t understand very well).
Atlassian’s cash-generating ability is at a genius level. For example, in its IPO year of 2015, it was making a loss but generated $57 million in free cash flow. Free cash flow is operating cash flow minus fixed asset purchase amount. It is the cash you can use freely, such as for paying your debt, issuing dividends, or whatever you want.
Its marketing cost is always very low; the sales increase was more than $100 million in 2015, but marketing and sales expenses were less than the sales increase, only $68 million.
This is very rare for SaaS companies. While their retention rate (the percentage of customers who stay with the service for a year) is very high, often around 90%, the monthly payments are small. Therefore, it typically takes multiple years to recover the sales and marketing spending through monthly subscription revenue.
For example, Asana, a rival of Atlassian that also offers project management services but for general usage rather than targeting only software developers, saw a revenue increase of $100 million in 2024, but spent $391 million on sales and marketing. This means it takes almost 4 years to recover only the sales and marketing spending.
Atlassian’s cash generation is systematic
1.Annual subscription: It has monthly plan and annual plans. Annual subscriptions bring in more cash.
2.SaaS + one-time software selling: If your business adopts a pure SaaS model, you first invest in sales and marketing, then recover the cash month by month. This takes a very long time and hurts cash flow. The cash outflow comes first, followed by slow cash inflow. Every time you acquire more sales, you pay a large amount upfront like marketing costs, then get paid slowly over time. This approach means that increasing sales requires additional capital.
Atlassian, on the other hand, adopted a hybrid model of SaaS and one-time selling. In 2015, perpetual license and its maintenance revenue were $217 million, well exceeding subscription revenue of $85 million.
This allows a company to get the full price when they provide perpetual licenses, which is good for cash flow. But subscription was the future of its business, hence the hybrid approach.
Now subscription revenue is the majority of sales, but when it was still small, one-time sales cash supported the company. You can change the model later.
3.Word-of-mouth strategy: As I mentioned, compared to its rivals, Atlassian’s sales and marketing costs are very low. This is because it doesn’t have a sales force inside the company, which usually costs a lot. You have to keep many salespeople and it is a huge fixed cost; even if they don’t sell very well, you still have to pay their salaries.
For example, Asana has a large sales force. It offers a freemium model where up to 10 people can use it for free, but exceeding that starts to cost. When a company’s user base approaches 10 people, the sales team contacts the company to convince them to upgrade to the paid service.
This costs Asana $391 million but only results in a $100 million sales increase. On the other hand, Atlassian does advertise the product but relies on word of mouth. People hear the service is very good and try it for free since it too has a freemium model. Then they learn it is actually so good that they convince the purchase decision-makers to buy the service because it enhances efficiency.
This happens when the product is 10 times better than competitors’ because:
a. It was the earliest product on the market. Atlassian has enhanced since then, and no new entries can provide service at that level.
b. It focuses on a niche. Not a project management software for general purposes, it focuses on software developers’ needs and solves their specific problems. This makes the product much better.
c. The cycle of getting cash, investing in R&D, creating a better product, generating more word of mouth, getting more cash, and reinvesting in R&D keeps turning since the beginning. No competitor can compete with it.
4.Cross-selling: Atlassian is not only for Jira; it offers many other software products too. Some of them were acquired through M&A. These software products ‘complement each other’, so when a company starts using Jira, it’s very natural for them to use Atlassian’s other software products too.
Like:
- Confluence: Team knowledge management, like a company’s private wiki
- Trello: Visual collaboration tool
- Bitbucket: manages code changes
- Jira Service Management: IT service management tool
Cross-selling doesn’t incur additional marketing costs. Once you get customers for one service, they try other services too, generating additional revenue without additional cost.
This also reduces the sales and marketing cost ratio. For subscription companies, marketing cost is the major cash outflow. So reducing it helps a lot with positive cash flow.
On the other hand, Asana has a single software product and a single revenue source, with no cross-selling. That is one of the reasons its sales and marketing cost to sales ratio is so high.
Investment for the future
As I mentioned, the company keeps investing in R&D, with more than 50% of sales going to R&D in 2023. The R&D spending is so big that the company is making a loss. While Atlassian could easily make a profit now by reducing its R&D to a normal level, it has chosen to keep investing in R&D for further growth and future cash generation.
Reference
10 lessons from working at Atlassian
In this article, I write about what I learned from working at Atlassian for years.
by KEVIN INDIG
https://www.growth-memo.com/p/10-lessons-from-working-at-atlassian