Evan Goldberg remembers well a conversation he had with his former boss, Oracle (ORCL) CEO Larry Ellison, back in 1998. He told Ellison he was thinking about starting a company that offered software to help small businesses manage their salespeople. Ellison had three things to say about that: Make it Web-based, do accounting and bookkeeping software instead, and let me invest.
Goldberg recalls his good friend Marc Benioff telling him shortly after his chat with Ellison that he was thinking about launching a provider of the sort of customer-management software that Siebel Systems (SEBL) makes for big corporations, only it would be for small businesses.
About three months later, Benioff did exactly that with Salesforce.com (CRM), while Goldberg started NetSuite, of which he's now chairman and chief technology officer. And both companies received financial backing from Ellison.
FILLING THE GAPS. Such is the primordial soup of Silicon Valley, where multiple businesses can spring from a few conversations among people who have known each other for years - particularly if Ellison is part of those chats. Flash-forward to 2005, and Salesforce.com is coming off the hottest software initial public offering of the previous year, having posted a 55% gain on its first day of trading. The San Francisco-based outfit is profitable, growing, and approaching $200 million in annual sales.
And NetSuite? It and a handful of other companies that deliver software as a service over the Internet aren't far behind. Web-services companies are primed to take Wall Street by storm. The words "hot" and "business software" haven't exactly gone together in recent years. Sure, software startups get more venture capital than any other sector. However, many of them have been filling in the gaps between far-reaching software suites sold by the likes of SAP (SAP), Oracle, and Siebel Systems.
Until Salesforce.com made it big, a view common in the tech world held that no new big innovations were coming in the business-software sector. Guess again. Instead of inventing a new software category, companies like Salesforce.com, NetSuite, and newly public RightNow Technologies (RNOW) are reinventing the way customers buy software. They're all making basic corporate software to manage finances or a sales team, run a business or run a call center -- not new stuff, and in many cases, with fewer features than existing products.
LAST OPEN MARKET. But the innovation is in the business model. These companies deliver software over the Internet - a Web service, if you will -- and companies pay as they go with monthly fees. That means less costly integration, no hiring an in-house administrator, and no big up-front contracts. It's a considerably cheaper and easier approach that gives these software-as-a-service companies an entrée into the last wide-open sector of software customers: Small and midsize companies.
"The middle market is the last growing software market on the planet," says Zach Nelson, president and chief executive of NetSuite. "No one has more than a 10% market share, but eventually someone will."
Other small companies like Grand Central and Oblix also are cashing in on the trend by connecting these applications and making them more secure. Oblix makes sure the right people can use all this access-it-from-anywhere software without information getting stolen. More important, Oblix ensures that people who have quit or been fired are locked out before they can steal leads. Oblix, still privately held, is growing at about 45% per quarter.
WATCHED CAREFULLY. Grand Central is the baby of the group, but it's getting plenty of attention. Founder and CEO Halsey Minor, one of the original investors in Salesforce.com, declines to say how many clients his company has at the moment, but he acknowledges his ambitious goal for the year is to get 20,000 customers using his network.
Collectively, these software-as-a service companies are squarely in the sights of investors waiting to see who'll follow the trail blazed by Salesforce.com, says Patrick Mason, analyst at Pacific Growth Equities. RightNow was the second to hit Wall Street just a little more than two months after Salesforce.com, which went public in June, 2004. With $61 million in annual revenues, it's smaller than Salesforce.com, but Mason thinks it may have a more defensible position in the long run. "I think the technology they provide is more difficult to build and deploy than Salesforce's," he says.
At NetSuite, revenues have grown from $4 million in 2002 to $42 million last year. It's likely to go public in the next year or so.
"DELIGHTED CUSTOMERS." Why all this enthusiasm? Consider RightNow's impact on Remington Arms, the 200-year-old gunmaker in Madison, N.C. When Remington put up its first Web site in 1999, it was inundated with e-mail, says Ned Moore, the company's eBusiness Manager. He turned to RightNow, and within a year it helped expand customer information on Remington's site.
Incoming calls from customers dropped 30%, and hang-ups by frustrated customers fell 75%. The software quickly did the work of five full-time call-center staffers, at a much lower cost, says Moore. Remington's tech managers found the traditional software from SAP they were using expensive and difficult to employ at times. So the low-cost, low-maintenance RightNow service was a welcome change, Moore says.
That's the kind of feedback that perked the ears of Roger Evans, general partner at venture firm Greylock Partners who invested in RightNow in 1999. "The story of this company isn't just about satisfied customers, but delighted customers," Evans boasts. "They have an annual customer conference that's more like a religious revival."
EARLY STRUGGLES. Plenty of other venture capitalists have since gotten the faith about software as service. It's a far cry from a few years ago when funding to these companies was all but shut after many venture capitalists had been burned by dot-com flameouts and software-hosting companies that turned into investment sinkholes.
Even Benioff, a man known for audacious marketing and his "End of Software" advertising campaign, spent several years getting traction for Salesforce.com and had to aggressively drum up investment dollars when he first started his outfit.
NetSuite also struggled in its early days, when it was called NetLedger. The venture elite of Silicon Valley's Sand Hill Road wouldn't touch it, remembers Deborah Farrington, of StarVest Partners, a New York venture firm and the second-biggest investor in NetSuite after Ellison.
BEFORE HIS TIME. While some were leery of investing with Ellison, StarVest leapt at the chance to co-invest with the outspoken software mogul, says Farrington. "We instantly became Larry groupies" after their first meeting, she says. "We were really taken with his vision of software as a service, particularly for small business."
Few have waited for this moment longer than Minor, a serial entrepreneur who by his own admission has a habit of starting companies way before the market is ready for them. His first startup, the well-known Web publishing site CNet (CNET), was launched two years before Netscape popularized Web browsers. This time around, he had to wait for companies like Salesforce.com to catch on before there was much need for Grand Central.
His company acts like a virtual Grand Central Station, making sure all the different Web services a customer uses can interact. If customers weren't using those services, they wouldn't have much need for Grand Central. But now they do.
Of course, the customer lists of Web-service companies include more than just little guys. Their software services are used by some of the world's largest companies as well. Add it all together, and they may well represent the hottest trend in software and the last great hope for business-software IPOs. By Sarah Lacy in Silicon Valley