Agile Ops

“There’s a paradigm shift occuring in the way that large enterprises manage their software infrastructure,” Kleiner Perkins Caufield & Byers (Kleiner) partner Matt Murphy says. “Corporations are now trusting their mission critical applications to the cloud. So they need mission critical tools to manage them.”

Murphy should know, as he’s an investor and board member in next-generation application performance management platform AppDynamics, not to mention multiple other complementary cloud infrastructure category leaders. Today, the late-stage startup is announcing $50 million in growth financing via a Series D round led by Institutional Venture Partners (IVP), with participation from existing investors, Greylock Partners, Kleiner, and Lightspeed Venture Partners. The round brings its total financing to date to $86.5 million. IVP’s Steve Harrick will join the company’s board as an observer

AppDynamics allows businesses to manage the transition to an agile, distributed, cloud-based architecture. The company offers its software via a freemium, “lend and extend” model, similar to Splunk and Yammer. Paying customers typically purchase one year or longer software licenses, and unlike many other more high-touch enterprise software models, AppDynamics does not offer professional services – nor do its customers require them, according to its CEO and founder Jyoti Bansal.

The company promises that entire organizations can be up and running on its platform within minutes – a stark contrast to the now inferior on-premise solutions sold by legacy competitors like IBM, HP, Quest, Compuware, and others. Once setup, the system allows development and operations teams to monitor application performance, identifying and diagnosing errors as they inevitably occur.

“Finding the root cause of application performance in a complex, distributed app isn’t like trying to find a needle in a haystack,” says Glassdoor CTO and AppDynamics user Ryan Aylward. “Rather, it’s like try finding a needle in a stack of needles. AppDynamics actually makes this possible.”

Since launching in 2010, AppDynamics has been the dominating its category, besting the above-mentioned legacy solutions, as well as longtail solutions from fellow startup New Relic. The company has generated 300 percent year over year revenue growth for two consecutive years, and is winning 90 percent of head to head sales battles against all challengers, according to Bansal. Average net promoter scores in the enterprise software category, a measure of customer loyalty, are approximately 20. AppDynamics is generating a score of approximately 81, higher than both Amazon and Apple.

The company’s free service has been downloaded more than 100,000 times to date, and the company doubled its large enterprise paying customers from 250 to 500 in 2012, including the likes of Edmunds, Netflix, Priceline, Glassdoor, Overstock, Roku, TiVo, Hotels.com, StubHub, Staples, Insight Technologies, and others. Across this network of customers, AppDynamics monitors some 51 billion transactions per day. The company grew its employee count commensurate with its client roster, swelling from 100 to 200 in 2012.

AppDynamics has surpassed its growth targets by 30 to 40 percent, each of the last two years, according to Murphy. Raising new financing was never a question for the rapidly growing company, but the size of the IVP-led round surprised both the company and its previous investors.

With the massive infusion of capital, Bansal plans to double down on international expansion. His company already derives 30 percent of its revenue from international clients despite not having on the ground sales teams in other markets. The CEO plans to expand its physical operations into Europe and Asia-Pacific this year, while also continuing to invest in R&D.

In addition to its latest financing, AppDynamics is announcing the addition of several senior executives to its leadership team. Notably, the company hired former McAfee head of global sales Joe Sexton as its new president of worldwide field operations, and former Adobe developer products head of R&D Ed Rowe as its SVP of engineering.

Like any company at this stage, especially following a high profile financing of this nature, execution challenges are the biggest thing to fear. AppDynamics doesn’t face any immediate competitors in its space, but growing sales teams while seeking to maintain exponential revenue growth has proven the downfall of countless other “can’t-miss” companies.

Initially, AppDynamics planned to raise approximately $30 million, Murphy says, more than the three insider firms could manage on their own meaning the company had to look outside. But IVP had equity ownership targets that called for it to put in that much on its own. By the time insiders contributed their pro-rata share, the round had swelled to the $50 million number.

Bansal described the IVP as an ideal partner who was too good to pass up. Most attractive was the 90 plus IPO’s in its portfolio, given the CEO’s goal of listing AppDynamics publicly in “a few years.” The company is already leading the $2 billion application performance market, which is expected to grow to $4 billion to $5 billion over the next five years.

Murphy agrees that an IPO is the most likely exit path at this stage. “A year ago, I would have predicted an acquisition,” he says. “But its growth rate has been so rapid that I think it’s getting too expensive to be a natural acquisition target. Besides, the last year proved the public markets’ appetite for rapidly growing enterprise companies.”

IVP general partner Steve Harrick is equally bullish, saying, “Supporting a company that solves practical, real-world problems in large markets fits squarely with IVP’s investment strategy and we believe AppDynamics is on a trajectory to become the next great enterprise software company.”

[Image source: AppDynamics]