PagerDuty's systems of growth

Ethan Kurzweil analyzes the driving forces that propelled PagerDuty from early stage to IPO.

By Ethan Kurzweil 4.12.19 Developer

“We’ll page you,” I remember telling the founder, Alex Solomon, as I passed him a Motorola Advisor II. It was 2014, and we were wrapping up one of our final meetings with PagerDuty, the incident response platform for IT departments. The startup had only 89 employees with an outstanding trajectory. However, what resonated most was PagerDuty’s deep understanding of the DevOps movement and bringing fantastic user experience to this often overlooked group.

DevOps teams monitor the technology we depend on to run smoothly. They also troubleshoot issues during downtime and manage the business systems when important signals require immediate action. (If your company boasts of 99.99% uptime rates, thank them!)

Compared to the alternatives at the time, PagerDuty’s dispatch system for IT operations teams was revolutionary. Its approach to alerting people on call, with its comprehensive list of third-party integrations and staying “Switzerland” by working with all vendors, convinced us that PagerDuty would be the company to change the way teams and enterprises manage and monitor increasingly complex, digital systems from that point onward.

A few hours after handing Alex the Motorola Advisor II, we paged him with the message, “Congrats we’d like to fund you!” (By the way, that was the character limit for the top of the line Motorola model we procured on a day’s notice.) We then presented a term sheet to lead their $27.2 million Series B financing.

“This small, yet delightful gesture demonstrated Ethan’s commitment and willingness to always go above and beyond in our partnership,” Alex told us recently.

Five years later, we couldn’t be more proud of how PagerDuty has grown and evolved over the years, including its ever-strengthening leadership and Alex’s superb judgment in recruiting Jennifer Tejada to take the helm as CEO in July 2016.

Jenn ushered in years of growth while championing the importance of inclusive leadership and building a diverse team. With more than 500 teammates around the globe, PagerDuty’s leadership team stands out: 40 percent of women and 25 percent of underrepresented people hold management roles.

In the spirit of celebrating PagerDuty’s IPO, we look back and examine the lessons founders can glean from the rise of this real-time operations platform.

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The systems of growth that turned startups like Shopify, Twilio, and SendGrid into B2D powerhouses–which included elements such as replacing internal builds, land and expand go-to-market characteristics, favorable customer acquisition costs, and network effects–were also the forces that propelled PagerDuty forward.

Forces that vaulted PagerDuty to market leadership

During our due diligence in 2014, the growth in PagerDuty’s users, customers, and revenue were all positive indicators of its success. However, our confidence in the startup deepened because of three forces already in place that matched directly to our eight laws for developer platforms, and not necessarily because of its immediate business outcomes.

1. PagerDuty streamlined the complexity of the DevOps ecosystem. In doing so, the company eliminated hundreds, if not thousands, of internal developer hours, saving millions of dollars for an enterprise.

To this day, eliminating the need for non-core skill sets for developers is incredibly valuable and drives the creation of most B2B SaaS solutions. (See Developer Law 7) For example, Twilio allows developers to outsource communication applications (voice, SMS, and video). Shopify releases developers from building e-commerce checkout flows. Similarly, PagerDuty eliminates the need for companies to construct and maintain an incident management system or deal with the constant upkeep required of configuring and reconfiguring as many as 300 third-party systems to keep up with the nature of real-time work.

Integrations and predefined rules reduced “alert fatigue” and streamlined the frenetic DevOps experience, as stated in our internal Investment Recommendation:

“It’s not uncommon for a large enterprise to have hundreds of monitoring tools, such as Nagios for server monitoring, Pingdom for website monitoring, and New Relic for application performance.

Typically, signals are blasted to one person or a whole IT Ops team, with no prioritization or filtering or mechanism to escalate and route alerts to the right person. Not only do the critical signals get lost in the noise but also alert fatigue itself becomes an issue with the noise of continual false positives constantly hitting the inbox or SMS account of the low-level ops person.

PagerDuty ingests incoming alerts from virtually every monitoring tool. As alerts are ingested, PagerDuty de-duplicates and normalizes them to cut down on noise.“

Implementing an easy-to-use and robust solution freed developers from internal tool building and DevOps professionals from the noise so they could all concentrate on more compelling and strategic priorities. That way, teams could get ahead of customer experience issues, resolve bugs more quickly, and even automate solutions so leaders could turn any signal into an orchestrated, cross-team response with the right team members.

2. PagerDuty’s go-to-market strategy meant that revenue would grow as the customer grew.

At Bessemer, we’ve observed that the most successful developer platforms deliver predictable, recurring revenue with opportunities for expansion. The best pricing strategies also take advantage of selling a service that scales up or down . In this same vein, PagerDuty offered a metered service by selling access to the platform by the seat. (See Developer Laws 1 & 2)

Pulled from our internal Investment Recommendation, we saw how PagerDuty’s pricing strategy created a natural opportunity for best-in-class dollar-based net retention:

“As accounts have expanded, PagerDuty is starting to see meaningfully-sized deals. A major athletic fashion company began with two users paying $40 per month with a credit card and now pays $10,000 per month (they are still paying with a credit card). A video streamlining platform moved from 300 users at $40,000 per year to 900 users at $150,000 per year. These are not one-offs. PagerDuty sees this type of expansion across the board.”

Companies noticed that implementing PagerDuty was a much better solution than building a version from the ground up. At which point, DevOps and IT users would evangelize the platform internally to other teams, adding more and more users to the system. In our diligence, we learned that each new logo brought an average of 10 net new users onto the platform, and they were relatively sticky ones. At that time, logo churn rate was only at one percent.

This trend became even more salient as PagerDuty matured, according to their recent S-1:

“The majority of our revenue is generated from our existing customer base. Often our customers expand the deployment of our platform across large teams and more broadly within the enterprise as they realize the benefits of our platform. We believe that our land and expand business model allows us to efficiently increase revenue from our existing customer base.

As of January 2019, fewer than 5 percent of customers with greater than $100,000 in ARR were new customers, which reflects the typical customer behavior expected of our land and expand business model–starting with a smaller-sized subscription and expanding it over time. Additionally, our dollar-based net retention rate has consistently exceeded 130 percent over the last three fiscal years.”

3. PagerDuty built a product that gets better as more people use it.

Similar to how people get more value from Facebook or Venmo as the number of connections increases over time, the same goes for PagerDuty. The more seats people occupy within a company’s PagerDuty ecosystem, the more value accrues for the teams that are live on the system. Dispatches, after all, are only as useful as the people who are on the platform so everyone can get the right alert at just the right moment.

Increased connectivity on PagerDuty results in a flywheel of product value and customer retention.

Increased connectivity results in a flywheel of product value and customer retention. As Bessemer’s fifth law of developer platforms states, advocacy on social media is one of the most influential marketing accelerants a company could ask for (which PagerDuty also has!). However, nothing can match the powerful network effects where more customers encourage more integrations and data. This virtuous cycle made the platform even more valuable over time, and in turn, brought on more customers. (See Developer Law 6)

Leadership as a growth strategy

As we look back on the forces that created PagerDuty, we can’t help but see how integral every team member was in the company’s evolution–starting first and foremost with its founders, Alex, Andrew, and Baskar. They were first inspired to build the SaaS solution after working on the Amazon operations team. Alex handled incidents with the core Amazon.com e-commerce site, which had several well-designed internal tools for routing alerts. Amazon wasn’t the only company that could benefit from a sophisticated IT command center.

Alex and his co-founders’ intricate understanding of DevOps helped PagerDuty quickly secure product-market fit and rise in the ranks as the number one IT alerting platform.

Integrations, customers, and revenue increased every day, and so did the stakes. Alex welcomed Jennifer Tejada to lead the company toward its next phase with an immense vision for what the company and platform could become with great operational rigor.

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“The life and death of an enterprise now ride on the strength and reliability of its digital operations,” Jenn told us recently. “How a company interprets signals, engages the right team members, and takes immediate action, directly impacts user experience and brand perception.”

In a world that’s always on, trust is docked for mere milliseconds of downtime, making reliability and responsiveness non-negotiable for any digital service. Today, PagerDuty is the central nervous system for more than 380,000 users around the world. And let’s just say–that’s much better than a Motorola Advisor II.

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