NetSuite’s stealth S-1 filing

Posted: July 11, 2007 in CRM

It’s just a hunch but I think that NetSuite CEO Zach Nelson will not have the same problems with the SEC regarding his IPO 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 hype-less environment so that no widows or orphans get flim-flamed.

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 sometime in the next few months NetSuite will sell a few million shares of stock 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.

The immediate questions that come to mind include, Is this good? For whom? And what about all the other vendors?  Let me offer some ideas.

Is this good?

Sure, why not?  It’s good for NetSuite because, if they raise the $75 million they hope to it will fill their coffers and they will be able to hire more sales people and do some more marketing.  As a private company they’ve done a nice job of growing their franchise (with the financial assistance of Larry Ellison who owns about 70% of the voting stock according to the filing).  Nevertheless, there is a practical limit to how fast you can grow in organic mode where you rely 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) but in addition, I think the marketplace benefits a lot from the effective maturation of another dot-com era company reaching this milestone.  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; 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 and 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 they also offer sales and marketing systems.  NetSuite combined front and back office systems with eCommerce and that’s a bit different than the others.  So the mount of overlap is not as great as you might think.

Non-SaaS vendors

This 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 factor 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 all that into account, there are a couple of vendors who should be squarely in NetSuite’s sights and they are 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 same 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 SMB business, 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 some of the same territory as NetSuite.  In addition, Sage also has a significant reseller community that can put many more feet on the street than can NetSuite. 

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 who ensure that all markets are covered with the company’s large variety of solutions.

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

So it looks like the IPO that many thought would be continually delayed and never happen might be about to occur.  What that all means is somewhat 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, when they find out about it. 

So, what did you think?

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