ServiceNow Founder and Investor Offer Lessons in Startup Growth

After Fred Luddy founded ServiceNow in 2003, he was still a little shell-shocked from his experience as the CTO of San Diego’s Peregrine Systems.

Luddy had spent 13 years developing Peregrine’s asset management product before the high-flying enterprise software giant collapsed in a corporate accounting scandal in 2002. When a new management team finally calculated the extent of the fraud as part of Peregrine’s bankruptcy reorganization, Luddy said his Peregrine fortune was “zero.” He estimated that his stake in the company had amounted to $35 million just a few years earlier, when he was 40.

Now Luddy is 60, and he has a pretty good comeback story—which he told last week in a special presentation to the San Diego Venture Group. It was a relatively rare public appearance for Luddy, and was billed as “a fireside chat” with Paul Barber, the San Diego-based managing general partner of JMI Equity, the investment firm (and related entitites) that provided the initial $9.3 million in startup funding to ServiceNow.

In the 13 years since Luddy started ServiceNow, the company has grown into a software industry juggernaut, with roughly 3,400 employees and a current market valuation of nearly $12 billion. At the time of ServiceNow’s initial public offering in 2012, Luddy owned a 9 percent stake in the company (about 13.4 million shares), and Forbes estimated his net worth at $400 million.

ServiceNow’s software, like Peregrine’s, helps big companies and organizations manage their help desk and IT services.

But where Peregrine installed its enterprise software on its customers’ internal networks, ServiceNow was among the software companies pioneering cloud-based, software-as-a-service. The company has expanded over time into more of a platform-as-a-service, and now provides Web-based software used by big organizations to manage their human resources, legal, and financial services. The company also enables customers to easily develop their own forms-based workflow applications.

Much of that growth has occurred since 2011, when ServiceNow named ex-Data Domain CEO Frank Slootman to succeed Luddy as CEO—and Luddy shifted into a more familiar role as chief product officer. But Luddy said that making the transition was one of the most stressful periods of his life.

Before Slootman joined the company, Luddy said he was initially unsure whether he should continue as CEO, or shift to a more familiar role in software development. He recalled that Sequoia Capital partner and ServiceNow board member Doug Leone took him on a tour of several Silicon Valley software companies, so he could meet CEOs and talk with them about their jobs. The process helped him realize that he didn’t have the kind of CEO skills that ServiceNow needed, “and I had no interest in acquiring them.”

Fred Luddy of ServiceNow

Fred Luddy

It may sound funny, Luddy told the audience, but “I wake up every morning, and all I want to do is write code.” Nevertheless, it was still hard to hand over control of the company to Slootman.

“When Frank came in, we had some famous fights,” Luddy said. Yet he conceded that the corporate culture at ServiceNow “had to become Frank’s culture. Our culture was very collegial, but it wasn’t really a culture of excellence and execution.”

Making that transition was a fractious and … Next Page »

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Bruce V. Bigelow was the editor of Xconomy San Diego from 2008 to 2018. Read more about his life and work here. Follow @bvbigelow

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