Technology News: Going Public Caps Dream for a Maker of Software

SAN MATEO, Calif. — If the initial public offering for NetSuite shares goes as planned later this week, Evan Goldberg will have come a long way from the overcrowded Silicon Valley apartment that served as the company’s first office nearly 10 years ago.

At that time, Mr. Goldberg, a former programmer at Oracle, was struggling with the business model for his first start-up, a stalled multimedia software company. Then came a game-changing phone call from the chief executive of Oracle, Larry Ellison, his financial backer. Mr. Ellison suggested that the future of Mr. Goldberg’s company might just be in a new approach to accounting software. Luckily for Mr. Goldberg, he took the advice.

NetSuite plans to start selling shares to the public this week, most likely Thursday, in hopes of raising close to $100 million. It is one of the most anticipated public offerings coming out of Silicon Valley, and its Dutch auction method and year-end timing shows just how confident the company is.

NetSuite, which employs about 600 people and is based here, produces accounting software to help companies manage their operations — from making a sale to delivering the goods. But rather than sell the software outright, NetSuite distributes its software via subscription, a model known as on-demand software. Companies using on-demand software manage their business functions over the Internet using a Web browser rather than running programs on their own servers.

On-demand is a growing trend among business software makers. It was popularized by Salesforce.com, which went public in 2004, but more recently it has been embraced by the software giants SAP and Microsoft.

Demand for “software as a service,” as this approach is also known, is growing rapidly because it can reduce the cost and trouble of maintaining a company’s own information technology.

On-demand software generated revenues of about $3.7 billion in 2006, with sales projected to rise about 32 percent annually for the next few years, according to the research firm IDC. NetSuite brings the on-demand approach to small and midsize businesses whose needs are too demanding for simple accounting programs and spreadsheets, but who are still too small for the corporate software made by SAP and Oracle.

“For all the noise in this space, NetSuite is actually addressing a unique problem,” said Peter Goldmacher, an analyst with Cowen and Company. “Once a small company has outgrown QuickBooks it’s a big leap to enterprise-level programs. NetSuite fills that gap.”

NetSuite has said it hopes to sell up to 6.2 million shares for $13 to $16 each, and use the proceeds to start paying down its $8 million line of credit with Mr. Ellison’s investment company, Tako Ventures. It plans to use a Dutch auction process similar to that used by Google in 2004.

In a Dutch auction, investors are invited to submit individual bids, but in the end all the winners end up paying the same amount for the stock. That share price is based on the highest bid that ensures all 6.2 million shares will be sold. The system enables more individual investors to participate, in contrast to traditional public offerings.

NetSuite’s bankers — Credit Suisse Securities and W.R. Hambrecht & Co., the father of the Dutch auction I.P.O. — began collecting bids Dec. 10.

Although December is typically considered the worst month for I.P.O.’s, NetSuite is clearly hoping that the strong year in the I.P.O. market will hold out through the end of the year. The total number of I.P.O.’s is up 25 percent over last year, according to Renaissance Capital. Of the total, 49 have been technology companies, the most in any industry this year.

Mr. Ellison, NetSuite’s largest shareholder with 74 percent of shares, has remained a close adviser to Mr. Goldberg and Zachary Nelson, the company’s president and chief executive, and is expected to continue in that role after the I.P.O. Mr. Ellison has said he plans to transfer all of the 32 million NetSuite shares he holds to a “lockbox” limited liability company that will be managed by an unrelated third party to avoid conflicts with a potential competitor.

NetSuite has yet to turn its first profit. But the company has enjoyed a steady rise in sales the past few years and today has more than 5,400 customers. In the first nine months of 2007, revenue rose 63 percent to $76.8 million over the first nine months of 2006, and the company’s net loss narrowed to $20.6 million from $26.9 million.

One of NetSuite’s greatest challenges has been the need to reduce the length of the sales cycle, given the high upfront costs of its subscription model. For that, the company recognized early on that it would need more marketing know-how, and in 2000 it brought on Mr. Nelson, a Nebraska native who once ran Oracle’s marketing operations.

Since Mr. Nelson’s arrival, Mr. Goldberg has been able to focus entirely on technology development. The match appears to have been a good one, with Mr. Nelson’s farm-boy demeanor a counterpoint to Mr. Goldberg’s high-strung California intensity.

“It’s not your typical Silicon Valley company,” said Bruce Richardson, chief research officer with AMR Research. “Part of the charm of the company has always been the personalities. Zach has enough of the Oracle bravado, but with a Midwest sensibility.”