The idea that software as a category is dead is ludicrous to me. I'm like, it's tough out there. It's going to be hard. Welcome to the technology industry.
Now, today we have Mike Cannon-Brooks, co-founder of Atlassian, joining us for my favorite show of the week.
I just think we have to give up on TAM. We just have to let the revenue show us the path to TAM. Every category that I know of outside of engineering and product is at existential risk of shrinking seats.
It's the venture capital equivalent of you can't get fired for buying IBM, right? You can't get fired for sticking money in with a 1x preference on the consensus winner. This is classic top of the bubble stuff.
Ready to go.
So excited for this, guys. We have a very special guest joining the trio in Mike Cannon-Brooks. Mike, thank you so much for joining such a phenomenal group of intellectuals.
Now, I want to start. We saw Anthropic release updates which wiped billions off the stock market. I want to start with Anthropic predicts 149 billion in ARR in 2029 under the most optimistic scenario. The question that we ask ourselves is: is this just the collective budgets of enterprises all going to Anthropic, and how do we think about that?
Well, just to mention it out quickly, 150 billion for Anthropic. Let's just say if they make that number, OpenAI's estimate for the same year I checked is 180, right? So call it, you know, 350, 380 between them, right? You know, the total worldwide software business is 700 billion, so it would be a pretty big chunk unless you expand the TAM. It's the same old discussion. If you don't believe in TAM expansion and it's a zero-sum game, then if two companies are going to do 400 billion, and we can probably assume Microsoft, who's already at 200 billion, going to roll over and die, then yeah, they're going to have to take the money away from the rest of us. But clearly the bet is TAM expansion, otherwise it gets really hard. I mean, that would be the first pass.
Hey Mike, can I ask you a meta question? I'm sure you've thought about this. Does all this Anthropic revenue, at some point companies only have so much budget, especially CIOs and down, at some level do you compete with that budget on product engineering? I know it's a boost for you, but on the other hand there's only so much budget to get extra seats, to get extra licenses. Do you feel any meta competition from that, or none at all?
Let me take that second. I think you also have to work out the revenue stack here because, like, we use Anthropic a lot. It's one of our biggest models. We use, you know, multiple models, which I think is what most good SaaS vendors are doing within their customers' choices, right? Like we use a lot of Gemini, a lot of Anthropic. We have a whole bunch of Llama and Mistral running and stuff internally, and a bunch of OpenAI, right? And our job is to pick the best model for the best cost with the best quality outcome and the best speed. Then we have a whole gateway that's constantly balancing that. But when we spend money on Anthropic, don't forget we pay AWS, and then AWS pay Anthropic. So if someone spends a million on the Atlassian platform and we spend $200,000 on AI bills or something — pick a number, it's nowhere near that high proportionally — but that goes to AWS revenue. And then AWS spend, what, 150,000 on Anthropic revenue. Don't forget, like, the individual revenue number is not necessarily counting the whole stack, right? And they have to buy a bunch of chips and stuff. So the revenue stacking here gets a bit complicated, because there is a whole set of layers underneath this, right? There's no doubt that's a big number, though. Do we compete with the model providers? I think this is one of the big questions over the long term, right? I don't know, we've yet worked out for all the model providers what they're going to do, right? We use a lot of Gemini, deep partner with Google, but obviously you could argue — I don't know — Google Docs and Confluence are somewhat competitive, the two ways you can write a piece of text and collaborate on it and change it. Mega-corps in tech competing on one level and partnering on other levels, there's nothing new in that, I don't think. I think we have to be good, right? I think the question underneath that is: can they all afford to shut down their models, right? That they get so good they'll only use themselves. I don't believe they will, given the competition from the other three, four, before we get to China on models or anything else, right? So I'm not particularly worried about that. We have to compete with everybody that's providing our customers with the same value that we're providing them, right? In some era, there's 150 billion for Anthropic. It's a lot of CIO budget. It does make you wonder — the more I read, the more I get confused where that money is really coming from.
But I think to Rory's point, it depends on your question of whether it's zero-sum, right? Like I don't think any of this is going to be zero-sum. Like people say, 'Oh, well that's going to swap software.' And I'm like, 'Well, is it really swapping for software?' Like, if your business is getting more productive, you're building more products and services, your quality is going up, your speed is going up, whatever, you're going to spend money on different things. The technology budget of most companies over the last 30 years has gone up massively, I would argue, since 30 years ago when they were buying keyboards and mice and stuff like that. I don't think that's going to stop.
I think the interesting thing about that — there's a ton in answer to unpack, but I just want to highlight the 'you have to be good' sentence, because when we're going to talk about all the 'oh, what happens to SaaS' and all that, I think Mike's big-picture comment we should remember every time. It turns out if you want to make a lot of money, you have to be good, right? And you have to compete with everyone else for the same dollars. And my guess is that will be a recurring theme. It's not impossible to succeed. You just, quote-unquote, have to be good.
There's such a lot of complexity here because you're right, you have the margin stacking. So, you know, a classic example is you look at Anthropic, it's doing a billion dollars in revenue. You look at Cursor, it's doing a billion dollars in revenue, but it's pretty much the same billion dollars. So you have to think about the margin stacking. Then on the other hand you have to say to yourself, if say, you know, if Anthropic hypothetically was doing a hundred billion dollars and all of it was through third-party ISVs that were also adding value and getting more money on that, it would point to the end market would have to expand a lot, right? If everyone's going to eat and grow, you're going to have to buy into big TAM expansion. And you're right, software's grown nicely over the years. My guess is for this kind of growth you probably need more than the trend line of the last 20 years — you probably need some acceleration on top, just because the numbers are so big. I mean, you know, to go — if Anthropic goes from four and a half billion to — and I'm not for a second saying I think they will, it's just like their number — to 150 billion in a world where, you know, Microsoft does 200 billion, you're basically saying to a rounding error, Anthropic is another Microsoft. OpenAI is another Microsoft. And that's two more Microsofts, which are pretty voracious mouths to feed out of the same pile of cash. There better be more money coming or it's going to get pretty kind of short around here. I mean, you know, an obvious one is when you look at the IT spend, you know, you get 670 billion of software. But the stunning thing is you have a trillion of consulting-services-type stuff, and if some of the software can eat that, that's a pretty big slug of extra, you know, budget that's available for a more efficient product. So I kind of agree — it's finding the extra money is the thing.
Do you not think that consulting services pie actually goes up? I think one of the most profitable categories right now is your Accentures on the implementation and integration of some of these systems in the largest enterprises in the world. I tweeted this. I said I think they will be more revenue-generative than the foundation model companies in the next two to three years, as they often are in early stages of kind of cycles. But actually I think that would grow, not shrink.
And Rory, that kind of stuff, maybe. Yes. The, you know, the consulting to help you implement AI, yes. The consulting to help you, you know, morph your codebase from Fortran to blah. A market we've been looking at a lot is all the consulting spend around systems integration. You know, SAP, Oracle, NetSuite. A lot of that is pretty rote stuff, and you know, it makes coding look hard, and there's a lot of automation that we think you'll see there. So again, it's the same thing. It's the swings and roundabouts — places where it grows and places where you're going to get scrunched.
Listen, we all need these consultants, whether they're FDEs or Accenture. We all need them, right? I think we need them more in the age of AI. The only thing that I find lost in this, in the simplistic version of the argument, is they have to be smarter than they used to be. They really do. The average agency — I don't know. I mean, maybe I've lost a little bit of track of this at Atlassian, but traditionally in the more enterprise, Mike, there were a lot of partner agencies that were helping doing big deployments, right, of Jira and Confluence. I'm sure they had to be smart, but not quite 'train the agent from scratch' smart. And maybe Atlassian's a bad example, but I can tell you only a handful of folks that we work with are really smart. Like, this is why customer success is dead, because all these B2B companies are trying to convert their CS teams to FDEs. And I don't think even 10% of them can do it. They can't really be like product engineers. They don't need to code. So I wonder if we have enough consultants out there to really do this, to fully lubricate the...
I like the argument that we're heading into the death of consulting because we're going to run out of consultants. The ones that are smart enough, we'll have to make a new factory.
Mike's taking no prisoners here. Okay, it's open season.
Okay, but the thing that's going to stop that is, look, their economic incentive with the software provider is to make this adoptable by ordinary people. If the only people who can roll out your stuff are wizards, then you're going to run out of wizards, and then you're going to run out of revenue. So for mass adoption, you're going to need mass simplification. We will build those guardrails, right? We do most of our customers deploying agents. The agents that they deploy themselves when they start are relatively simplistic. They are small automations and pieces of software that make some business process go a little quicker. And you could argue, well, it's a very minor improvement. I said, no, but it's a major leap in their learning, right? And they're learning, and they're controlling, and they're letting them out slowly, and they're getting understanding what they can and can't do as the technology improves and as they find more business processes that they can automate with software. Right? We can call it an agent, we can call it whatever we want, but like, that's a pretty normal, I would say, corporate adoption pattern, and we're super early in that cycle, right? Like, these companies — they'll tell you some sort of fantastic AI story, but they're not like having millions of agents run right over their bank.
So how do you — genuine comment, because that all makes sense to me, and I've said this to guys before, is like, I think one of my weaknesses as a VC sometimes, I can be too incrementalist. That makes sense to me is how I'd adopt it, right? How do you square that with, you know, the Wall Street VC buzz that, you know, the entire SaaS industry was meant to implode in the last two weeks and new company agents are going to take over everywhere? How do you — like, I don't want to put you on the spot on that last scene in particular, but how do you — unless you want to, but...
Okay, come on. Rory, put him on the spot. Rory, come on.
24 years of being on the spot. It's okay. I just didn't want to be rude to our guest, but I'm game. Yeah.
Genuinely, how do you respond to people — like, how do you respond to the madness of the last three weeks where people were like, you know, the entire software industry is going away and being replaced by AI? Because my LPs are asking me, how do you think about SaaS today? Which, you know, what's your thoughts on that?
Look, I've said a few times, I don't think software is dead. I think software is alive and kicking. I think it's confusing to a lot of people in the software industry, and maybe that's normal. Like, to take the most generous view: will every single software and SaaS company make it through the next five to ten years? Absolutely not. Will a lot of them continue to grow and prosper through that five to ten years? Absolutely. Is that any different to the last ten years? No. I keep saying internally, the competitors we had in 2005 and 2010 and 2015 — I went and pulled all these old documents, a whole bunch of those companies don't exist, they've been merged, acquired, gone out of business, right? And we have a set of competitors today that are new and upcoming, and we have to compete with those. That is the history of the technology industry, and that's going to keep going. The idea that software as a category is dead is ludicrous to me. I'm like, wait a second — it's very efficient for businesses to buy pre-anned solutions of technology. They don't write everything with assembly, and they probably still won't.
But can I throw in one micro thought? I view Atlassian — and I'm just a student, I didn't found it — as above the fold. And what I mean is, you're not seeing seat reduction. Product and engineering is a beneficiary of AI spend, right? And whether it's vibe coding or however we model it, we are creating radically more software than six months ago. Like any curve, if you look at it, it's exploding, right? And at least for a while, I think that benefits Atlassian, because I need more tools, right? I need to track more issues, more tickets, more everything. I think there's plenty of other spaces that are being decimated. I mean, if your traditional support software like Zendesk — the old Zendesk is growing 0%. Like, we are cutting humans. And to go to Rory's point, I think there's some folks that are above the fold, and there's a few that, like Anthropic, that are so far above the fold we need to figure out how to scroll above the top of the monitor. But I think more are below the fold. More are seeing hits. And I actually think product and engineering is an island of stability today. No one is — the idea that you maybe see teams with fewer engineers. But when I walk into leaders — you know, I was at Replit the other day at 300 million in revenue, 300 people. There's like 11 people in go-to-market. It's probably like the old days at Atlassian, right? But a lot of engineers — like, they're not shrinking the size of their engineering team, but everything else looks pretty lean.
Look, product and engineering and software teams is a significant part of our business, right? 40% — it's a big part of our business. Service in general is a big part of our business. So your argument about Zendesk — service collection is a very large business. It's our largest at-scale business, growing very fast, faster than the overall company. And that is IT service management. HR service management is like our fastest functional area, right? Going inside there, financial service management, just general employee service management. We just shipped a customer service offering in October. So like, we're wading into those waters. This is crazy, right? This doesn't make any sense. No, the business is growing really, really well, right? We have to provide that software layer that makes that cheaper. There's no doubt about that, right? Like, that's our job to do. I think the generalized view that customers are going away in these times — like, certainly for some businesses, yes, you can say that. Like, some software businesses — the industry-wide phenomenon, which I think is what Rory was asking, doesn't make any logical sense to me, right? And again, we're either an example of the whole industry or we are somehow unique, and people will argue one or the other depending on the point they're trying to make. So it's very difficult. The one point I would make is, again, we're accelerating our cloud revenue, which is a 26% quarter growth rate at well north of 56 billion at the moment, and we grew our RPO by 44%. Right? That's also accelerated for the third quarter in a row. Now, what is RPO? That is customers who are buying $3 million worth of software for three years, something like this. Two million of that goes into our balance of the future, right? We book a billion dollars in revenue. Ultra-simplistic CFOs and accountants — I understand how it works, but that's a close enough proxy. Those are customers making three-year bets. And so now we have people arguing, 'Ah, but in year four it's all going to fall apart.' And I'm like, really? Like, I think these customers aren't stupid.
Two comments. One is because of the — what do we call them — the AI and OpenAI and Anthropic, we now all are experts on RPO. So everyone knows RPO now. Turns out once someone signs 100 billion in RPO, everyone has to figure it out. But going back to your comment, first, I want to say the word 'software' is overused, because you're right — the people owe it, 'it's the death of software.' But on the other hand, we're going to talk in a while — Harvey just raised a wonderful sum of money at a high price, and that's clearly software. So 'software is dead' is a stupid statement, right? And we should discard it, right? But on the other hand, your comment — yes, there's always an element of change, and you know, if you look at your competitors every five years, you know, some folks go to the wall. The argument here would be somewhere in the middle. It would say when technology doesn't do a step-function change, you probably have an organic death rate of 5–10% a year, because that's the way capitalism works, and the winners like you guys come to the top. But every 10 or 15 years there's an architectural shift in software, right? Where it just gets so new that instead of being a 5% death rate, you go through a two-year period where there's a 50% death rate. I'm just picking numbers out of my ass, right? And that at least is a credible discussion. And so to make it kind of tactical to you: do you think that the software you guys write with LLMs is quantum different than what you did before, or do you see it as a step-function change in the kind of software you make, or just an organic progression? Does that make sense?
It's both. It's both. So the way that we are building software — and I think the irony is often forgotten here — that apparently we're some sort of cavemen sitting around just banging on clicky-clacky keyboards and writing assembly code, and we haven't figured out that LLMs are pretty good at writing code and can speed us up. We got 10,000 people in R&D. This is amazing, right? I'm like, sweet, we can build a lot more stuff a lot better. Do we have some pockets of the company where people just sit and Claude Code all day every day and write cool stuff? Yes. But I don't know there are many software companies probably sitting around in their R&D department still working the old way, right? Some won't make it fast enough. Totally agree with you. You have to build new things. Some of those will work. Some of those probably won't work. And I don't think it's like — it gets very simplified in people's minds that like you're just bolting on AI features. I'm like, no, I'm building — I have a very, very large team at this stage building an entire substrate of context and search and chat, not to sell, but because I have to. And I have a very large infrastructure team at this point managing AI costs. Right? You guys all went on about inference cost, it's going to crush us, etc. I'm like, actually, it's going the other way, right? Our inference costs are going down. And we're very good at adopting new models, but we're also good about knowing the features that need the old models that get very cheap. Some of our features are a thousand times cheaper to run than when we introduced them today. And the feature still works really well as an AI feature. So guess what? We're good at optimizing infrastructure, right? Our COGS has gone down, right? Our gross margin has gone up the last six or seven quarters, and we've deployed a lot of AI, right?
My question is then, like, are we just throwing the babies out with the bathwater because we've got your Mondays, your Duos, your Workdays, your HubSpots that — I mean, like, this is real. I'm just trying to understand, like, should I just call it quits and sell my Monday and my Duo and just accept defeat, like, they ain't coming back, or like, they coming back?
Mike, we have a brilliant saying on this show. Rory always says it wonderfully. Harry says, 'That's great, but what about me?' I'm like, help me out here. I'm looking at all my positions, manage his portfolio. It's a living.
That's right. Well, apparently AI can just — AI just listen to this podcast repeatedly and it'll do the trading for you and you'll be fine. I think, look, there's no doubt we have a sector rotation out of software, right? I've been on many, many therapy calls with many software CEOs and other things, like, it's tricky to understand how that changes and rerates and everything else. I would say in my view that's definitively fear-driven at the moment, and fear overrides it. Generally fear comes from somewhere real as well, though, right? Like, so will every single one of those names be bigger in five years' time than today? It's probably pretty hard to say. If you list a basket of 20 companies, will they all do that? Will the overall average be higher? I would argue yes. The fear-driven sort of average software price at the moment is there. But also you get all sorts of financial effects, like people are buying chips. You know, the software versus semi charts been around a lot, right? Like, it's this thing. And guess where those chips are going? Well, these chips are going into data centers to make AI inference, to do all sorts of wonderful APIs, and eventually that's delivered through applications at some layer. And we're working out where the profit stack and the revenue stack gets redistributed, as we talked about beforehand.
Maybe I've got my Atlassian numbers wrong, forgive me, but Atlassian had a pretty good quarter. I know Mike probably doesn't want to talk about this, but somehow we got down it. But Atlassian's growing 23% and RPO is up 44%. Right? That's pretty good. Okay. But more importantly — and I don't want to put Mike on the public — it's accelerating. Okay, Atlassian is doing better. The problem with so many peer companies — and these are the best founder companies. Almost all the public SaaS and B2B are founder-led, right? Very few are — is they're still decelerating. And how long do you get? The LLMs are open to everybody. You have a year. You know, Claude 3.5, 3.7 were really good. Like, you've had seven months since then. Do you get 12 months? Do you get 18 months? It's like, how long do we give you to recapture some growth and some revenue from the AI revolution? Because Atlassian's got this layer, but it's also got growth. If you spent the last year with 50,000 engineers building all this great stuff and now your growth is in the teens, maybe heading down to 10% — I mean, better cos than me, but that's the one where, Rory, I think you should tell your LPs you're worried. And it's more of the public folks have seen no reacceleration than have — more of them have seen persistent deceleration. Go and we're going to see more this quarter, and I wish it wasn't the case. My life would be better if it wasn't. My life would be better if SaaS was on autopilot like it was through 2022. But you got to show me the money in 2026. At some point, all that infrastructure spend goes to inference, has to go to software. Like, it's got to go down, and you've got to show a connection to that spend, or you may not have a reason.
Presumably, if you look at history, some of that goes to new companies that arrive, right?
You nailed it. I was actually — you're exactly right, is that the problem with looking at the overall SaaS growth rate now is we haven't had any good ones to the top of the funnel, right? So we're gradually — so the survivor growth rate's going down because, you know, we looked at this once and it was 30% for about a decade and a half. But when you went into it, that's because anyone who goes to your — to your point, Jason, when you go below 10, you get the red card. You're sent off. You're told, you know, you go off DCF PE land. But they were dropping another one in at 60% growth on the top, right? So it stayed roughly 30% median growth rate for a decade and a half, and now there's been nothing good coming in. So, you know, you're just seeing the bad side.
And in fact, you've had a lot more. I would argue there's a whole series of phenomena. Maybe it's a great post to break apart. Software IPOs for the last five years have not been a category of new companies introduced, right? And to be fair, if you go talk to a Figma employee — my friend Dylan's having a fun time over there. They're a good example of a company who's like, I think they're going to do great in the current environment, right? But you're probably not setting an example where a lot of other private company CEOs — you had Cliffy on a little while, another good friend of mine, actually lives like two blocks down that way. You know, he's a little bit less motivated having seen what's going on, right?
I wouldn't be rushing today to IPO there.
Well, number one factor is you don't have those 60, 70, 80% growers that take the average up, right? Because you do have this one. Number two, you've had private equity — and again, a totally valid part of the capital markets — come in and hoover up a ton of companies over the last five years, right? I'll give you an example. In 2020, we formed a group of SaaS CEOs. I think there were 16 of us that got together. We'd meet on Zoom every single week, right? At one stage, 10, 11 of us were public, maybe more. We all had earnings calls and, you know, it was a really good therapy group for a while. I think it's like me, Eric from Zoom, Aaron from Box, Toby from Shopify. That's it. That we're all that's left, right? Because almost all of them have been bought by private equity or big tech. Big tech's getting a lot better at buying stuff historically, right? Like, so all of these phenomena lead to this weird average system, and you have companies going public, staying private a lot longer, right? They've got a lot more capital, right? Poor Cliffy, Mel Campbell would have gone public a lot longer in an old era. They don't need to nowadays as much, right? The Stripe guys, same thing. But that means when you look at a public company, you're like almost seeing this like the survivor bias of not small enough to get bought by private equity, not large enough to get bought by big tech, no new companies coming in. I don't — it's hard to work out what that average should be actually, right? But that's not saying that's not happening. I think this is where these are all a set of forces that are happening simultaneously. We will see how much this case, because there's one more effect that we're not talking about, which is some of those SaaS companies — and again, people have argued it's us, and we're like, wait a second, that 44% RPO growth is not coming from people paying $20 off Google ads. Some of those have been affected also by the changes in like marketing channels and other things that AI have talked about. That isn't — again, I would argue if you're a multi-decade company, you get used to this, right? You've moved your marketing to TikTok or some other way of the business model, right? And you get these chasms in marketing that have opened up. Some of those have also become a lot more challenged. So there's a lot of different forces happening here, right? It's often oversimplified by people. Fundamentally, though, software customers — are they going to buy more in the future? Yes.
We mentioned that new companies bringing enterprise value and expanding budgets. Harvey, we mentioned that raised in December, raised $200 million at an 11 billion price. It must be quite nice though, every month to fundraise. It's just like a nice hit of like ego, isn't it? Another $200 million from venture investors.
A nice bunch of secondary.
Nothing wrong with that. It drives a lot of this is secondary. It drives a lot of it.
Okay, let's talk about this. How do we think about this deal? They're going to end the year supposedly at close to 600. The growth is pretty phenomenal from 200 today. How do we think about this? First of all, let's just pick the obvious point. It was fun that it happened this week because if you think of what also happened this week is Claude Code produced a plugin and what, 13 plugins, and one of the plugins was the legal plugin, and that's one of the things that's alleged to have caused the SaaS apocalypse. Oh my god, the old-school vendors, Thomson Reuters and some of these guys declined, right? While at the same time a company who, if you squint one way, is just quote-unquote a GPT wrapper or a Claude Code wrapper raised $200 million at 11 billion. So literally the kind of whiplash in terms of the thinking here is hilarious, right? I think all software is dead except this software, which is pretty close to the plugin from Claude, but at the same time it's worth 11 billion, so it just works. So a fair amount of inconsistency there in the worldview, right? I don't think so. That's just worth pausing on. Other than that, I think it's all a look — we've discussed it. It's actually very similar to the discussion we had on OpenEvidence. This is the killer. This is the lead company in the AI for law firms space. Obviously, Lora is number two. They're both killing it. You're seeing mass adoption. And the million-dollar question, and you know, you cited what you think they'll...
do at year end. All you know for sure is what they're doing today at 190 million a year. The question here is total time, right? In other words, can you compound? If you can compound for three or more years at this kind of rate, you'll do amazing. And if you top out based on the number of, you know, AmLaw lawyers in the US, which isn't as large as you'd think, you could find yourself time-constrained. And that's the bet, because they're clearly going to get an arbitrary number — 60% of the market share, with Lora getting 40, I don't know, 50, something like that. So it's really a question of how big is the TAM and when do they hit it?
If they're going from 200 to 600 in one year, so that's tripling. If they're magically able to double the next year to 1.2, we're paying 10 times two-year forward revenue, right? It's for an asset that, unlike Atlassian, I can't go buy. So there's scarcity on top of it, right? I just think we have to give up on TAM. I think we have to give up on the — I think we just have to let the revenue show us the path to TAM. But if the numbers are there, I think — I think if Harvey does 200 to 600, it showed us the money on TAM, right?
So, so why do you think we should give up on TAM? Just because it goes from 200 to 600 doesn't mean we should give up on TAM.
Because it's a reason to say no. You got — because if you're generating — it's a reason to say no to Databricks growing 56% at 5.5 billion, right? Or 65% — 65% at 5.5 billion, right? You just — sometimes you got to lean into it if you want to make money, at least.
I don't know, TAM is a — I've always struggled with the concept of TAM, right? Because our whole job in technology is to change TAM, actually. Like if you think about it, the TAM of technology has changed as a whole for 50 years. I think Harvey is a — is a fantastic, fantastic business, but let's not forget if anyone's been involved in legal proceedings or court cases or even just dealt with a lot of lawyers, they're not an efficient part of an industry, right? And they deal with a lot of text. So you'd argue that there's a ripeness to do that. And credit to this — this company, maybe — maybe Harvey is a GPT wrapper, but you know what? They're a GPT wrapper that's got a product that their customers like. They've got a go-to-market model that's clearly working in a market that probably doesn't have a lot of competition to start with. Good job building a piece of technology that customers want and hence a valuable business, whether it's worth 11 billion or whatever. Okay, great. But like, it's growing 300% a year at 190 ARR — fantastic business.
Totally agree. I want to come back on two things. One is because I realize as I replay it, I was using the word GPT wrapper as a third — I didn't — that's not a phrase I would use. It was a phrase that was applied to the sector and then people simultaneously were doing this, and I'm pointing out the — you know, the — the divergence. You can't — it can't be bought at the same time. I think that, you know, you — you can't — people are, you know, if you're doing a deal like this, and I think it's an amazing deal, and we have a deal in a related space. I — I don't buy the GPT wrapper appellation, is my point. I don't think it's a useful phrase. Right. My point was, um, it was — it was wonderful and funny that it happened the same week that Claude was deemed to be able to annex the entire legal market just by issuing a plugin. Right. So my point is those were two different, contradictory ways of looking at the world.
Oh, entirely, entirely agree. And I think what I was — sorry, I was trying to poke fun at the GPT wrapper. Right. If Atlassian's just an orchestrator of humans, right? All of software is just a process wrapper. We take some business process and we deliver a better UI to do that, or a way to repeatably do said process, and we — we make money doing that, right? Is Harvey got a — has Harvey got a sustainable competitive advantage that will just be eaten up? That is entirely, I assume, what their leadership team is sitting about thinking is like, we've got customers and distribution, and that is in itself an advantage, right? Like those customers presumably are pretty sticky right now. Do they keep adding value to their customers with more GPT wrapping, or do they add more and more bits of the legal process into the UI, into the technology? I suspect that's exactly what they're doing, and that's what they're getting paid for, right?
Any law firm can pick up Anthropic and go build their own Harvey. Are they? No.
But — but I think — I think the important question to ask is like risk-adjusted and opportunity-cost-adjusted: is this a good place to put my dollars? And when you go back to Jason's argument, I'm totally with you, and I'm not shitting on them at all, Mike. Shit me. I've created a podcast. These guys have created $600 million at the end of this year. So who the fuck am I to throw shade? But like, ultimately, I can put my money in Atlassian today, which respectfully is — is obviously, as you know, down to very low levels, unfairly priced, brilliant business. Um, and I can put my money there today, or I can put my money in Harvey, which needs to triple and then double, and then I pay 10x. That —
And I — I totally agree. I'm not arguing whether you should put a dollar in A or B. Um, and — and there'll be mispricings up and down the stack, right? I'll give you an example from history, which I'm sure the Accel guys wouldn't mind. So when the Accel guys invested in Atlassian, right, it was all secondary. They put 60 million bucks in 2010. Uh, and they bid highest of the five VCs. Can I just say they're also the nicest and had the one-page term sheet and all sorts of other things. But when they put in that — we — I now we have their model. We've known them 15 years. Rich just stepped off the board in December after 15 years of amazing service, right? Well beyond Accel's investment. Um, and they're legendary people as far as I'm concerned. Their expectation was that Jira would grow and Confluence collectively, I think, 30% the year after they invested, then 20%, then sort of peter out at 15%. So by 2013 instead we did 50, 60, 70 or something, and they were like, what? And we are still growing Jira at faster than their three-year terminal rate 15 years later. Now, are they stupid and did they get the TAM wrong? No. The business just was a lot better than — than they even — they understood. They were trying to get two to three times their money. They made a hundred times their money. And like, but that's a success. You're looking back at a success example, right? That they probably did a bunch of those deals that didn't work around us, right? Um, it's very hard to predict what the management team of Harvey are going to do in building out their business over the next some years. So I assume the smart people that are putting this money in believe that management team can build a business that gets to, on current SaaS rates, 11 billion. They'd have to be what — four times forward revenue to like 4 billion in revenue or something, 3 billion in revenue.
Because just to take your two — I — I think your comment is correct as the entrepreneur, but I also think Harry's comment was correct as the investor. Because look, when you're talking about companies that are raising at 11 billion, there's no useful sentence that says this is a bad company. They're freaking amazing companies. But as Harry points out, we're not here to say, 'You're amazing because you built a big company. The Harvey team are amazing because they built a big company. I didn't build a big company. I'm not amazing on that dimension.' But in terms of capital allocation, you have to say to yourself and compare the two scenarios. You were a profitable company. Accel stick in 60 — 60 million. You know, my guess is the revenue multiple well sub-10, right? Growth rate. You know, thinking back, I can tell you what it wasn't. You know, it — like what we got? Harvey's at 190 ARR now. 11 billion. That's 50 times. I can tell you it wasn't 50 times, Mike.
No. No. I was going to say it was probably 10 to 12 times forward revenue, but we were an unusual company. We were like 50 mil in revenue with 20 million profit or something.
And — and that's a deal that outperformed on the growth rate. And as a result, as you say, a 3x became a 50 to 100x, right? And then when you look at another deal where you're paying, you know, you just got to say to yourself, you're paying 50 times run-rate revenues. It's growing much faster than you were growing at the time. And then how do you — to Harry's point, how do you think about the risk-return on that, right? And it boils down to you just have to have — you were able to beat their model by just growing at 30% instead of 20, right? What do you have to do to beat the model when you're paying 50 times? The answer is you have to peg that growth rate at well north of 300, 400% a year for three or four years.
Yeah, I can't agree with the math.
If you do, then it works.
The only thing I — I — I would just add —
That's worked every time so far is just —
That's the point. Go.
Sorry. Just on the TAM thing. What I mean is that, listen, when we started this podcast, I was actually fairly skeptical of AI replacing humans. Not because I didn't think it would happen when I started vibe coding, but because I thought too many VCs talked out of their rear. Oh, you know, we're going to replace — AI is going to destroy all jobs. And I thought, this is a bunch of people who haven't done any — any work. Are they just reading Twitter all day? But my mind has changed over time. And — and so what I mean is, when you look, it's not going to be true in all categories. But when you say, listen, there's 200 billion a year spent in the US on non-partner lawyers, associates and paralegals. 200 billion a year. Okay? You can — six months ago, you could say it'd be ridiculous to think Harvey's going to make a dent in that. Maybe it's not ridiculous now. And so if that growth stays, if it stays, if it can literally grow at the pace it is, what you're seeing is it's happening. It has to come to Rory's prior points — it can't come out of the legacy software budgets. It can't come out of the old — the old TAM for Bitbucket or whatever, or legal software of the old days. And so my point is it — it's not all going to prove itself. Some of these will flame out, but that amount of growth is spectacular. It's — it's spectacular. And — and — and at some point, like Anthropic, you prove it. Like the growth is so stellar, you have proven that you have captured a mass amount of TAM that was uncapturable before. And so as an investor, I would just put my money in at some point, right?
Agree. What you watch — I — I totally agree. Let me make the argument against, not because I think it's correct, but because it is the other argument. I — you know, I sat there as an investor thinking about it. What if you look at — they have 200 million — 190 million in revenue, right, in ARR, 100,000 active users. That's 2K per active user, right? That's under what Westlaw gets from — from a lawyer. That's not replace-the-labor revenue. That's nice next-generation tool revenue. Do you understand me? Right. And if so today there — and the point is, if you're only getting 2,000 times a lawyer and there's, you know, five — there's 1.3 million lawyers in America. Some of them are in-house. Some of them do weird things like patent that can buy Harry's product. There's four or 500,000 lawyers that are in, you know, AmLaw big-law people who would be a buyer for this. You know, it's a billion, billion-two marketplace. If you're only getting two grand per head, the math won't work. Now, Mike's right. In the end, my point is this, and this is why I get back to Harry saying to make this a big-ass company, you have to take that two grand and turn it into five grand and 10 grand per lawyer by — by eating the work, right? And then you, you know, time-expand and it's doable. Well, Mike's right. The whole last 50 years has been software does more.
I don't think it's going to be true, Jen. I think it's because this is what I'm already seeing. It's not that. It's 50 to 100 because you get rid of the humans. All of the agents that now — listen, we're in a weird niche, but I can tell you because I know the GTM agent category really well. I know everything. They're all 50 to 100 grand because you get rid of the people. And so if you compare a Pipedrive or, you know, a Trello clone for CRM in the old days for eight, $12 to an agentic product that gets rid of humans — I'm not saying for sure this is what happened to Harvey, but 50 to 100 grand if you can get rid of half of your associates or two-thirds of your associates, it's dirt. And — and you'll just pay it because they won't quit. They don't want raises. They don't complain about weekends. Um, they don't have all the issues like our agent closed — you know, I mean, closed a 100k deal the other day on a Saturday night. Doesn't complain. You know, these agents — they want — they want — they want family lives. These associates in law firms, you just get rid of them. A 100 grand is nothing. There's two arguments against what you're saying. One, Mike's already made, which is this, which is if we can make more software, we're not going to get rid of those humans and the coordination problem. We're just going to make more software, have the same number of humans, and have the same coordination problem and keep buying Atlassian stuff. So the same argument in law here. Maybe you just automate more. No, it's totally different. We — we are building more software than ever and we need the humans and no one is reducing their engineering team. No, the world is so competitive today. You can't wait every four years for a release like the old days. You're pushing content. So — so that cate — every other category may shrink that. Okay, that's — that's coherent at least. What you're saying is if you're selling to engineers — No, seriously, because we've talked enough that we know what we're going to say. You're right. What you're saying is every engineering category in software won't be cut, will use the tools to just make more software, but every non-engineering area like law, like SDRs, could be automated away so the headcount goes down there. That's —
I think every category that I know of outside of engineering and product is at existential risk of shrinking seats. You — Workday said it. Um, everyone else is saying it. We're seeing subst — I mean, Workday just — founder had to go back. They said — they said even at Workday we're seeing headwinds on seats because people just aren't hiring across the — for, you know, the Fortune 500 like they used to. They're seeing — but — but — but we are in a renaissance of software. We are building so much software. It is — it is unbelievable.
I think it's fascinating that on this — on this podcast the product and engineering firms are going to win. So we're a winner. We're above the fold, which I love that as well. This is — that in itself is an old-school term, Jason. The fold doesn't exist anymore.
I know. But I think listen —
But I think Zoom — I mean, HubSpot and Monday, even Zoom, are below the fold.
Mike still has the floor.
Well — well, a few things. Firstly, your holiday party with your lack of belief in humans is going to be amazing, right? You're sitting around drinking wine with all your agents that are going to be super fun holiday party, right? I'm really looking forward to it. I want to see the pictures.
Get drunk and make an ass of themselves if they're all agents. At least we won't be — but managers there. But —
I like humans. Humans are fun to hang out with, right? We — we're going to need a lot of these people. Um, I — I think there's — there's a lot in Harvey that's fascinating. The question is two — two things. One, legal firms generally bill time. So it's — it's hard for them to increase their profit margin by billing more and less time. So I don't know how that affects this particular industry. I'm not an expert at all on — on — on legals, but I'm just saying there's some interesting — their pricing, right? I don't know how legal services are going to be value-based priced or something. They're literally the ultimate selling of ours — um, photocopying and all that sort of stuff. So we'll see how that works for the billing model and maybe Harvey helps them with that or doesn't help them with that. Secondly, I think you'll —
I like to think about things that are demand- or supply-constrained, right? Is a particular function input- or output-constrained, and that makes a big difference in how I think AI will be applied to it. It's one of the interesting schemas to put to it. So you've talked about customer service or legal. I would argue those are input-constrained domains. All right. I have a whole lot of fantastical lawyers at Atlassian, in-house counsel, you know, group. They're input-constrained because if I make them more efficient or if Harvey makes them more efficient, they can't like create more legal problems. There is a certain set of problems. Just like customer service, your customers ask a hundred questions a day. You need a certain amount of service to help them out. Well, if you have twice as many customers, you'll probably have 200 questions a day. So it is — it's — it's based on some other ratio. The difference with something like software or engineering is it's creation, right? It's how much can you make, right? The — the roadmap is never finished. You can keep creating more. So some domains in a company have like a constraint on the input is fixed and you're doing a certain amount. Now sales and marketing are kind of in this middle ground, which is fascinating because ostensibly sales is sort of input-constrained by a TAM, but you can build new products and new ways of going to market. So I don't know — we — we sometimes jump across these categories and it's not super helpful because they're very different in —
I think genuinely that's super helpful because I remember when we were looking at the systems integration automation category, one of the things that we realized — and you got to in a second, and it took us a few days — is like if we automate the process of installing SAP, installing Salesforce, installing NetSuite, it's not like the company's going to buy two helpings of NetSuite because it got cheaper. They're just going to spend less money doing it. And those are inherently less magical markets than, you know, the stuff where — where the intelligence allows just whole new things to come. I think that input-output thing is actually a very useful way to think about where the magic upside might be.
