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NetSuite Gets Ready For Its Close-Up


It was late in the evening on Apr. 6, and a stressed-out Evan Goldberg was racing to get to Pier 38 on San Francisco Bay. Awaiting him there, he hoped, was a yachtful of co-workers and customers. But if his watch was right, they had set sail long ago. As Goldberg pulled up at the pier, a tanned young crew member took his keys and assured him that a speedboat was waiting to whisk him to the lavish offshore party. Goldberg relaxed and smiled. "Oh, yeah," he recalls thinking. "I'm in Larry's world."

In Silicon Valley, of course, "Larry" is Lawrence J. Ellison, the billionaire chief executive of Oracle Corp. (ORCL) The splendor of the evening, arranged for NetSuite Inc. clients and executives, attested to the fact that Ellison is also the proud majority owner of that growing, privately held software company run by Goldberg, its chairman and chief technology officer, and Zachary A. Nelson, its CEO. As Nelson, Goldberg, and a phalanx of their best salespeople gawked at the opulent Ronin, Ellison's "smaller" yacht, a few couldn't help but wonder when their own net worth would get a long-anticipated boost.

For years, NetSuite has been seen as the next great software stock offering. With 2006 revenues of about $70 million, NetSuite is eight years old--an octogenarian by Valley startup standards. Every six months, Nelson has ended his staffwide meetings with a slide on that IPO that always seemed to be just around the corner.

Now, finally, NetSuite's stock offering may be at hand. After a whirlwind trip that included meeting with bankers in New York, Nelson and the rest of his board on Nov. 20 entertained proposals from a handful of investment banks in San Mateo. At press time they were close to picking a team to pitch an offering in early 2007. The three institutions left in the running, sources say, are Merrill Lynch (MERR), Credit Suisse First Boston (CSR), and the smaller San Francisco firm W.R. Hambrecht & Co.

ORDINARY FOLKS

It would be a rare tech IPO: Only a tenth as many deals have been completed so far this year as in 1999. And if structured as planned, as an auction open to the public, the deal would be a much smaller version of an epic Valley event, Google Inc.'s (GOOG) 2004 IPO. Instead of bankers peddling the shares to big institutions and the very wealthy, everyday folks would, in theory, be able to log on to the Internet and bid alongside the institutions. Bankers would conduct a road show, run the auction, and execute orders. Says Nelson: "We're an Internet company, and the whole thing is that the Internet changes everything. Why not change the IPO distribution business?"

A NetSuite IPO also would shine a spotlight on Ellison's role in backing several software startups. He was an early supporter of Salesforce.com Inc. (CRM), a software outfit that went public in 2004 and now has a $4.5 billion market cap. Its shares have risen 266%. Ellison has also invested the lion's share of the more than $100 million that NetSuite has raised to date. It could be argued that Ellison is profiting from growth opportunities that Oracle shareholders missed out on. Ellison wouldn't comment. But Steven B. Fink, CEO of Ellison's investment firm, Lawrence Investments, says that independent Oracle directors keep an eye on Ellison's investments and in the past they have raised questions "even if he's invested in a company that is upgrading to Oracle" software. He adds: "Since I'm not getting any calls from a concerned board member, it's a sign they're assuming [NetSuite's business] is just a different marketplace than Oracle's core business."

Ellison and NetSuite's executives are talking about a deal that could raise another $100 million by selling just 10% of its shares. They hope to benefit from the strong showing of Salesforce.com and the lessons from Google's auction. Some bankers bad-mouthed that deal, viewing the process as a slap in the face because it dismissed their value as underwriters and cut them out of lucrative deal fees. But it's hard to argue with Google's success. As an analyst at one of the investment firms in the NetSuite mix told his bankers: "Larry's not stupid. They're doing it as an auction because they can. Just...get this deal."

People weren't always jumping to invest in NetSuite. If not for Ellison, it's likely the company wouldn't exist. In the late 1990s, two friends, Marc Benioff and Evan Goldberg, were mulling how the Web would change business software. Both had the idea to build tools to let salespeople organize their leads and contacts via a site as easy to use as Amazon.com (AMZN). Benioff built just that after leaving Oracle, calling it Salesforce.com. But thanks to a five-minute conversation with Ellison, Goldbergwho had already left Oracletook a different tack. Ellison told him to build easy, cheap software to manage small companies' accounting and financials, a considerably more complex undertaking. "That is the underpinning of [anyone's] business," Goldberg recalls Ellison saying.

From there the idea was to add programs that could organize warehouses, sales teams, online stores, you name it. Today, the software is aimed at businesses that are too big for Intuit Inc.'s (INTU) QuickBooks but too small for offerings from Oracle or SAP. Instead of paying up front, customers fork over a monthly fee to have NetSuite run programs and beam them out over the Web. For time-strapped managers, NetSuite also pioneered easy-to-read desktop "dashboards" that give real-time readouts on metrics such as employee productivity or sales growth.

FIRED UP

Ellison believed businesses wanted to purchase all their software from one company. Years later he would spend nearly $20 billion in a buying spree to make Oracle that company for large outfits. Done right, NetSuite could be the same thing for small companies. Fink says he has never seen Ellison so engaged, so passionate about a company other than Oracle. Ellison checks his NetSuite dashboard daily to see how the company is doing and checks in with Goldberg and Nelson regularly. And he has never hesitated to write a check.

Why did the NetSuite offering take so long to jell? For one thing, it wasn't easy to get the business model right. There's a reason why very few large software companies sell to small businesses: They have to work just as hard to make a sale that is a magnitude smaller. To cut costs and turn what will be its first profit this quarter, NetSuite took such steps as basing its support center in the Philippines. Another factor in the delay was that Ellison was in no rush to sell. Nelson says that in his third year on the job, they were close to meeting with bankers, but Ellison told him to hold off. Instead he invested more money to double NetSuite's salesforce.

Even today the IPO is hardly a certainty. Ellison's heavy ownership put off some venture investors early on, and it could spook public investors as well. After the IPO he's still likely to own over 50% of the stock. And while Google was an important test case for a large company going public by auction, the kinks are hardly ironed out. In six pitches by banks, not one described the offering process the same way.

If the deal does come off, of course, Nelson will have to please more shareholders than just Ellison. And NetSuite has a long way to go before it's the size of Oracle or SAP. As Nelson says: "I'm looking forward to that moment in time when we ring the [opening] bell. Then I'll put on my coal [miner's] hat and grab the lantern and go back into the mine."

By Sarah Lacy


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