NetSuite IPO shows how much has changed since August, 2004

John Shinal · December 21, 2007 · Short URL:

NetSuite did this week what Google couldn't do more than three years ago -- complete an auction-based IPO at a price that was even higher than the company's bankers anticipated.

That the offering got out the door at a higher price than initially targeted, and the stock went up another 50% in its first two trading days, shows how much has changed since August, 2004.

Back then, Google had to cut the price of its auction IPO significantly to get it out the door, even though it was a profitable and much-larger company than NetSuite. 

That's not to say NetSuite is going to impact the technology investor marketplace on the scale that Google has. The Internet search leader's initial stock sale was executed at $85 a share, giving Google a market cap close to $30 billion.

NetSuite, on the other hand, is worth just over $2 billion, even with the after-market stock surge to a price near $39 a share. That means NetSuite's bankers, who first put a price range on the deal between $13 and $16, were conservative in their initial estimate of the company's worth.

Still, the success of an IPO is all about timing and priming investor demand, and the fact remains that the skepticism among institutional investors that greeted the Google offering has been replaced by a hunger for the shares of fast-growing tech companies, even unprofitable ones. 

To get an insider's view of IPO demand among big investors, click on our video interview with Paul Deninger, vice-chair of the investment bank Jefferies and Co.

NetSuite, which provides both back-end and customer-facing applications for small and mid-sized businesses, is indeed in an accelerating market, one that's expected to grow around 30% annually for the near future. The company, like, also bills their customers on a subscription-based model, providing the type of steady revenue stream that Wall Street loves. 

But while NetSuite is expected to reach profitability next year, it faces stiff competition from several giant rivals like Microsoft and the German giant SAP, which is making a major push to sell more software to smaller-sized enterprises. 

None of that mattered this week, however, when the public market embraced NetSuite with both arms. The strong demand among public investors for NetSuite is a reminder of why venture capitalists, angel investors and others are still plowing money into software startups. And let's not forget Oracle CEO Larry Ellison, who together with his family owns a majority stake in NetSuite.

It also tells us that while social networking sites, online video startups and other Web 2.0 companies may have received the most buzz this year among private investors, public institutional investors still love a good old software company.

Lastly, it bodes well for late-stage startup companies like Ingres, the open source database software company that hopes to get out the door next year. See our interview with Ingres CEO Roger Burkhardt here.


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