Crucible Moments Returns for S2: The ServiceNow Story ft. CEO Frank Slootman & Founder Fred Luddy

0:00On training data, we learn from innovators pushing forward the frontier of AI. Today, we're bringing you something different. It's the story of a company currently implementing AI at scale in the enterprise, and how it was built from a bootstrapped idea in the pre -AI era to a $150 billion market cap giant. It's the season 2 premiere of Sequoia's other podcast, Crucible Moments, where we hear from the founders and leaders of some legendary companies about the crossroads and inflection points that shapes their journeys. In this episode, you'll hear from Fred Levy and Frank Slutman about building and scaling service now.

0:40... It was much more existential than, oh, you know, we got some tough challenges. It's all I had. I didn't think we were going to live through this. This is so huge, so enormous. How do you survive this? because there are no good explanations, there are no reasonable stories to be told. This is just insanity.

1:04Welcome to season two of Crucible Moments, a podcast about the critical crossroads and inflection points that shaped some of the world's most remarkable companies. I'm your host and the managing partner of Sequoia Capital, Ruluf Huerta.

1:22Picture the office mail room of the 1970s. In that mail room were stacks of typewritten forms, a form for expense reports, a form for vacation days, a form for purchase orders, and so on. A few decades later, a programmer named Fred Luddy was determined to reimagine that workflow system for the Internet age and the IT department's tasks with managing it. His low -code, no -code solution would be able to handle anything from reporting a broken laptop to managing the world's largest particle physics lab. Today's episode is about ServiceNow, a cloud application platform for digital workflows. ServiceNow evolved from an IT service tool into a workflow platform that can be used in any department.

2:13With this evolution, its market cap has grown to over $150 billion. Difficult questions and hard choices shaped service now's journey. How does one rebuild their life after catastrophe and devise an innovative idea in the process? When do you know it's time to hand over the role of CEO for the good of your own company? And how do you decide whether to take what seems like a once in a lifetime offer to sell your company, or take a gamble and remain independent. These are the crucible moments that forged service now. I'm Fred Lutty and I'm the founder of ServiceNow. My journey into coding was really pretty much an unconventional one.

2:59I left home at a very early age right around the same time I got my driver's license and started working in a factory. In the office part of the factory, a machine came down the hallway that was wrapped in plastic and this clear plastic. And I didn't even know what the machine was but I followed it. And it went into this room with this white raised floor and people were wearing lab coats. And somehow I knew that that was the place where I needed to be. For a couple of weeks or months I poked around and tried to find out what was going on in that room and found out that it was a computer an HP 2100C and that there were people building applications to do things like payroll and order entry.

3:41I found the passion of my life at that moment. I never really wanted to leave that room until I went to a bigger computer room. And that holds true today.

3:55In 1990, Fred became CTO of Perigrant Systems, a company that built some of the first IT Service Management Software. But in 2002, the company faced a major crisis. The ACC would find the company guilty of massive accounting fraud. Baragran went bankrupt, and several of its top executives went to prison for fraud, embezzlement, and lying to regulators. I had all of my net worth tied up in this company, and my net worth went from 35 million to zero in an instant. I had fear because I wasn't sure what I was going to do next. But then there was relief because fundamentally I didn't like working there.

4:42The year at this point is 2002. You could see on the horizon that there is going to be just tectonic shift. It serves now kind of sad at the intersection of two major tailwinds. My name is Pack Rady and I'm a partner at Sequoia. Tailwind number one was as simple as the cloud transition and the benefits that this new business model provided for software companies.

5:09The second was a very specific tailwind, which is this thing called ITIL, or ITIL, which stood for IT infrastructure library, and it was basically a language for talking about what was happening in IT. And it coincided with this broader transition from the heads of IT, the CIOs, being hackers who had sort of gotten promoted up into the role to being professional business people who were more likely to have an MBA than a CS degree. ITIL defined different processes for running your IT organization. Largely break fix, change management, upgrades, application development cycles, security, risk, etc.

5:55Nobody to that point had built something to this ITIL standard. So there is no set of applications available. So we ran into really, I think, a perfect storm, if you will, of market opportunity. The idea for ServiceNow was that we were going to create a completely extensible low -code, no -code platform that would let you build applications with just a tiny amount of technical knowledge. We really wanted to build something that empowered people that had been previously intimidated by technology stacks. But my heroes were Steve Jobs and Bill Gates and Paige and Brynn and they all started it, you know, right out of puberty, right?

6:40And all of a sudden they're building these great corporations and I think what the heck am I thinking trying to build a company, especially starting it after 50? Fred was a founder that had been burned before. He had a chip in his shoulder. I'm Doug Leoni. I'm a partner at Sequoia Capital. If you want to do something special, one, two, he had domain expertise, so he knew what he wanted to build, he had crystal clear vision. Those are the best kinds of founders. In 2004, two weeks before his 50th birthday, Fred Ladi launched ServiceNow from his house, with no resources and no sales team to pitch the product.

7:22He took to the road driving up and down San Diego County, looking for prospective customers. I asked people, would you please use our software for free, but I'm asking you in return to give us some kind of feedback on how it's working. We worked with them on a day -and -day out basis because we wanted to make sure that they were properly engaged and actually driving value from the software. And this turned out to be a really good way of getting into the market. So the evolution of the service now platform was really inherent in its initial design, which was based on simplicity and approachability.

8:04And this idea turned out to be a fantastic one, and a not good at all one at the same time. By not good at all, I mean that we built this platform, and it was similar like to creating a computer language. What can it do? Well, it can do anything you want. Well, what business problem can you solve for me? Well, what business problem do you have? We'll solve it for you. So you go around in this circle because it didn't solve a specific business need. Almost at the outset, service now faced a crucible decision. How do you take such a general product to market? Do you stick to your broader vision of a Swiss army knife solution?

8:44would you frame it as something more specific? And so, even though when I left Paragrin, I swore that I would never, ever, ever go back into the IT service management area, it turns out that my definition of never was about nine months. Fred took service now's broad architecture and refined it into a help -dest replacement tool, specifically for IT departments. But Fred also decided on a seat -based licensing structure with no limit on seats. This way, a company could organically begin using the product across the entire office, not just IT. So the product that he had built was, in his words, just a forms -based workflow on top of a database.

9:32The specific workflows that ServiceNow was targeting was the resolution and management of help desk tickets. You join a company, you get a laptop, you have questions, you want to be integrated to the systems in the corporation. And what you really need is a back and forth forms application to do that. Somebody submits a helpdesk ticket. You got to figure out if that incident speaks to some sort of underlying issue. You got to resolve the incident while also inspecting the issue and you got to keep going until you get a fixed. That's a basic process of managing things through a workflow. That's the same thing that you would do if you were tracking a candidate through the candidate pipeline.

10:19It's the same thing you might do if you were tracking a prospect through your customer pipeline. It's the same thing you might do if you were processing an insurance claim. It's Ammonately more extensible, eliminating more scalable, eliminating more secure, and at the same time, it's more approachable. Using IT as a lever to encourage adoption across the entire organization was a strategy frid -cooled going wide. We had a couple of different customers that were very much leading edge in showing us this ability to go wide. And probably my favorite one is CERN, which is a particle physics laboratory in Europe.

11:01They offer four or five thousand different services to the visiting people. And it could be anything from getting a classroom, getting a whiteboard, complaining that the toilet is leaking or scheduling time on a large halteron collider to do a particle physics experiment. And CERN built 4 ,000 of these tiny little applications that serve this entire community, and they came and presented it at our user group meeting. And I think the people that were most blown away were those of us that had built the platform, because we thought, my God, this is awesome, that they could build these sets of applications.

11:37Slowly, the company was growing, gaining enterprise customers like Edmunds, and Qualcomm. And I would say that the thing that told me that the company was going to do well was the enthusiasm that our customers had to make reference calls. They said, let us talk to your prospects. They actually asked us if they could talk to our prospects. And I had worked in software companies where digging up a reference call could take a month because our customers hated us so much. We kept meeting people from the VC community. First of all, they come in and assert that they were different. Then they tell us exactly the same story that we heard from the prior person.

12:19And then they would say, well, listen, you guys are doing great. And they say, let's keep in touch. And then they leave. And we looked at each other, my CFO and I thought, well, I'm not sure we're getting any value out of these. So in Pat started calling, like, oh, here's another one of these people from Sandhill Road. In 2008, I started emailing Fred three out of four emails went unanswered. And then the fourth email might have been a polite, hey, thanks for thinking of us, but we don't need any money sort of thing. I think during one of those responses, he said, but let me give you a little update on the business.

12:52And the little update on the business was a couple of sentences that basically painted the picture of a business that was thriving. And so at that point, I transitioned from the, hey, do you want to get on the phone, emails to the hey, I'll be in San Diego next Tuesday. Do you want to grab lunch? And of course, if you were to respond, then I would fly to San Diego for lunch. I sent them one of those and He responded, I want to say at 11 .30 AM on the Tuesday that I told him I was going to be there and said, yeah, yeah, do you want to swing by or are you still open? And I responded immediately and said, ah shoot, my trip got pushed in next week.

13:26How about same time next week? And he said, okay, great. So Doug and I flew there for a lunch on a Tuesday, which is the first time we met for Edmund Person. When you talked with them, and this is the thing that really stood out, the clarity of thought and the focus on first order issues wasn't possible to miss. He was hungry, he worked like mad, and he was building a great business. And so it seemed like something we ought to do without much thinking. And then as the conversation progressed, Doug has this magical way of sort of getting a complete picture of a founder and of a business, not just the stuff that the regor to share, but also the stuff that maybe they're not so eager to share.

14:04When we met Fred, we gave him the picture of Sequoia. I remember we had 10 slight pitch. It talked about all the mistakes we've made. And all the mistakes we commit, our companies would not make again because we've seen those mistakes. I remember Fred took that slide and kept it in his binder. And along the way, I asked them, what's the biggest challenge you have now? He said, keeping our systems up, our data centers are getting inundated by volume. And I said, I know just a person that can help you. and he took the name and the card and I remember that I got a call from Fred a week later he said you've already helped me more than my existing investors have helped me up to now and I knew when he said that we had a shot of becoming investors.

14:51In late 2009, Sequoia laid service now's 41 million dollar series D -Round. Service now gained household name customers like Deutsche Bank, Intel and McDonald's. The company was on a tear, doubling revenue annually. But the problems with outages that Fridge shared with Sequoia in their first meeting were only mounting. It was clear to us that the company was being just buried under its own success. The number of customers it was getting was too fast. It's probably the only time in my life that I suggested we slow down growth because I didn't think the den management team could absorb the volume of business coming our way.

15:36And in Fred, a wonderful founder, you also have a person that's much happier coding than interfacing with people. And unfortunately, as a chief executive officer, you have to interface with people. He was a visionary, but just left to his own wishes, he'd rather be left in a corner room and code. service now was at a crossroads it needed leadership to get to the next level where would it come from? after Sequoia made the investment Doug asks me Fred do you want to be the CEO or do you want to be the product guy because in our experience you can do one but not both and Fred will support you in whichever path you want to take but I don't think you'll have the bandwidth to do both And I took this under advisement and did absolutely nothing.

16:30We did have an idea for a process that we could run to help him figure it out. And so we brought Fred up to the Bay Area to meet with a bunch of people who were executives or founders of various shapes and sizes. And so we wanted Fred to hear all of the different sides of the story and all of the different pros and cons to the various configurations that he could set up for himself. It was a fairly exhausting day for me anyway. They put together all these meetings we drove all over the valley. And then that night, Doug and Fred and I go to dinner and I just remember Fred having this big grin on his face.

17:07And they were like, Fred, what are you grinning about? He's like, I know exactly what I want to do. I'm like, okay, great. What do you want to do? I looked at Doug and he looked at me and I said, Doug, I don't have any of the skills that those people have that are CEOs, and furthermore, I have no desire in developing them. I'm your product guy. We need to find a CEO. But we went through a really exhaustive search to find somebody. We want an omission to find someone that could be his business partner. Someone who went to Stody was coming in as a CEO, but he would have to partner with Fred, not in running the business, but as a business partner and if that marriage work, we were gonna have a home run opportunity.

17:53Doug had a favorite, I had a favorite. We did not have a shared favorite. We both didn't quite have the meeting on the minds. And then we came across Frank Slootman, who was then an operating partner at Greylock. And we got wind of the fact that he had known that investing was not for him and he was looking for a CEO job. Frank is a doer. Frank is not, you know, all sugar, lollipop and apple pie. Frank is a real deal. My name is first approached by Sequoia. I was slightly incredulous because this was help desmanagement. It was the most boring business on the planet, right? My name is Frank Sluubman and I was the Chief Executive Officer of ServiceNow.

18:37When I started making inquiries and yeah, everybody kind of replaces that software every three years and eventually they'll just go away. So I was getting all these conflicting signals about, wow, is this a hot shit company or is this something that is incredibly boring and has no real strategic mojo to it? So the one thing that stuck out of course is the company was growing fast. I mean, velocity is the mother's milk of venture capital. Okay, I mean, when you have velocity, you got something. And when you don't have it, you got nothing. So when you have velocity, you're going to start looking closer and go like what's going on here?

19:17I think what intrigued Frank was first of all he really didn't believe how well we were doing financially from a cashful positive perspective at this age of the company. There's high growth there. There's velocity and there is an incredibly passionate customer base there. So I sort of figured you know what I can figure out the rest. I think we got to most important things covered here. In 2011, Frank Sluitman became CEO of ServiceNow and Fred became Chief Product Officer. Leadership change is always a crucible moment because you never know what you're going to get. It's a system full of people and even the best and most capable and well -intentioned people are still human beings and when you throw somebody new into the mix, no matter how talented that person is or how much you might respect them, disagreements are going to come up.

20:14Organ rejection is a possibility and there's a lot of work that you have to do to get the team to gel. The first 90 to 120 days that Frank was CEO was probably the most difficult of my career. That was used to being a benevolent autocrat at the corporation and now I had a position where he was in that seat. Frank is a do something yesterday kind of person. He doesn't mess around your lead follow or get out of the way kind of leader. There's a new sheriff in town moment that does stick out and that was the company was based in San Diego but then it opened a Bay Area office and they had tickets to one of the San Diego sports teams but they did not have tickets to any of the Bay Area sports teams.

21:02And when Frank found out about this, he said, huh, well, that's not fair. That one office has tickets to go to the games and the other office doesn't get rid of the tickets. And a couple of weeks later, he heard that some people had gone to the game and he went to the person who he deputized to get rid of the tickets. And he said, what happened? I thought I told you to get rid of the tickets. And he said, well, you know, people were already signed up for the games and people really liked them. So So we decide we just keep them through the end of the season. And Frank said, okay, you don't work here anymore.

21:34And it's a trivial thing, but the message that he needed to make sure that people heard was when I asked you to do something, that's not a request, that's an order. I remember calling Doug and telling him that I'm not sure that this was the right thing. And his only advice to me was give it 90 days. And I thought, well, I can do that pretty easily. Early on, Frank said, well, this is going to be our number one priority. He sent this email out to, you know, six or seven people. And I said, well, I disagree. I don't, this can't be our number one priority. Our number one priority should be this. And he calls me and he said, Fred, there can only be one CEO.

22:14He said, it's okay if you don't want me to be the CEO, but there can only be one CEO. And I said, you know what? You're absolutely right. there is absolutely one CEO. And that really set the tone for our relationship in that if I disagreed with him and it was something that was perhaps where people would get emotional, then he and I discuss it one -on -one. We needed him. The question was very much, are you gonna be here? Well, I'm going to be here and there were many reasons we need a him because he was a visionary, he was a driver, he was an innovator, and he knew where all the bodies were buried.

22:54There were a lot of reasons why we needed Fred in a worse way. I mean, that was just not an option at all. He had to be there. What Frank faced is a company which had more issues than what I understood, maybe anybody understood. The thing that really scared us is that we were a cloud application platform. At a time when cloud infrastructures didn't exist. Fred jokingly said when I joined, he said, oh, when we first got started, we bought a used Dell server on eBay and we stuck it in the closet and that was our cloud. That was the data center or whatever had to pretend to be a data center. Frank realized far more so than I did what was going to be necessary to build out the resilient and scalable architecture that we have today.

23:49We have customers like General Electric, UBS, Deutsche Bank, the largest institutions in the world who had committed themselves to a service -noust strategy. One of the things about our system, which is different from a lot of others, is that our Our customers can't take an outage of even several minutes. And by that, I mean several minutes ever.

24:17I remember having a conversation early on with the chief operating officer at Doetsubek, and he said, you must succeed. He says, we have no way back. And I'm thinking at the same time, yeah, and we're running on a deal, server running out of clauses. As many days we were up and down in sightways that after a while became super intense because we were not growing out of that situation. I had CIOs from Johnson and Johnson, which just called up and say, what the hell is going on over there? We didn't even understand the problem. So people looked at us like, you guys don't know what you're doing. And they were not wrong.

24:55We didn't know what we were doing. I remember Frank telling me that for the first year he went to sleep terrified of the calls he may get it in the middle of the night. It was much more existential than, oh, you know, we got some tough challenge to solve. I didn't think we were going to lift through this. I mean, it was one of those things. This is so huge, so enormous, right? How do you survive this? Right? Because there are no good explanations. There are no reasonable stories to be told. This is just insanity. Facing potential collapse, ServiceNow needed to figure out how to build a reliable cloud network.

25:35We started to enlist all kinds of different people, different resources. Everybody had an opinion, everybody had a recommendation. But it was a discipline that was not understood or developed at the time. We went down this path and we had multiple false starts where we said this is not going to work. And we had to part ways with people several times. We were like looking for water in the desert. The terms are that in the end are VP of engineering that was part of the incoming team. Dan McGee was an incredibly strong process and discipline guy. And he really figured out how to homogenize the infrastructure, meaning that everybody ran on exactly the same software stack.

26:19So, homogenizing, making everything absolutely the same in terms of patch levels, it's service levels. All these different things, that process, you know, started to really freeze out, you know, a lot of these problems. They were just completely cookie cutter in the end, and that helped us really get over this chaos of mayhem that we experienced in the early days. It went from being the absolute worst to being one of the best in the industry, and also So incredibly economically viable as well. Gross margins became very, very strong. Among the other issues Frank faced were unworkable contracts with customers that had to be rewritten, a lack of patents for its intellectual property that put the company in danger of catastrophic lawsuits and the need for more talent to fill out every department, from sales to research and development.