‘Down rounds’: Atlassian co-founder Scott Farquhar warns of bumpy ride for start-ups

Australia’s seventh-wealthiest person says he may not have started Atlassian if it wasn’t for the dotcom crash 20 years ago.

Australian start-ups should brace for a bumpy rest of the year as the downturn roiling public tech companies flows through to privately held start-ups, according to Atlassian co-founder Scott Farquhar.

Speaking to The Australian on the sidelines of his company’s Team23 conference in Las Vegas, Mr Farquhar predicted a change in private company valuations, to better reflect public company valuations which have suffered a torrid 12 months.

Shares in Atlassian, which is listed on the Nasdaq in the US, are down 41 per cent over the past year and fell by nearly 8 per cent on Wednesday, while shares in the likes of Salesforce, Netflix, Google and Amazon have also tumbled.

“There is a public market and a private market aspect here,” Mr Farquhar said of the downturn.

“With public markets, when the Federal Reserve changes the rates, the next day public markets respond. With private markets, though, effectively they get to choose when they raise money so they’re a bit less responsive. And given how much money was sloshing around in the venture capital ecosystem, many start-ups are well overcapitalised from what they needed.

“The smart ones have trimmed some staff, and maybe some projects as well to extend their runway, but what I think we’re seeing is that [the downturn] hasn’t really rolled through to private companies to the same extent as it has public companies.

“I would expect that to change over time, I would expect to see more down rounds, and you know, just more private companies’ valuations better reflecting public company valuations over time.”

Scott Farquhar on stage at Atlassian’s Team23 in Las Vegas.

Dreaded by start-ups, a “down round” is when a company is forced to raise capital from investors at a lower valuation than their previous funding round, and sell shares at a lower price.

Research released this month by Cut Through Venture found the start-up sector has reported the lowest amount of funding since pre-pandemic, and the fewest number of deals reported since 2019. The results of the survey of about 140 investors, including start-up accelerator programs, angel syndicates, family offices and venture capital funds, suggests that valuations in later-stage private start-ups have fallen by up to 50 per cent amid the downturn, which in some cases would mean billions of dollars wiped from market capitalisation.

“In many cases it’ll be start-ups having to grow into their valuation, because they have so much capital sitting around that they can wait two years and then raise money at that stage, and it will still be above the previous valuation,” Mr Farquhar said.

The executive added that Atlassian, similar to other high-profile tech companies like Uber and Airbnb, was started in a downturn. Atlassian was founded 20 years ago in the wake of the dotcom bubble, while Uber and Airbnb started life amid the global financial crisis of the late 2000s.

“I think overall the vibrancy of the sector is only going in a positive direction,” Mr Farquhar said. “Maybe if there hadn’t been a downturn Mike and I might have got jobs with tech companies and there wouldn’t be Atlassian, we would be middle-aged executives at Oracle or something, and it definitely would not have been as fun.

“I think the opportunity cost to not be working goes down, and you can stay ‘OK I’ll start my own thing, and worst case I go back’, so typically you’ll find more start-ups and innovation in these areas, because there isn’t VC funding around that wants to write big cheques at the moment. So you’re going to find more small start-ups getting started.”

Shares in Atlassian are down 41 per cent over the past 12 months, and the company’s operating losses widened in its most recent financial results in February, swelling to $US205m ($309m) compared with a net loss of $US22.3m a year earlier. Its collaboration and IT service management applications, including Jira, Confluence and Trello, have more than 250,000 customers globally.

Anthony Albanese – Prime Minister and Scott Farquhar co-CEO of Atlassian at the Jobs and Skills Summit at Parliament House in Canberra. Picture: Martin Ollman/NCA NewsWire

The software outfit last month laid off 500 workers – about 5 per cent of its workforce – cutting staff across its HR, program management and research and insights teams. Affected employees received 15 weeks of severance pay plus one week for each year of their employment, and could keep their laptops. They also kept access to their communications tools like Slack and Gmail for longer than what’s occurred at other companies laying off staff.

“We’re hiring technical roles. And when we look at how the world has changed and the cost of capital has changed, we said ‘hey, we are doubling down on migrations [to cloud], ITSM [IT service management], enterprise’. They’re the areas we’re investing in, and we looked at the market conditions and saw we needed to invest even more in those things, and we reduce investments in other areas,” Mr Farquhar said.

“We redeployed a lot of people internally, but we can’t repurpose recruiters as engineers, for example.

“I do think the way that we did it, I’m really proud of that, and I think we did it in a way that reflects Atlassian’s values. We took what most other people do, and we took what we thought was the right way to do it, and sort of invented a new way of doing it, that was more sort of human.”

David Swan travelled to Las Vegas as a guest of Atlassian.