NetSuite’s Paradigm-Shifting IPO

It’s just a hunch, but I think that NetSuite CEO Zach Nelson will not have the same problems with the SEC (Securities and Exchange Commission) regarding his IPO (initial public offering) that Marc Benioff had a couple of years ago when he took Salesforce.com public.

You might recall that Benioff was slapped with a large fine for speaking about his impending IPO with a New York Times reporter. Insiders in the finance biz cite a quiet period prior to a stock’s offering, which is supposed to ensure a hypeless environment so that no widows or orphans get flim-flammed.

In reality, IPOs are a schizoid cross between a circus and convent, producing much ado about something we all avoid mentioning — like the 800-pound gorilla in the corner. Into this tradition, NetSuite announced its S-1 filing with the SEC on one of the slowest news days of the year. There was no brass band, just a band of groggy tech journalists awakened to wonder if they could go home for the holiday. Instead, they got to cover the NetSuite news.

So, for better or worse, the news is now out, and NetSuite will sell a few million shares of stock sometime in the next few months with Credit Suisse managing the affair. Since the markets will be closed for Labor Day, we at least know that NetSuite will be forced to make a little more noise when the time comes.

Why Should We Care?

Some of the immediate questions that come to mind: Is this good? For whom? What about all the other vendors?

Let me offer some ideas:

• Is this good? Sure, why not? It’s good for NetSuite, because if it raises the US$75 million it hopes to, it will fill its coffers, and it will be able to hire more sales people and do some more marketing.

  As a private company, it has done a nice job of growing the firm — with the financial assistance of Larry Ellison, who owns about 70 percent of the voting stock, according to the filing. Nevertheless, there is a practical limit to how fast a company can grow in organic mode, where it relies on revenues and outside cash to pay for things like marketing. Seventy-five megabucks could help in that department.

• Who is this good for? Well, lots of parties. Obviously the company benefits, as well as the investors — that would be Ellison, primarily. In addition, I think the marketplace benefits a lot from the effective maturation of another dot-com era company reaching this milestone.

A Paradigm Shift

More to the point, we need to keep in mind that on-demand, which is NetSuite’s delivery model, is not simply a market — it is a paradigm shift. It is the way computing will be done in the future. NetSuite’s IPO, when it happens, will be another proof point for delivering software services as if they were natural gas or electricity.

More broadly speaking, it would not surprise me to see other publicly traded on-demand vendors’ stock prices go north at the same time, if you follow my milestone theory. Some people might suggest that another on-demand company might start making the marketplace look a little crowded — but I don’t agree.

On-demand is like book publishing. If you and I each publish a book, the only way it becomes a problem is if we write on the very same topic. On the face of it, you might think that’s what NetSuite is doing relative to Salesforce.com or RightNow or even Oracle — but it is amazing to me that the on-demand companies do a pretty good job, at the moment, of staying out of each other’s way.

Salesforce.com is blazing a trail in platforms and development tools, as well as upper-end CRM, while RightNow is primarily known as a service and support company, despite the fact that it also offers sales and marketing systems. So, the mount of overlap is not as great as you might think.

Other vendors

As for other vendors, that is a very different story. First, we need to keep in mind that NetSuite already exists and is in the marketplace, so an IPO will not drop a completely unknown entity into the laps of traditional enterprise software vendors. True, additional marketing and sales muscle will change the complexion of the market, but not tomorrow. It will evolve over time.

Even taking that into account, there are a couple of vendors that should be squarely in NetSuite’s sights: SAP and Sage. Each company is much larger than NetSuite, at the moment, but NetSuite offers a tantalizing new set of choices to some of the customers these companies serve.

For SAP, which has been working out the kinks of its on-demand strategy for a long time, NetSuite is a potentially disruptive innovation in the same mold as Salesforce.com vs. Siebel. A NetSuite system that is easier to use, lower cost and more compatible with small and medium-sized businesses (SMBs) — especially at the lower end of the market — could present a serious challenge to SAP.

At the same time, that lower end of the market is not underserved. Sage represents a serious competitor with both on-demand and on-premise solutions that cover the same territory as NetSuite. In addition, Sage also has a significant reseller community that can put many more feet on the street than NetSuite can.

Sage has its own issues, though, and one of them is the company’s large collection of different applications, which can both help and hurt Sage’s case. In CRM, the collection includes ACT, SageCRM for on-demand and on-premise, and SalesLogix, as well as an assortment of back-end accounting systems. Sage’s strength is its resellers, which ensure that all markets are covered with the company’s large variety of solutions.

Getting Ready for a Breakout

My bet is that NetSuite initially will thread its way through the SMB market, focusing on verticals that are underserved by SAP and Sage while building strength for a breakout. I see signs of this in the company’s recent announcements about vertical strategies.

So, it looks as though the IPO that many thought would be endlessly delayed might finally occur. What that means is something of a guess for a lot of reasons. It’s a big market, though — and, overall, I’d say the event will be a good thing for everyone in the industry.