Guest author Christopher Lochhead is a cofounding partner of Play Bigger Advisors. He wrote this post with his partners Al Ramadan and Dave Peterson.

Atlassian cofounders Mike Cannon-Brookes and Scott Farquhar in 2014.

In mid-December, Atlassian pulled off a successful tech IPO and is now enjoying a $5.5 billion market capitalization. The software company founded by Australian entrepreneurs Mike Cannon-Brookes and Scott Farquhar has become Silicon Valley’s hot company of the moment. Some are speculating that their success is a sign of good things in 2016 for other young, hot tech companies with IPO dreams.

This raises a question, though: What makes one company hot and another, well, not? By any measure, it appears that Atlassian has built great products, a solid business model and is executing well. But so do a lot of companies.

Taking A Company’s Temperature

Wall Street analyst Jason Carlamere had this to say about Atlassian’s IPO on Seeking Alpha:

The growth of software applications across every aspect of technology is constantly expanding, which in turn supports the growing software engineering industry. As the industry grows the need for collaboration tools increase, which will benefit [Atlassian] if market share can [be] solidified.

In other words, Atlassian is in a new, growing category and it looks like it will be the king. That’s what counts in measuring a company’s hotness.

Why Yahoo Can’t Warm Up

Brett Sappington, director of research for Parks Associates, recently told CNET, “At one point, AOL and Yahoo seemed like they were the Internet.”  

That was when being a Web portal was the thing to be. Google redesigned the category and convinced users and advertisers to shift from portals to search. As the portal space went cold, Yahoo got hypothermia. 

Now Yahoo has a category problem. As analysts and press debate whether Marissa Mayer should stay or go, we think the more relevant question is, can Yahoo find a hot category to dominate? Mayer seems to think there’s space Yahoo can stake out in mobile search—but plenty of others, including Apple, Google, and Facebook, are eyeing the same territory.

Owning The Category

Facebook is the most valuable technology company created since the turn of the century, with $288 billion in market cap. The Motley Fool recently declared Facebook “the big winner” in the shift to online advertising

So how did Mark Zuckerberg do it? Did Facebook build great products, a great business model, and scale like mad?

Yes, it did. But it also created a giant new category of Web service that is now loved by over one billion users and countless advertisers. Because Facebook made the category of social networking red-hot, Facebook is red-hot.

In 1999, Michael Dell was the toast of the tech industry, selling PCs, laptops, and servers directly to customers over the phone and on the Web. Today, the company is struggling. It had to take itself private to stop a constant stream of carping from shareholders. Now it is borrowing $40 billion to complete a hail Mary pass of a deal to acquire EMC

Dell still sells PCs, laptops, and servers directly to customers over the phone and the Web and it still has the same CEO that everyone used to love. What changed? 

A category crisis. The market categories it led in got whacked when smartphones, tablets, and virtualization took off and the market shifted. As analysts and press debate whether the merger will work, just like Yahoo, we think the more relevant question is, can a combined Dell and EMC find hot new categories to dominate? Because just selling existing products in existing categories cheaply and efficiently isn’t cutting it anymore.

The Power Of The New

Companies that are considered hot create something new. They give us new ways of living, thinking or doing business, many times solving a problem we didn’t know we had—or a problem we didn’t pay attention to because we never imagined there was another way. They design a new product, a new market category, and new ways of doing business at the same time.

Think Facebook, Google, Salesforce, Uber, VMware, Netflix, and Palo Alto Networks.

What do these companies have in common? These companies don’t only invent something to sell us. They introduce the world to a new category of product or service. And when the category takes off, it takes the company with it. That’s why the category is the arbiter of whether a company is hot or not.

Photo by Aundray