Fred Luddy, ServiceNow: A Bootstrapped Path to $45M in Revenue

1Mby1M Research · 1Mby1M Case Study

Interviewer: Sramana Mitra

This interview is part of the case study-based research and entrepreneurship education work of the 1Mby1M global virtual accelerator founded by Sramana Mitra.

Abstract

Fred Luddy bootstrapped ServiceNow entirely on his own for 18 months, building the initial product with a single $800 computer and no employees before raising any outside capital. Only after establishing paying customers did he formalize the company in July 2005, raising a modest $7.5 million in total venture financing on his own terms. This case illustrates the bootstrap-first pathway to scalable, capital-efficient growth that later became a hallmark of the 1Mby1M entrepreneurship methodology.

About Fred Luddy

Fred Luddy founded ServiceNow in early 2004 and served as chief executive and chief technology officer since the company’s inception. He was CTO at Peregrine Systems from 1990 to 2003. Prior to Peregrine, he founded Enterprise Software Associates (ESA) and worked at Boole and Babbage and the Amdahl Corporation. Fred attended Indiana University and Sir George Williams University, but found part-time programming for these institutions far more compelling than the classroom experience.

Interview

Sramana Mitra: Fred, give me some background about your childhood and early career.
Fred Luddy: When I was 16 years old, which was in the early ’70s, I had a part-time job as a purchasing guy at American Standard. They bought a high-end computer, and I walked into the data center where the Hewlett-Packard computer was and never wanted to leave. I was a moth drawn to the flame. Something pulled me in and made me believe that I wanted to be part of this data processing community. I’ve been that way ever since.

For more than the past 30 years I’ve been a programmer. It’s what I want to do every morning when I wake up, and it’s what I do on weekends and on long plane flights to Europe. In a lot of ways I started this company to support my habit, which is writing software.

Sramana Mitra: You are a nerd with a capital “N”.
Fred Luddy: You could spell the entire word capitalized.

Sramana Mitra: What did you do after?
Fred Luddy: I went to Indiana University, where I got a job working for the dean of economics. I was running part-time, which paid for my school. I managed to work for him for 70 to 80 hours a week, and I flunked out of school. I then moved to Montreal, where I got a job working for a French service bureau and had a wonderful time. It was a very technical company.

From there I ended up in Silicon Valley in 1976, before it was known as Silicon Valley. I went to work for the Amdahl Corporation. They built mainframes and I built a couple of software products for the hardware company. They became very successful in terms of the amount of revenue they generated and notoriety gained for the company. They were in the area of mainframe performance. I thoroughly enjoyed the company, and it was a wonderful experience. It was probably the most formative part of my career. There were a lot of very bright people from both a technical and a business perspective. Those people really gave me a phenomenal education to help me through the next 15 to 20 years of my career.

I then went to work for a software company called Boole and Babbage as a consultant. I worked on mount products that they sold, which were also reasonably successful in the mainframe area. At some point in 1988, I got disillusioned. I decided to quit my job and moved to Los Angeles to play beach volleyball. I found out a few things. I learned that I was short, slow and not a good athlete. Beach volleyball quickly went by the wayside and I started a software company called Enterprise Software Associates. It was a cataclysmic failure.

Sramana Mitra: What were you trying to do with it?
Fred Luddy: It was in the area of mainframe software tools. I have advice for any entrepreneur, which is if you’re starting a company and you have a partner, you should first find out if your partner is a convicted felon for fraud. I forgot to do that. I got talked into going into business with a man who did not have a good reputation. It was a very painful part of my career and a very expensive lesson. We racked up the normal amount of debt, which I had to pay as an individual over a three or four year period after the company folded. I became disillusioned with people in general. Fortunately I met up with John Moores, the founder of BMC. He pulled me into Peregrine. My career had an upturn from there.

Sramana Mitra: What were you doing at Peregrine?
Fred Luddy: I was the chief technology officer from 1990 until the end of 2003. We built software for the help desk and service desk market. The company grew from $4.5 million a year to $500 million a year. We acquired a lot of companies before Peregrine Corporation had to declare bankruptcy due to accounting irregularities. That was another wake-up call in my career. It happened after I had been working there for 13 years.

In 2003 I saw a phenomenal opportunity to build software that was totally different from what I had done before. It was different in the way I could deliver and charge for it. I started ServiceNow in October of 2003, and I built the initial software myself. We started selling a product over the Internet in early 2005.

Sramana Mitra: Can you explain what your goal was for ServiceNow?
Fred Luddy: I would like to tell you I had a brilliant business plan which I executed perfectly, but nothing could be further from the truth. I just knew that the Internet delivery of applications was very simple to use and was going to be a huge wave. Salesforce.com was becoming very popular, and things like myYahoo! and iGoogle were starting to appear.

Internet deployments were obviously a wonderful way to do business and a great enabler for a significantly larger group of people than client server software had been. When I started ServiceNow.com I had no idea what area we would attack. I clearly wanted to do something involving forms-based workflows. It turns out the whole service desk area was a wide-open opportunity for us given our Internet posture and delivery model.

Sramana Mitra: How do you define the service desk? Are you talking about the help desk?
Fred Luddy: Most large corporations will refer to it as a service desk or IT service management.

Sramana Mitra: In that context, what software did you provide? What part of that service were you addressing?
Fred Luddy: There are a set of practices called Information Technology Infrastructure Library (ITIL) which have four disciplines: incident, problem, change, and configuration management. Incident means something is broken and needs to be fixed immediately. Let’s say your laptop won’t boot up. The problem is, why did the laptop break? A change is how you fix the particular piece of technology so that the incident does not ever happen again. Those are the core disciplines of how most large IT organizations approach problems in this day and age.

Sramana Mitra: Your customer is not a help desk then, it’s an internal IT help desk. Is that correct?
Fred Luddy: Correct. It is not a customer service help desk for washing machines or anything like that. It’s definitely for internal IT.

Sramana Mitra: You decided to build a software and deliver it over the Internet in 2003. How long did it take you to put something together that you could start selling?
Fred Luddy: I had 12 customers during production, which was in the beginning of 2005. It took us 18 months and I had no employees. I had one $800 computer, worked out of a Teleco closet, and had a borrowed IP address.

Sramana Mitra: Did you bootstrap ServiceNow?
Fred Luddy: In the beginning it was completely bootstrapped. I had a couple guys volunteering who worked on nights and weekends, and that helped me out. However, it was really just me and a dozen customers at that point.

Sramana Mitra: How did you find those twelve customers?
Fred Luddy: I made phone calls and literally drove up and down the coast of San Diego County to talk small businesses into using our product.

Sramana Mitra: How much did you charge them?
Fred Luddy: Nothing. They were customers by virtue of the fact that they used our software and gave us feedback. They were wonderful about giving us feedback regarding what was right and wrong. That’s how we went to market. We didn’t charge them money.

Sramana Mitra: How did you get to the next level?
Fred Luddy: In July 2005 I decided to turn this into a real company. I wanted to generate revenue. I hired five people and raised a venture capital round of $2.5 million from JMI. We then started trying to sell the software.

Sramana Mitra: How did you sustain yourself between 2003 and 2005?
Fred Luddy: I’m a frugal person, so I lived on my savings. It did not cost much to run a company. Starting an Internet company requires a laptop and 200 pounds of Starbucks French Roast coffee. Anyone with a DSL connection can do it. Anyone can bootstrap an Internet company these days, at least one that’s in the SaaS business like ours.

Sramana Mitra: When you went back to your original twelve customers who had been using the software free and asked them to start paying, how did they react?
Fred Luddy: Positively. They signed agreements and agreed to pay us. We then went out and got new customers as well.

Sramana Mitra: How much were you charging at that point?
Fred Luddy: We were charging about $25 a month per seat. We currently charge around $90 a month per seat.

Sramana Mitra: How many seats did your first customer buy?
Fred Luddy: It was a very small deal. Our very first contract was with a company called WageWorks in San Francisco. It was for $2,600 a year. It took only three months to generate real revenue, so we were ecstatic. We could not have been happier.

Sramana Mitra: How were you selling such small deals? You couldn’t possibly do those all in person.
Fred Luddy: No, we couldn’t, which is why we absolutely had to find something more scalable. We did start out very inefficiently selling direct. We used the telephone, and we were primarily trying to close deals over the phone. We would visit some potential clients. Each deal we earned became larger than the one before. We recently signed deals for multiples of millions of dollars per year. We have many multimillion dollar customers now.

Sramana Mitra: How do you go from selling $2,500 a year deals to millions of dollars a year deals?
Fred Luddy: Unfortunately, we didn’t have a grand plan or scheme. We worked hard, but I think a lot of it has to do with luck. We first sold to WageWorks, and the guy who bought us there went to work at Edmunds.com. He recommended Edmunds.com buy our product, and they bought at $35,000 a year. It just started to proliferate and spider out from there. We had more and more customers at increasingly higher price points.

At first we thought we would serve the mid-market, but we quickly found out that we were far more appealing to the global 2000. They have large IT organizations and a lot of employees who are the customers of that IT organization. We wasted a full year on the mid-market. We really thought we were going after a certain market.

Sramana Mitra: Who was your first enterprise customer?
Fred Luddy: We had a couple of big customers very early. Edmunds.com was a big customer of ours, as was Qualcomm. TIAA-CREF was another. Those companies became a beachhead for us to get follow-on customers such as Hyatt.

Sramana Mitra: What year did you land Qualcomm as an account?
Fred Luddy: I think that was in 2006.

Sramana Mitra: That’s fairly early in the game to get a marquee customer. What was the revenue ramp from starting your company to getting enterprise deals?
Fred Luddy: Our revenue is a recurring revenue stream. The first year we did $850,000. The second year we were at $5 million, and in the third year we were $13 million. We finished the fourth year at $28 million. We are now about a $45-million-a-year recurring revenue company. Of course, the year is not over and we expect to grow some more.

Sramana Mitra: How much venture capital did you raise in total?
Fred Luddy: We raised a total of $7.5 million in venture capital. We’ve been cash flow positive for 36 months.

Sramana Mitra: Tell me a little bit about your journey. What was the process of building a team to support a $45 million, high-revenue company?
Fred Luddy: A lot of the people we have hired are people I knew from other companies and who I worked with. We have also hired people who have worked for some of our customers. At first I hired about four or five people who were friends and very close colleagues from Peregrine. Then we hired some people from a number of different technology companies to grow out the different areas of our business such as support, operations, sales, and marketing.

Most of the people whom we hired who became the core of the company were people I had known for five to ten years. Another bonus is that the people I originally hired have reached out into their networks, and that’s how we found our second wave of employees. We have been adding more and more employees ever since.

Sramana Mitra: Talk a little bit about your personal evolution. You said that you liked to program day and night. How has that worked for you as the CEO of a sizable company?
Fred Luddy: One of the great things for me is that we have a wonderful senior management team. They can be relied upon to run the business day-to-day. My job is largely setting the direction for the company from a technology and market approach. I work with various groups of people in different areas to try to take our marketplace up a couple of rungs.

For me, the initial days of the company were a great time. I was able to program 16 to 17 hours a day. That is down to 10 to 15 hours a week now. The balance is very different now. It is very enjoyable for me to meet with customers, come back and meet with the employees, and communicate to them what I sensed about the customer pain points. I influence how we build technology that directly addresses our customers’ pain points. It’s a very exciting job. I don’t get to program as much, but I do get to stay involved in the technology. Overall it has been a good balance for me.

Sramana Mitra: How many enterprise customers do you have now?
Fred Luddy: About 350.

Sramana Mitra: I talk with a lot of CIOs. They tell me that 25% of their architecture is cloud computing. How does the role of the service desk evolve in that scenario?
Fred Luddy: As these customers start to move more and different apps into the cloud, they still have to manage those applications and the vendors.

Sramana Mitra: How do you handle that process?
Fred Luddy: It’s about managing the cloud from the cloud. If people decide that they are going to put a bunch of their development and testing infrastructure into Amazon EC2, then they use software like ours to manage the deployment and retirement of their EC2 instances. It goes hand in glove. There are still management challenges from an incident, problem, and change perspective. There are still issues with outages and configuration changes. Our software fits in great with that.

Sramana Mitra: If I’m using a CRM solution and it goes down, then as an IT shop I have no control over that. If it is a vendor-side problem, how does your software help me?
Fred Luddy: You would have users of the CRM system who are going to call your central IT help desk. Those people are going to turn around and talk to your vendor to find out what the issue is. They would manage it in conjunction with the SaaS-based vendor. Once the service is resurrected, they would want to do problem management with that vendor. It requires the same amount of managed work. The difference is that the people doing the work tend to be at a different organization.

Sramana Mitra: Can you talk about your competitive landscape? What was it like when you started, and how has it evolved over the past two years?
Fred Luddy: When we started our competition was either home-grown databases such as Excel and Access or SMB solutions such as TrackIt, which was sold by Intuit. Today our competition is primarily BMC, Hewlett-Packard, Computer Associates, and IBM. In all of those cases their products are very old technologies. We call them Soviet-era technologies. They were built in the 1980s or early 1990s, and they look like Soviet-era technology. They have the feel of a Soviet military airplane. It’s unappealing to anyone who uses Facebook at night. These people come back to work and wonder why they have to deal with that.

We are competing with established corporations that have significant relationships with their customers. We are showing our prospects and customers something that we think is several orders of magnitude different from what our competition is selling, and our competition has reacted. I think of the quote from Mahatma Gandhi that says “first they ignore you, then they laugh at you, then you fight them, and then you win.” Our competition first ignored us, and they laughed at us, saying that we were just a cute little thing for small companies. Then they started to find out that we were taking a lot of their customers, and so they started fighting.

When they adjusted, they did the things we wanted them to do the most. They took their client/server products and hosted them at a data center so that they could call it a Software as a Service solution. It was nothing more than a client/server ASP solution. Prospects see through that instantly.

We think it is wonderful because our competition has validated our market approach. If you look at our competition and our revenue, our revenue is probably equal to the daily pretax revenue of the Hewlett-Packard Corporation. We are clearly buzzing around their ears. Nonetheless, I think these companies have taken notice of us, which is good for the marketplace in general. We have introduced a new way of doing things that has broken up the oligopoly.

Sramana Mitra: Your company has been disruptive to the marketplace, which has forced your competitors to change their entire business model to address your success.
Fred Luddy: Exactly. It’s similar to when Southwest came on the scene and dropped a whole new way of doing business for airlines into the market. We have a very different model. We’ve been very good for the marketplace in general, and we’ve helped our customers lower a lot of cost. We tell our prospects that if they tell our competitors that they are talking to us, they will get it at a discount, so we’ve already saved them money.

Sramana Mitra: How big is your total available market? What is your assessment of the service desk market?
Fred Luddy: The service desk market is $1.2 billion to $2 billion a year. However, we have a much broader vision. Based on our customer feedback, we believe that there is a need for enterprise resource planning (ERP) for IT. If you look at most large IT organizations, they will have 40 to 50 different processes to manage their operational areas, their application development area, their application portfolio, and demand management. We believe that should all be offered under a single portfolio. We can offer all of that, not just the service desk.

Application portfolio management, performance management, capacity planning, budgeting, and financial aspect cost management can all be done in a single system of records. Upper management in the IT organization as well as the people turning the wrenches at the lower levels should all have an idea of what should be done, when it should be done, who it should be done by, who approved it to be done, how much it will cost, and what risks there are associated with doing it. Even though we are in the service desk market, which is a $1.2 billion to $2 billion marketplace, we really believe that our approachable marketplace is probably a lot closer to $4 billion to $6 billion a year.

Sramana Mitra: Your strategy is to move into that $4 billion to $6 billion marketplace with a SaaS model?
Fred Luddy: Yes. We are forthright in that we use our customers as our development partners. We ask them where their current pain points are and what we can do to help them. We have a project with Staples Corporation. There is a woman there who is phenomenal at application portfolio management, and she has phenomenal knowledge of how that business is supposed to be run. She is in fact telling us how we should be building out some of our applications so that they reach a broader audience inside the IT organization.

Sramana Mitra: What does the rest of the competitive landscape look like? Are there smaller players who perhaps are addressing some of these areas inside the IT portfolio? Are there potential acquisitions you could make to assist you in opening up this new market area?
Fred Luddy: One thing that makes our company very different is that we have no plans whatsoever to acquire other technology. We believe in organically built software, and we are going to build it ourselves. That is the same approach SAP, PeopleSoft, and Oracle all initially took. We believe that these systems all have to work together which will give us a distinct, almost unfair, competitive advantage against others in those market segments.

Sramana Mitra: Are there even any companies out there that have technologies worth acquiring that are in what you term the ERP for the IT market?
Fred Luddy: Some, but not too many. Companies such as Hewlett-Packard and Computer Associates made dozens and dozens of acquisitions. They would approach the ERP for the IT field with five or six acquisitions, none of which are integrated with each other. If you have an ERP system that wants to be a continuum of work and is not integrated into other systems, then you do not have a solution to a problem. You have a bunch of point solutions that do not necessarily work well together.

In the area of application portfolio management, most of the small companies that were successful in that area have already been acquired. Mercury Interactive acquired a bunch and was subsequently acquired by Hewlett-Packard, or they were ultimately acquired by Computer Associates. We really believe that taking an approach more like SAP’s or PeopleSoft’s approach, which means building the software organically so it is cohesive, is a much better approach for our customer base.

Sramana Mitra: How many people do you have now?
Fred Luddy: We have 135 employees.

Sramana Mitra: That is impressive. Earning $45 million a year with 135 employees is a very profitable structure.
Fred Luddy: Thank you.

Sramana Mitra: Do you intend to run this business and grow it organically? Do you have any sort of exit strategy?
Fred Luddy: We have never had an exit strategy. John Moores is an initial backer of our company and a founder of BMC. He said that if you have happy customers, continue to innovate, and make a reasonable profit, then there is no need for an exit strategy because everything will take care of itself. We have adopted his philosophy. We did not build the company to be sold or flipped. We may entertain going into the public markets if they look favorable to a company like ours, but when I started the company I had no desire to sell it to anyone. I built it so that we could build a large company through which, in the long run, we could make a difference.

Sramana Mitra: The moment you take venture capital financing you have to exit. Exiting to the public markets may be a good option, but the financial structure of taking VC funding means you have no choice but to exit. That may even be required not too far in the future.
Fred Luddy: That is true. One of the things beneficial about our venture financing is that it was at the front end of a 10-year fund. They do not have to show a return for another six years. You are absolutely right. If we do have to have an exit strategy, then it will be as an IPO.

Sramana Mitra: Then your exit strategy, in a nutshell, will be an IPO.
Fred Luddy: That is fair.

Sramana Mitra: I enjoyed listening to your story, and I wish you the very best. Thank you for your time.

Key Takeaways

• Fred Luddy bootstrapped ServiceNow entirely solo for 18 months, working out of a Teleco closet with one $800 computer and a borrowed IP address, before hiring anyone.
• The first 12 customers used the product for free in exchange for feedback; only after formalizing the business in July 2005 did Luddy begin charging – starting at roughly $25/seat/month.
• Revenue grew from $850,000 in year one to $5M, $13M, $28M, and roughly $45M by year four/five, funded on just $7.5M in total venture capital, with 36 months of positive cash flow.
• Luddy bootstrapped ServiceNow before raising a modest 2.5M (7.5M total), validating the product and securing paying customers first. This gave him leverage and preserved equity. This sequencing, validation before capital, is central to the 1Mby1M methodology.