Back in 2011, acclaimed American investor Marc Andreessen famously said, “Software is eating the world”. A decade later, we believe software is still eating the world, perhaps only faster. Over the years, software has also mutated from being on-premise to the almost omnipresent cloud based avatar we popularly know as SaaS. Today, there is hardly any industry or function where SaaS tools haven’t made inroads.

In this exploding galaxy of SaaS tools, there is one category - Developer tools - that has been getting a lot of attention, and there are few companies that have won in this category like Atlassian has!

Thus, in this article, we provide an overview of developer tools and Atlassian’s success story. We hope that readers would learn from Atlassian’s journey and apply some of these learnings in their own context.

What are developer tools?

Developers are builders. They write code to create software that solves a specific problem or enables a better way of doing things. In other words, a developer’s core job is to write the best code that helps deliver on the product blueprint, and even for the best of developers, this process isn’t linear. Development, by nature, is an iterative process which requires several cycles of creation, testing, deployment etc. Thus,the key proposition of any developer tool is to help developers be more efficient and improve the development experience. From no-code platforms for automated QA testing and collaboration to one-API platforms that programmatically allow rapid prototyping, development and running of serverless applications, there is a wide variety of developer tools available today.

Developers are important stakeholders in any organization who significantly influence any software buying decision and adoption process. Furthermore, with more than 22M developers globally (and increasing!), it is no surprise that the spotlight is on developer tools. The blockbuster success of companies such as Twilio, MongoDB, Postman and Atlassian, among several others, has only added to the interest in this space.

What is Atlassian and why is it interesting?

Founded in 2002, Atlassian is an Australian company that builds software development and collaboration tools for teams. Atlassian has a suite of products targeting different use cases, but all based on the core proposition of enabling teams to work more efficiently. Some of its key products are:

Jira: This flagship product is a project management and team collaboration tool that focuses on effective tracking of bugs/issues related to development workflows. It enables a team of developers to plan, track and release high quality software. It also provides real time visual data so that teams can improve their performance

Confluence: It is a remote friendly workspace for teams to create/collaborate on documents and it also enables seamless knowledge sharing

Trello: Another popular productivity and collaboration software that provides teams with a variety of tools such as boards, lists and cards enabling them to organize and prioritize projects in a flexible yet efficient way

Bitbucket: A Git code management tool that provides developer teams a single place to plan projects, collaborate on code, test and deploy. For eg - team members can hold discussions right in the source code with inline comments. Teams can build, test and deploy with continuous integration and continuous deployment (CI/CD).

Atlassian has been committed to investing in R&D (~ 40% of revenue), which has led to creation of great products over time. On the back of these excellent products, Atlassian has been able to expand into multiple markets and has delivered strong financial performance despite intense competition. Earning an impressive revenue of ~US $1.6 Bn in FY20, the company has a current market cap of ~US $60 Bn and a P/S of 38. It currently trades at ~6x of the share price at the time of IPO in 2015.

Atlassian has consistently recorded higher than industry average gross margins of ~80%, has been able to achieve a 35-40% Y-o-Y growth in the top line (since IPO, between FY 16 - 19) and has implemented a unique sales model that has kept the S&M costs lower than its peers (~ 21% of revenue).

Though all these facts and figures are enough to make Atlassian a very interesting case study for any SaaS entrepreneur or enthusiast, one fact that truly hits the ball out of the park for us is it’s fund raise history. Though the company raised a total of ~ US $210 Mn before IPO, it was bootstrapped for the first 8 years (2002 - 10). During these years, it implemented a unique self-serve GTM strategy and was able to achieve an impressive ARR of US $60 Mn by 2010!

What made Atlassian so successful?

Since developers are very different from traditional SaaS customers,it is unlikely that any playbook for building a successful traditional business would work in the case of devtools. Building a successful devtools business would need the company to do things differently. Let us look at choices that led to Atlassian’s exemplary success.

1. Built a no-nonsense product that enables the developers in a way they like

Atlassian has been a pioneer of ‘product led growth’ approach to building a business. Its approach to building a great product could be unpacked along three key dimensions.

Focus on solving adjacent pain points, leaving developers more time to focus on development of the core product

Every developer needs to navigate support activities (manage bugs, track productivity, QA testing etc.) that are important but not core to the product. Thus, any tool that can help them manage these support activities effectively and leaves them with more time to focus on the core product would be a true enabler and more likely to see adoption

Offer frictionless pricing, quick sign up and ease of deployment

Customers often find SaaS products complex and overwhelming, making it difficult for them to sign up and start using a tool. Realizing this, Atlassian created an intuitive experience where the product could guide the customers, almost as if humans were hand-holding them. To enable this, the company decided on a single price point, just above the free version, and made it easy for customers to transact online to buy the product.

Unlike other products, Atlassian does not confuse the customers with convoluted business terms. It has no discounts and offers standard contracts and detailed FAQs. Consequently, we see that even at the time of its IPO, 97% of Atlassian’s ARR came from website sales.

Ensure your product’s DNA is aligned to that of a developer's

Developers are curious tinkerers, who like to play around with stuff and explore, and often improve upon, what’s under the hood. It is not unusual for developers to build add-ons/extensions for existing products. Thus, a rigid black box product doesn’t appeal to them and Atlassian understood this very well from its early days. Thus, when Jira was released, it had a very flexible build and offered the developers a chance to customize the product as per their liking. As a result, it saw a lot of engagement and traction in the developer community where customers built customizations and integrations

2. Implemented an effective low cost sales model that complemented the product

From its inception in 2002 till 2011, Atlassian scaled to US $100 Mn ARR without an enterprise salesforce in place. And even later on, when it got a sales team in place, its sales costs continued to be significantly lower than its peers, hovering around ~20% of its revenues. Atlassian is indeed a unique company when it comes to its sales model, which has three key differences when compared to a traditional enterprise SaaS sales model.

Leveraged channel partners exclusively to achieve sales velocity and business efficiency early on in its journey

For a business to succeed, having a great product is necessary but not sufficient. The company ought to ensure that its product sells. Since having a strong sales engine is critical to success, most companies strive for a direct control and end up hiring and training their own sales teams.

While having their own sales team gives direct control to the companies, this comes with added complications of higher marketing, sales and people costs. Furthermore, while entering a new geography, things get immensely complicated with local hiring challenges and tax implications thrown into the mix.

With its focus on efficiency, Atlassian chose to create a robust channel partner ecosystem that could offer immense leverage to multiply its sales velocity while keeping the costs low. In order to get exclusive and preferred treatment from channel partners, Atlassian was careful not to cannibalize the opportunity by putting its own boots on hunting missions.

Today, Atlassian’s ecosystem has over 400 partners around the world including leading players such as Nagarro, Capgemini, and Accenture. These partners help customers with Atlassian’s offerings by providing a host of services across migration, change management, consulting, managed support etc.

Focused on building a relay-model of customer acquisition and growth in later years

In the later years, when Atlassian got marketing and sales teams in place, they chose a unique model. The marketing and sales teams operate like players in a relay race, where one runner passes on the baton to another with a concerted effort focused on winning the race. In a traditional SaaS sales model, SMB, Mid-Market and Enterprise teams can all source and grow their accounts independently. But at Atlassian, only one team is focused on acquisition while others focus on account growth.

Unlike in a traditional SaaS company, where enterprise teams do the hunting, at Atlassian, only the SMB team is allowed to acquire new customers (hunting). Here, the enterprise team is supposed to focus only on increasing business from the current customer base (farming) created by the SMB team or the marketing engine. In brevity, at Atlassian, the enterprise team is the upsell and cross sell team.

Built a great product and focused on bottoms-up adoption

Most of the traditional enterprise softwares are monoliths that are usually rolled out to (or have implications for) a large part of the customer organization. Hence, the buying decisions are usually top down and the users are mostly non-technical people. But in case of devtools things are different.

Devtools are generally built for individual or team level uses and decision makers are developers themselves. Here, instead of top-down selling, an organic bottoms up adoption is more likely to work. Thus, a high quality and competitively priced product that crosses the bar on technical soundness and offers enough flexibility for developers to tinker with, could find it easier to make an entry wedge into its customer base. As in case of Atlassian, soon enough, the product could spread from team to team and become viral within the community.

3. Focused on holistic retention and expansion measures

For any business to scale and become successful, an initial flash in the pan is not enough. It needs to acquire, retain and expand customer accounts sustainably. With a Net Retention Rate of ~147%, Atlassian does it exceedingly well. Let us look at four key factors that made the company’s land and expand strategy a success.

Inherent network effects in the products

Products such as Confluence and Bitbucket are collaboration tools for document and Git code management respectively. For any user the value derived from these tools increases if more colleagues/team members start using the product. More people on the same platform would lead to a single mode of collaboration while working on any project. Otherwise, to access the same set of documents, a person would need to reach out to different document owners separately. Thus, these inherent network effects have contributed to the virality of Atlassian’s products. The company further fueled it by offering a competitive usage based pricing and incentivising the early adopters for promoting the product forward.

Built a suite of related tools where customer could start from one product and expand to any other product seamlessly

Atlassian offers a suite of multiple tools that enable collaboration amongst software teams for a variety of use cases - Git code management, bug tracking, incident management etc. Through its suite of developer tools Atlassian has deepened its presence in the developer community. Furthering its mission of unleashing the potential of every team, Atlassian has gone beyond developer use cases and acquired Confluence and Trello which are tools for effective document collaboration and project management respectively.

In line with it’s land and expand strategy, Atlassian’s approach here has been to create a product portfolio that makes things easy for the customer to start and grow its engagement. Hence, every product in Atlassian’s portfolio could either serve as the entry point or a subsequent product that a customer expands to. For instance, a customer could begin with Jira and expand to Trello or begin with Confluence and expand to Bitbucket with the same ease.

The company deploys marketing and product nudges that help customers make a seamless expansion from one product to the other. This approach has allowed Atlassian to not only retain customers but also increase its share of wallet.

Backing-off from a fight to stay true to its customer-first values

Before Slack became synonymous with internal messaging and chat, there was HipChat by Atlassian. Around 2012, while the market was still nascent, Atlassian acquired HipChat as part of its strategy to continue building a suite of productivity and collaboration tools. While this strategy had mostly worked very well for the company, it did not work this time. Soon Slack appeared on the scene and with its blinkers on approach, focused on winning in this one product, it did everything right. Slack built a great product and was able to jump start a sales motion that made the product a viral success.

As a company, Atlassian is driven by five guiding values and one of those values is - Don’t f*ck the customer. Staying steadfast to this value, the company perhaps realized that Slack was a superior product and with HipChat it could not serve its customers in the best possible way. Again, doing things differently, Atlassian took the difficult call to divest HipChat to Slack in 2018.

As much as this was about staying true to its values, it was also about being pragmatic with the deployment of resources. Picking up fights big enough to matter and small enough to win enhances the chances of sustained success.

Launch of the Atlassian MarketPlace

In 2012, Atlassian had launched a market-place for the developers, where they could download plug-ins or get APIs to build add-ons for the company’s products. This strategy ties back to the approach of serving the customers in a manner preferred by them. Since developers are curious builders, they love to experiment, customize and improve products in their unique ways. With more than 25,000 third party developers, the platform generated more than US $300 Mn in market-place purchases in 2019. As Atlassian charges a 25% commission in each sale, this becomes an important alternate revenue channel for the company.

4. Though harder, choosing to play the longer game

Around 2011-12, Atlassian was at a critical crossroads where it had to choose between one of the two paths. One option was to defer the cloud and chase the immediate opportunity of going after the enterprise customers who were still mostly on-prem. The alternative was to say no to this faster but short term growth and choose to re-architect its cloud so that it could serve customers across a spectrum of size and scale. Again, doing things differently, the company made the harder choice of playing the longer game and worked towards setting itself up for success for the next 10-20 years.

What learnings can we take away from Atlassian’s story?

Having understood the reasons that contributed to its success, we believe Atlassian’s example is a great case study for promising entrepreneurs looking to start/grow their SaaS companies in the devtools category. There are five key learnings that might be helpful.

1. Developers are a challenging Target Group

Since developers can code and build a variety of software themselves, finding the right use case could be challenging. Thus, Atlassian’s example suggests that it might be best to create products that can reduce the inefficiencies in developers’ workflow and leave them more time to do their core job of writing the product code

2. Don’t build a rigid black box, offer the flexibility to customize

Learning from Jira’s success, while building a devtool, it is important to create a product that allows the users to build customizations and integrations. This flexibility appeals to the developers and hence the product is more likely to find engagement and adoption

3. When it comes to on-boarding, keep it simple

Rather than confusing your customers with complex business terms and conditions, keep things simple by offering a frictionless pricing and a hassle-free sign up. Make the product experience intuitive, so that customers can start and expand their usage quickly.

4. Choose your GTM wisely

Use cases, target audience and LTV/CAC considerations define early GTM. Complex use cases, which require design and infrastructure choices, are better suited to an open-source GTM, as this approach could catalyze adoption among early customers (typically SMBs and new age companies). Documentation and integration requirements of such tools can be best served through community contributions.

For tools focusing on less complicated but very relevant pain-point of managing day to day mundane tasks, a light touch, freemium route might work well. Collaboration tools such as Jira, Confluent and Trello have inherent network effects which makes a freemium, user-led GTM extremely powerful, especially if these tools are easy to integrate and use.

Unlike the above plays, products that help solve problems of CTOs/CIOs of large companies are best suited to traditional GTM relying on a more top down approach to sell.

5. Monetization could take time, and you need to build multiple avenues

Devtools often stay free for a long time to get traction. Hence, as in the case of Atlassian, monetization scale-up could be accelerated by playing in multiple product markets and building a marketplace to enable further developer entrenchment.

While software had already been changing the way our world operates, the outbreak of COVID-19 has provided tailwinds to the SaaS-ification wave in a way few would have ever imagined. There is a surge in demand for innovative software tools across categories, and devtools are no exception.

PS: If you are building a start-up in devtools space, we would love to catch-up and brainstorm with you