The Ponderings of Woodrow

SuccessFactors IPO a Success

Amidst the ongoing market turmoil, SuccessFactors (SFSF) was able to price a successful IPO this week. The offering (co-led by Morgan Stanley and Goldman Sachs) priced at the top end of its proposed range ($10) and stands at $12.75 after the first two days of trading. Considering how bleak the market has been over those two days, it's an auspicious debut.

SuccessFactors is the latest in an ever-increasing number of SaaS IPOs. The company raised just over $100mm in the IPO and carries a market cap north of $500mm. My good friend and HCM analyst Jason Corsello has weighed in on the company several times:

• The Looming SuccessFactors IPO
• SuccessFactors IPO - My Take and What It Means
• Why SuccessFactors is the Hottest Vendor in Enterprise Software

I'd like to extend a congratulations to Lars and the team; as well as the VCs involved in this successful deal. One of the funds I manage is a passive investor in SFSF by way of Granite Global Ventures; congratulations to them on yet another winner.

With a successful offering comes real opportunity to grow the business; but being a publicly traded company also brings with it new challenges. SuccessFactors competes in a niche of the market that already has several successful public companies; including Taleo (TLEO), Kenexa (KNXA) and Ultimate Software (ULTI). Authoria is also probably not far off from a public listing potentially. In addition, SFSF will need to deliver on quarterly expectations and must dance the delicate balance of maximizing growth and market share, while at least showing a push toward profitability and margin leverage. I'll be keenly interested in whether the company can use its newfound capital to fill out the whitespace in its services offerings and, in turn, prove itself the equal to Taleo; who has tremendous momentum among customers and the financial community.

Note: This is not a recommendation to buy or sell SFSF, TLEO, KNXA, ULTI or any other security, but is merely a personal analysis to foster discussion for informational purposes only. At the time of this writing, I and/or funds I maintain discretionary control over, did not maintain a direct position (long or short) in any of the companies mentioned but did maintain a passive investment in SFSF via our participation in Granite Global Ventures. We also may, at times, carry derivative options on underlying positions as a hedge.

successfactors sfsf saas hcm talent management investing jason corsello woodrow enterprise irregulars

SAP Business ByDesign: Peter Zencke discusses the product evolution

Peter Zencke walks us through the evolution of SAP Business ByDesign; equating early work on the mid-market SAP solution to a "concept car." It's been 4+ years of development and more than 1,000 software engineers.

He highlighted the four key points of differentiation between ByDesign and other midmarket ERP solutions:

• Completeness
• Adaptability
• Ease of Use
• TCO Reduction

Zencke then showed a video of several of SAP's initial beta customers. Although the video showed four or five, it's my understanding that SAP has 20 live customers with 40+ more in pilots.

The product is designed to provide COMPLETE business process functionality from "order to cash."  The functional footprint covers eight segments:

• Compliance Management
• Executive Management Support
• Financial Management
• Customer Relationship Management
• Supplier Relationship Management
• Project Management
• Supply Chain Management
• HR Management

...now on to the DEMO

Note: This is not a recommendation to buy or sell SAP or any other security, but is merely a personal analysis to foster discussion for informational purposes only. At the time of this writing, I and/or funds I maintain discretionary control over, did not maintain a position (long or short) in SAP. We also may, at times, carry derivative options on underlying positions as a hedge.

sap erp business bydesign midmarket ondemand investing software woodrow enterprise irregulars

SAP unveils mid-market solution…ByDesign

The much ballyhooed and oft-discussed evolution of SAP's midmarket software strategy is finally upon us. As I type this, SAP's Henning Kagermann has just announced the availability of SAP Business ByDesign; formerly referred to as A1S.

Business ByDesign is, "the most important announcement of my career" according to Kagermann; heady words for someone who was rather dismissive of the impact of on-demand software architecture just 18 months ago.

Segmenting the Market

One of the biggest challenges SAP will have is segmenting the new offering. Take a look at the opening paragraph of the Fact Sheet we were provided in today's press kit:

The SAP Business ByDesign solution is a new addition to the SAP portfolio of solutions for small businesses and midsize companies. The on-demand business software solution complements and does not replace any of the other solutions in the SAP portfolio. [note: emphasis mine] SAP Business ByDesign specifically addresses a new market of prospective customers: growing midsize companies that typically have not invested in the types of integrated business solutions SAP provides.

To my mind, there is tremendous need and opportunity for a hosted, subscription-based, easy-to-use ERP solution for small and mid-market companies. That said, I don't see how the demand doesn't, at least in part, cannibalize the traditional SMB on-premise ERP solutions; of which SAP has several already in the market.

Henning put up a chart describing SAP Business ByDesign as a solution that addresses an entirely new segment of the market.

Large	SAP BUsiness Suite	>2500 employees	~$30B market
Midsize	SAP Business All-In-One	<2500 employees	~$15B market
Midsize	SAP Business ByDesign	100-500 employees	~$15B market
Small	SAP Business One	<100 employees	~$15B market

Note: This is not a recommendation to buy or sell SAP or any other security, but is merely a personal analysis to foster discussion for informational purposes only. At the time of this writing, I and/or funds I maintain discretionary control over, did not maintain a position (long or short) in SAP. We also may, at times, carry derivative options on underlying positions as a hedge.

sap erp business bydesign midmarket ondemand investing software woodrow enterprise irregulars

Postini = Google's Most Enterprisey Acquisition Yet

OK, chances are this is not the first blog post you've read about Google's $625mm purchase of Postini today. At last count, Techmeme had 1,003 posts on the subject.

Google has been so acquisitive this year it's hardly news that they made another acquisition. But Postini is a horse (acquisition) of a different color; squarely focused on providing solutions to the enterprise. They provide a host of messaging security and infrastructure services to more than 35,000 companies and 10,000,000 users. Postini processes more than 2 billion SMTP connections and block more than 1 billion spam messages every single day.

A quick word of congratulations to Ryan, Brad and the rest of the Foundry Team. There are a lot of interesting nuances to this deal, not the least of which is the fact Postini was considered a likely IPO this year. So many of my favorite bloggers have written about this deal today, I'm simply going to hand it off to them:

• Ryan blogs about the deal from his perspective:

...What attracted us most to Postini was (FOUNDER) Scott Petry's vision of building out a true platform company built around the simple notion that email had become more important to corporate America than the telephone. A company that could build a suite of services around messaging would have the potential to harness a huge customer base given the broad horizontal nature of email. The total addressable market was every email address in the world.

Equally important was Postini's architecture and deployment model. Postini was a SaaS company well before SaaS was cool, and probably even before the acronym of SaaS had been coined. We loved the ease of deployment (just a change to the MX record in DNS) and the recurring revenue subscription model. And while the most notable SaaS companies to date have been built around specific vertical business applications, Postini is arguably among the first SaaS infrastructure companies...[continued]

• Bill Burnham hits the nail on the head with his analysis. I implore you to read his entire analysis, but here are his key takeaways:
  • Google is going after Microsoft Exchange [I agree]
  • Postini puts Google much closer to functional parity [I agree, presuming tighter integration]
  • This is bad news for traditional anti-spam vendors [I agree, in principle]
  • Google has put together an impressive set of hosted applications [I wholeheartedly agree]
  • Google can AND does pay up for assets it views strategically [How can I not agree?]
  • When Google is interested, they've yet to be outbid [Agreed]

• Cote breaks down the deal as part of the broader Microsoft vs. Google meme, and ultimately argues that Google is too smart to attack Microsoft using a traditional enterprise sales model:

The point for me is simple: Google wants people to use it’s software and click on its ads. Sure, it may not be on purpose that that means pulling people away from Microsoft software and services. Nonetheless, it means competing to get attention and dollars that could otherwise go to Microsoft and other vendors. What irks me most about this position is not the people who espouse it — like I said, “potato,” “patato” — but that Google itself seems so, well, goofy when it tries to weave and duck on the issue.

The question for Google isn’t “are you competing with Microsoft?” The question is more along the lines of: do you want as much of Microsoft’s attention-cum-revenue as you can get?

As an enterprise-focused technologist, this deal piqued my curiosity much more than the DoubleClick and YouTube deals. This is not to dismiss their potential strategic value, but rather, this is the first evidence I've seen that Google is ready to take the kid gloves off outside of the ad-driven model.

Note: This is not a recommendation to buy or sell any publicly-traded security. This discussion is merely a personal analysis to foster discussion for informational purposes only. At the time of this writing, I and/or funds I maintain discretionary control over, maintained a long equity position in MSFT but did not maintain a position (long or short) in GOOG or any of the other companies mentioned. We reserve the right to initiate positions in any of these companies at any time in the future. At times, we may maintain derivative options as a hedge on underlying positions.

postini google m&a investing ondemand saas security foundrygroup woodrow enterprise+irregulars

NetSuite IPO...Another SaaS horseman braves the public markets

NetSuite filed its S-1 this week, with an eye toward an IPO in September if the market conditions permit. The SaaS darling is looking to raise up to $75mm; Credit Suisse is the book runner and WR Hambrecht + Co is co-managing the deal. This is interesting for two reasons:

1) To those who think sell-side analysts don't play a role in the investment banking process, it's interesting that Jason Maynard's firm got the lead. Maynard has been way out in front of the SaaS world, including publishing a meaty research primer on the sector which has long been a prerequisite for firms that want to prove their mettle and expertise in a given space.

2) The selection of WR Hambrecht is a coup and undoubtedly relates to their expertise handling the Google auction. You see, NetSuite is taking a page out of Google and will hold an auction instead of the traditional IPO listing most are familiar with.

As you can imagine, this long-awaited offering garnered a ton of press in the last few days. Many of the mainstream stories are fixated on Larry Ellison's majority stake, yet few that I've seen have bothered to articulate why that's of any consequence.

Dissecting Ellison's Majority Stake

I was well aware of the fact Ellison and his family owned a majority position in the company, but even I was surprised at the magnitude of his position. As of March 31st, Larry Ellison and related parties owned 74.1% of the company:

• Larry Ellison -- 649mm shares (61.1%)
• Trustee for David Eillson (Larry's son) -- 69mm shares (6.5%)
• Trustee for Margaret Ellison (Larry's daughter) -- 69mm shares (6.5%)

Why does this matter?

1. Post IPO, Ellison will retain majority control. As a result, public shareholders will not have a material say in the governance of the company. Larry will still be able to make quasi-unilateral decisions and is under no obligation to create a truly independent board of directors. From the S-1:
   
   • As a result, Mr. Ellison and entities with which he is affiliated will be able to exercise control over most matters requiring approval by our stockholders, including:
       •   the election of directors;
       •   amending our Certificate of Incorporation;
       •   approval of significant corporate transactions, including a change of control;
       •   executive and director compensation plans, including equity compensation plans;
       •   issuing additional shares of capital stock; or
       •   commencing a liquidation.
2. While not a certainty, historically companies have been afforded a lower valuation than their comparable peers when they are captive
3. The ties to Oracle, itself with grand designs on the On Demand software market, will be hard to ignore as a real risk factor as long as Larry has controlling interest (imagine if you will Larry deciding to sell a major piece of the company in a privately negotiated transaction to Oracle, for example)

Nuggets from the S-1

• One Data Center -- I was surprised to learn that NetSuite currently operates its entire business out of one 3rd part data center in California. We host our services and serve all of our customers from a single third-party data center facility located in California. We do not control the operation of this facility. [cont]...[cont] We do not currently operate or maintain a backup data center for any of our services or for any of our customers’ data, which increases our vulnerability to interruptions or delays in our service. They have no redundancy which astounds me when you consider the company has 5,300 customers and $67mm in 2006 revenues and runs a utility computing model
• Staged Releases -- Unlike other SaaS companies that deploy major new releases to all customers at once, we roll out all major releases and many upgrades of our application suite to a portion of our customer base at any one time. This “phased release process” is designed to allow us to mitigate the impact of major changes and new releases, ensuring that any potential issues affect only a portion of our customers before they are addressed. Quite the contrast from SfDC, which prides itself on simultaneous release cycles.
• Principal Competitors List -- It's always fun to see who a company lists as its principal competitors. Lest you think this is a random sampling, I can assure you that every admission and omission is carefully calculated. So who does NetSuite list as its competition? Our principal competitors include Epicor Software Corporation, Intuit Inc., Microsoft Corporation, SAP, The Sage Group plc and salesforce.com, inc. The omission of Oracle is amusing and inaccurate (if SAP is a competitor, so too is Oracle). I give the company credit for listing Intuit, which I maintain is their most direct competition. Of course, NetSuite and the investment community are more likely going to compare the company to Salesforce, for obvious reasons.

The Inevitable Comparisons to Salesforce.com

Back in March of last year, I profiled NetSuite and handicapped its potential IPO, comparing it to salesforce.com. I'm pleased to see that many of my suppositions have proven accurate. Regardless of whether NetSuite and salesforce are really competing for deals (they don't very often), it's inevitable that from here on out, the two companies will be compared and contrasted against one another by the investment community. Many investors have been waiting for another pure-play SaaS vendor to hit the market, and now we're finally going to get what we asked for.

• Revenues at time of filing -- NetSuite reported 2006 revenues of $67.2mm, representing 85% year-over-year growth. March '07 results were $23.2mm, representing 72% growth. Compare that to Salesforce's numbers in 2004 when it files its S-1. It was coming off a $96mm year representing 88% growth. Don't underestimate the importance of NetSuite's June quarter results (which we will see in a subsequent S-1 amendment I'm sure). Although the company is growing incredibly fast, Q1 hinted at deceleration and investors will want to see that June results don't show further deceleration.
  
• Net profitability at the time of filing -- NetSuite is decidedly unprofitable. The company posted a 16% operating loss margin in March, and a 34% loss margin in 2006; compared to Salesforce.com's 3.9% operating profit margin.
• Current metrics -- It's hard to ignore the disparity in size between the two companies.
  • 2006 Revenues: SfDC -- $497mm (60% YOY) vs. NetSuite -- $67mm (85% YOY)
  • 4Q Annual Run Rate (As of most recent Q): SfDC -- $648mm vs. NetSuite -- $93mm
  • Customers: SfDC -- 32,300 vs. NetSuite -- 5,300

The size disparity is particularly interesting when you consider that NetSuite was founded in 1998 versus salesforce.com, which was founded in 1999. The fact that Marc Benioff's firm has been able to grow to be 7x larger over a similar time span raises broad questions:

1. Does being a publicly traded company make that much of a difference? NetSuite will argue as much, and certainly the ability to compensate talent with stock options and restricted stock grants is a factor in driving a growth company, but by itself this wouldn't seem to argue for the size disparity
2. Is this evidence of the more entrenched nature of on premise back office ERP functionality? Does the fact that NetSuite is 7x smaller than SfDC indicate demand for back-office SaaS pales in comparison to front-office SaaS? In aggregate, back-office ERP is several orders of magnitude larger than front-office SFA, yet uptake of SaaS appears far less pervasive.
3. Is the size disparity an indication of customer size? According to NetSuite's filing, they target the SMB channel, defined as companies with up to 1,000 employees. While that's an important part of SfDC's market, as well, they have been successful winning deals in larger enterprises, too. Does NetSuite need to prove an ability to scale in order to close the revenue gap?

Important metrics we've yet to be provided with:
There are variables to the NetSuite equation that we've not yet been provided with. I'm sure they will fill in the blanks in subsequent S-1 amendments, and will do the obligatory IPO deal roadshow when the time is right. In the meantime, here are a list of metrics that I would like to see from the company:

• Net new customer additions
• Net subscribers (we know they have 5,300 customers, but how many users?)
• Average revenue per customer (either annualized or quarterly)
• Pricing (e.g., per module? incremental pricing for platform? higher pricing for better SLAs?)
• Average contract length (the company has said it's been focusing more on 1-year deals of late)

What's NetSuite Worth?

I won't presume to tell you what NetSuite will, or should be worth at IPO. We have no idea what overall market conditions will be like at listing, what the institutional demand will be, how the auction process will alter the IPO pricing, or what NetSuite's forward-looking guidance will be. For the sake of comparison, here are a sampling of enterprise value/revenue estimates for publicly-traded SaaS companies, provided by Brent Thill's team at Citigroup:

• Concur (CNQR): $860mm market cap, 6.8x '07E revenues, 5.3x '08E revenues
• Salesforce.com (CRM): $5.0b market cap, 6.3x '07E revenues, 4.6x '08E revenues
• Omniture (OMTR): $1.1b market cap, 7.6x '07E revenues, 5.1x '08E revenues
• RightNow (RNOW): $540mm market cap, 3.9x '07E revenues, 2.9x '08E revenues
• Ultimate (ULTI): $725mm market cap, 4.5x '07E revenues, 3.8x '08E revenues
• Average '07E revenue multiple: 5.8x
• Average '08E revenue multiple: 4.3x

Remember, NetSuite is an entirely different company with a different growth rate (both historically and going forward), a different addressable market, and we have yet to see how NetSuite will approach margins and cash flow generation. Investors may opt to value NetSuite on entirely different metrics, and may also choose to assign a different multiple that lies outside the bounds of this theoretical analysis.

Related Materials:

• NetSuite S-1 (SEC.gov)
• NetSuite Ponders IPO (Ponderings of Woodrow)
• NetSuite Preps Long-Awaited IPO (Larry Dignan)
• NetSuite IPO will soon cost me (Zoli Erdos)
• NetSuite IPO: Why Now? (Phil Wainewright)
• NetSuite files for IPO (Sadagopan)

Note: This is not a recommendation to buy or sell any publicly-traded security nor is it a recommendation to participate (or not to participate) in upcoming IPO offerings of NetSuite or any other company. This discussion is merely a personal analysis to foster discussion for informational purposes only. At the time of this writing, I and/or funds I maintain discretionary control over, maintained a long equity position in CRM but did not maintain a position (long or short) in any of the other companies mentioned including. We reserve the right to initiate positions in any of these companies at any time in the future. We may, or may not, have interest in participating in the NetSuite IPO or other securities listings. At times, we may maintain derivative options as a hedge on underlying positions.

netsuite s-1 IPO investing ondemand saas erp applications software M&A woodrow enterprise+irregulars

Salesforce.com corrals Koral

Sometimes the best acquisitions are those that don't make headlines.  For all the pomp and circumstance that Oracle buying Hyperion or Google buying DoubleClick received, I believe one of the most potentially significant acquisitions of the last few weeks got far less fanfare. Last week, Salesforce.com announced the acquisition of privately-held Koral.  While terms weren't disclosed, I've heard unconfirmed chatter that total considerations were between $10mm and $20mm.  Even at the low end, that's a nice return for founder Marc Suster and his angel investors; who reportedly put a little more than $1mm into the three-year old, 9-person firm.  Koral's products have been rebranded ContentExchange, and Suster has joined Salesforce as product group VP. 

This deal garnered very little attention from the investment community, which wouldn't be surprising were it not for the attention last year's Kieden deal garnered.  While the Kieden deal was worthy of attention, I believe Koral's technology represents a much larger expansion of Salesforce's market opportunity in the long run.

What is Koral?

I had the chance to see Koral firsthand at Ismael's Office 2.0 Conference last year. In a sea of "me too" companies, Koral was one of a select few that stood out as having a differentiated approach toward solving a real business problem. Credit that to Suster and his team for having been through the startup game before. They obviously realize that cool technology isn't enough. Workers don't need a new spreadsheet app when Excel works just fine. But they DO need more efficient ways to search for unstructured content, manage files, share collaborative workspaces and handle versioning. Think of Koral as a Web 2.0 collaboration suite [yes, its "competition" would be Microsoft Sharepoint Services, Adobe Connect Professional and WebEx Connect].

Koral addresses each of these pain points in a way that's intuitive.

• Creation and sharing – Koral provides a private workspace that eschews a hierarchical file structure. Hierarchies are an absolute must for structured content, but they are arguably the biggest barrier toward fast and fail-safe retrieval of unstructured content within a corporate network. With Koral Share, you can create a document and drag and drop it into the workspace. From there, you can add contextual tags [or accept Koral's recommend tags] and manage/monitor who can read, edit and retrieve the document.
• Subscription and versioning – The Koral workspace is driven by a subscription mechanism. Users can choose to subscribe to individual documents, or authors, or metatagged groups. For example, a field sales rep can subscribe to any content that is tagged "sales." When you're subscribed to a document, there's never a worry that you're about to access an out-of-date version. The days of a sales rep launching an outdated version of a product demo or marketing presentation are over thanks to Koral.
• Search – How many times have you tried to dig up an old presentation or document, and struggled to remember either the file name or the folder location? Koral's centralized workspace and tagging make real language search and retrieval an easier process. The combination of tagging, full-text indexing and a frequency-of-use algorithm [how often is the document accessed? How many times does the search term appear? Is it in the title or only deep down in the document?] produce effective search results.  Another interesting feature is the ability to preview any type of content before downloading it; helpful for today's mobile workers [although maybe not as helpful now that laptops come with 80- to 160 Gig hard drives :) ]

A lot of you are probably thinking, "OK, this sounds great, but traditional enterprise content management [ECM] solutions do all of this and then some." True, but what sets Koral apart from other collaboration tools I've come across is EASE OF USE. The cardinal rule of K.I.S.S. reigns supreme for a lot of today's workforce; particularly field sales representatives who are the natural low-hanging fruit here given Salesforce.com's position in SFA. The reason SfDC enjoyed such tremendous uptake in SFA isn't because it's got a richer feature set or is less expensive than traditional CRM. The reason it's been deployed is because it's EASY TO CONFIGURE and INTUITIVE.  Sales reps don't want 20 tabs to manage their contacts and deal pipeline. They want the minimum amount of functionality that serves their purpose, and they want it to work with little training or configuration. Koral does for unstructured content management what Salesforce has done for traditional SFA process management.

When I saw the Koral demo at O2O, my first reaction was, "it's the ANTI wiki."  Don't get me wrong, I love wikis and think they're powerful tools for certain kinds of knowledge management. But they're not optimal for all users; including field sales reps who have neither the time nor the interest in feeling their way around the wiki landscape.  Over the last few months, I asked at least half dozen buddies who are in software sales to take a look at Koral. Universally the responses were positive, with the general reaction being, "why don't we have a tool like this?"

For many of them, now they do. Tying Koral's functionality into the core SFA functionality of Salesforce is a no-brainer. As Phil Wainewright says,

Further confirmation of the strategic importance of collaboration was to come within the ensuing few days. Microsoft's CEO Steve Ballmer called Sharepoint "the definitive OS or platform for the middle tier," followed by Cisco's acquisition of WebEx, which led Tim O'Reilly to describe collaboration suites as "the next generation of must-have enterprise software." Behind the scenes, Salesforce.com was already ahead of the game, because as we now know, it had already completed the Koral acquisition.

That's game-changing for Salesforce.com because collaboration is becoming the largest and fastest-growing segment of the SaaS sector — faster even than Salesforce.com's own CRM segment — and with a much larger potential reach, because it touches every employee in an organization rather than being restricted to specific departmental roles. Becoming a content management player adds a completely new and much larger opportunity than Salesforce.com's existing CRM market, brings it into direct competition with some heavyweight players (TechCrunch lists them) and, suggests Ismael Ghalimi, opens out an intriguing roadmap into Office 2.0 territory.

Remaining questions and observations:

1. Validation of AppExchange as an outsourced R&D platform – Last year, when the Kieden deal was announced, I posited that Salesforce was effectively leveraging AppExchange as outsourced R&D; and the Koral deal is further evidence to that end. Like Kieden, Koral put a significant amount of focus on integrating with Salesforce. That pre-existing integration significantly reduces the technology risks of the acquisition; we already know Koral and Salesforce work well together. Salesforce got to see Koral's momentum and its functional footprint long before it had to undertake financial commitments to the idea. As a Salesforce investor, I sincerely hope we see more of these kinds of deals in the future.
2. Infrastructure costs – Storing unstructured content, indexing and versioning it, plus adding a sophisticated audit trail involves a lot of cycles and storage. We're not talking about indexed flat files here. What are the infrastructure costs of supporting this on a scaled basis? Will Salesforce offer this as a truly hosted solution, or will this be a subtle departure from the current go-to-market strategy? Is the incremental margin profile of ContentExchange banded more than the sale of its traditional CRM apps? Will SfDC leverage something like Amazon's S3 in a formal manner to provide the needed storage infrastructure at affordable costs? I believe SfDC is still wrestling with these questions internally, which is why they've put off announcing pricing until later in 2007.
   
3. Specialization of the sales force? – SfDC has become a large company and, with that, comes a natural evolution of the field sales force. Global account overlays make sense. Vertical specialists will, over time, make sense. Will offerings like ContentExchange be better served with specialized reps or should this be in everyone's bag?

Related Enterprise Irregular content:

• Dennis on his initial reaction to Koral 
• Dennis on the re-discovering the importance of Koral's approach 
• Dan Farber on the acquisition
• Ismael on Koral equaling ECM for the masses
• Phil on why this is a game-changer [both positively and negatively] for SfDC 
• Zoli on why Koral's ease-of-use makes it attractive to the non-Wiki crowd 

Note: This is not a recommendation to buy or sell AMZN, ADBE, CRM, CSCO, GOOG, MSFT, WEBX or any other security, but is merely a personal analysis to foster discussion for informational purposes only. At the time of this writing, I and/or funds I maintain discretionary control over maintained long equity position in CRM, CSCO and MSFT but did not maintain a position (long or short) in AMZN, ADBE, GOOG, or WEBX . We also may, at times, carry derivative options on underlying positions as a hedge.

koral salesforce.com collaboration m&a sfdc crm saas investing woodrow enterprise irregulars

 

Spanning Sync launches...and passes the "penny gap test" it seems

A quick word of congratulations to friend and fellow Enterprise Irregular Charlie Wood on his launch of Spanning Sync. It's been fascinating to watch Spanning evolve from a nascent idea in Charlie's head to a full-fledged commercial launch; and I wish him all the best.

Spanning Sync joins the wildly popular functionality of Apple's iCal with the Google Calendar and Gmail. Although I'm not an Apple user (yet!), I can appreciate the complexity of any two-synchronization between disparate calendaring and contact databases; and this is a service that almost every Mac user seems to crave.

The easiest way to get what Spanning is all about is to view the Demo.

While Spanning has, functionally, been well received there appears to be a bit of a boondoggle over the proposed pricing.  A quick read through the comments at TUAW suggest that Charlie may have to either:

A) Re-think his $25 per annum price point, or

B) Develop a more defined ROI use case. As a veteran of many software term sheets, I'm sure Charlie will handle this with his usual aplomb.

But the feedback he's getting is, in its own way, a positive when you counterbalance that against a fascinating piece Josh Kopelman penned this week on his blog.  Josh, a partner at First Round Capital, spins a cautionary tale of the challenges entrepreneurs face getting someone to pay for a service.

Josh Kopelman: The Penny Gap

...The truth is, scaling from $5 to $50 million is not the toughest part of a new venture - it's getting your users to pay you anything at all. The biggest gap in any venture is that between a service that is free and one that costs a penny...

If you read through the TUAW comments, you'll notice that almost everyone is willing to pay for the service, even if they don't want to pay the list price. Using Josh's "Penny Gap", Charlie is well ahead of the game.

Note: At the time of this writing I, and/or funds I maintain discretionary control over, did not maintain a position (long or short) in either Apple (AAPL) or Google (GOOG).

charliewood spanningpartners spanningsync calendaring sync spanning google apple ical enterprise irregulars kopelman redeye penny gap charlie wood woodrow

Salesforce.com Wealth Management: Interesting opportunity...but hardly a Bloomberg Killer

Merrill Lynch's wealth management advisers could have used the new Wealth Management Edition of Salesforce.com last week as the markets suffered their worst losses in recent memory. Brokers make their money on the down days; by reassuring client's that the sky isn't falling and ultimately instilling a sense of calm in the eye of a downturn.

I attended last week's luncheon where Marc Benioff announced the Salesforce Wealth Management Edition amid much fanfare. The event was widely covered by mainstream media, so forgive me in advance if you've already read the basic highlights of the announcement:

• Wealth Edition is a tailored, customized version of the core SFA app geared toward wealth managers and stock brokers
• Merrill Lynch, the mysterious 25,000-seat customer, is a partner and was the guinea pig for much of the beta development [and it sounds like they got their 25,000 seats for a tidy discount as a result]
• Thomson Financial and Dow Jones were featured partners, as many of their best-selling information services and tools are embedded into salesforce as part of Wealth Edition
• Wealth Edition will retail for $500 per user per month; 2x the cost of Unlimited Edition
• Benioff and his partners are targeting Bloomberg

Let's take a moment to look at the last statement a bit more, shall we?

Benioff and his partners are targeting Bloomberg.

Boy did the mainstream media and sell-side analyst community take this bait hook, line and sinker. Take a look at some of the headlines following the event:

• Infoworld: Salesforce puts Bloomberg in its sights
• BusinessWeek: An Assault on Fortress Bloomberg?
• DM News: Salesforce set to challenge Bloomberg
• eWeek: Salesforce.com announces 2.0 strategy, wealth management edition

I can't blame the media for taking this at face value. After all, Salesforce has been on a roll and the luncheon at the Pierre Hotel was tightly coordinated, convincing and, in fact, had plenty of significant tidbits thrown in for good measure. And if that weren't enough, Benioff tried to visually beat us all over the head by having a "history of the financial services" display which went from a ticker tape machine to a Bloomberg terminal to, you guessed it, a workstation running Wealth Edition.

At face value, setting its sights on Bloomberg makes a lot of sense:

1. Bloomberg is ubiquitous; with arguably the best brand name in the financial services industry
2. Thomson Financial and Dow Jones, Salesforce partners in the venture, are major competitors to Bloomberg
3. Bloomberg is expensive, at $1,500 per terminal per month
4. Bloomberg's user interface, in my opinion, leaves something to be desired

This makes for a compelling argument that goes something like this...there are 3 to 4 million financial planners and wealth management advisers in this country who have no alternative but to pay Bloomberg exorbitant fees. Yet, because of a lack of competition, Bloomberg hasn't had to innovate and thus, the market is ripe for an alternative. Enter Salesforce, who provides a user-friendly version at your desktop for a mere 1/3rd of the price of a Bloomberg terminal.

Sounds great, but here's the not-so-dirty-little-secret that makes this equation completely flawed...Bloomberg isn't on the desktop over every wealth manager. Far from it. In a typical office full of say, two dozen brokers, you might find three or four Bloomberg terminals between them. In most offices, the terminals are a shared asset that augments the tools brokers use in their main workspace [e.g., their PCs, contact management software, phones, research portals]. And, if anything, Bloomberg can be accused of having TOO MUCH information, with literally thousands of screens and data sources accessible if you know where to look.

So the math is flawed...Bloomberg may "only" have 235,000 terminals deployed but that doesn't mean there are 3.7 million unserved wealth managers. I would contend those 235,000 terminals conservatively cover 1 to 2 million of those wealth managers at a minimum.

But don't blame Salesforce for doing the marketing bait-and-switch; it's actually a smart business move. In its core market, CRM doesn't really compete with SAP or Oracle directly; or I should say they rarely do, yet, it's not stopped Salesforce from marketing against the ERP behemoths at every turn. Bloomberg is, in many ways, the SAP of the financial data and information sector.

Let's not confuse my post with a lack of enthusiasm for the Wealth Management Edition. Having seen the demo with my own eyes, it's damn impressive. I have many friends in the wealth management business, and it's 99% about relationship management. Information has become a commodity. An average internet user can get as much information on Yahoo! Finance as a broker might have had access to just 10 years ago. If the Wealth Management Edition works as well in a real-time environment as it did in the demo, it will greatly reduce the friction between a broker's ability to coordinate a deluge of market-driven data with his clients' interests and priorities.

Will the price point stick? I'm skeptical, if only because it's 2x the price of the Unlimited Edition yet I don't believe it includes access to the partner services from Dow Jones and Thomson. All in, this is a significant monthly investment to commit to. But here's the great news, in addition to Merrill Lynch's commitment (25,000 seats), there were at least two other CIOs of major banks at the event publicly inquiring about the product. If SfDC gives a healthy discount but nets even 1% of the addressable market (i.e., 30,000-40,000 seats); you're talking about a significant incremental revenue stream.

Consider:

• $500 list price per user per month
• X 50% Discount
• = $250 per user per month
• X 35,000 seats
• = $8.75mm per month
• X 12 months
• = $105mm annual opportunity

Given how effective SfDC has been selling its services, and given the early commitment from Merrill Lynch and the quality of its partners, it's easy to see what kind of financial opportunity this could represent, even at a sizable discount per seat. When you consider that it's but the first in a series of new targeted editions for different financial services roles; the askew competitive positioning is almost forgivable. Almost.

Note: At the time of this writing I, and/or funds I maintain discretionary control over, maintained long equity positions in CRM, SAP and YHOO but did not maintain a position, long or short, in any of the other companies mentioned. We also may, at times, carry derivative options on underlying positions as a hedge.

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NetSuite glams up its board with Billy Beane...

NetSuite is gearing up for an IPO and has apparently decided to glam up its board of directors just in time to do some good old fashioned road show glad handing. Billy Beane, GM (and part owner) of the Oakland Athletics, has joined NetSuite's board of directors.

In case you're wondering if this doesn't have just a little bit to do with Beane's larger than life celebrity in the Valley, just take a look at the title of today's press release:

• NetSuite Changes Game with Billy Beane

"Billy's outrageously successful approach in changing the game of baseball by managing using facts to supplement instinct is very similar to the transformation our customers undergo when they move their business to NetSuite," said Evan Goldberg, chairman, co-founder, and CTO of NetSuite. "We are all excited about the insight Billy will bring to NetSuite and our customers."

Changes Game? Hmmmm...hyperbole much? This is not to suggest this wasn't a bold and interesting move for many reasons. Beane has proven himself to be a phenomenal judge of talent, decisive and is 100% committed to challenging the status quo when there is evidence to support a contrarian take. All of those things will be essential toward building NetSuite from a solid SMB-focused SaaS play into a publicly-traded software vendor that's got the weight of the much larger and more established salesforce.com as a direct comparable.

I've not had the chance to meet Billy Beane, but like any other math geek who loves baseball, I devoured Moneyball and have followed Beane's career arc religiously. What I find most interesting about today's announcement is it would have the uninitiated believe it's Beane himself who leveraged Sabermetrics and statistical methods to evaluate baseball talent in a more empirical manner. While he's certainly the driving force behind that movement; he wasn't the one who actually crunched the numbers or devised the algorithms.

He was just prescient (and gutsy) enough to find guys who could (like J.P. Ricciardi and Paul DePodesta). If you've read Moneyball, you understand that Beane's talent is not as a mathematical genius, but rather as a man with undying conviction in his beliefs and the will power to push back on long-held truisms if it means success.

With an IPO looming, NetSuite needs to strengthen the independence of its board and this is probably the first of several new appointments I'm imagining. Prior to Beane's addition, the board was comprised of Founder Evan Goldberg, CEO Zach Nelson, VC Deborah Farrington (Starvest) and Steve Fink and Philip Simon, two members of Lawrence Investments [Larry Ellison's personal investment firm].

Today's announcement resonates against the recent news that Lenny Dykstra was starting his own investment fund. Fortune profiled Dykstra's unlikely rise into the world of finance last month; and they captured the bull-in-a-china shop, rough around the edges persona that made Dykstra such an effective major league player. Contrasting Dykstra's in your face style with the polished veneer of Beane (now joining the board of a highly anticipated 2007 IPO potentially) hearkens back to when they were teammates on the New York Mets in the early 80s. In Moneyball, Beane talks a lot about how Dykstra, the guy with limited physical gifts and unremarkable pedigree, managed to outplay Beane (who was a 5-tool prospect and highly touted) because of their respective mental approaches to the game.

From a review in Knowledge@Wharton [free sub required]:

A high school phenomenon who chose pro ball over Stanford, Beane was drafted by the New York Mets in the same draft that brought Darryl Strawberry to the big leagues. Coming up in the Mets farm system, he roomed with Lenny Dykstra, who was destined for a permanent spot in the Mets outfield.

As Lewis tells us, they were two very different kinds of ball players and the contrast is instructive: “Lenny thought of himself and Billy as two buddies racing together down the same track, but Billy sensed differences between himself and Lenny. Physically, Lenny didn’t belong in the same league with him. He was half Billy’s size and had a fraction of Billy’s promise – which is why the Mets hadn’t drafted him until the 13th round. Mentally, Lenny was superior, which was odd, considering Lenny wasn’t what you’d call a student of the game. Billy remembers sitting with Lenny in a Mets dugout watching the opposing pitcher warm up. ‘Lenny says, “So who’s that big dumb ass out there on the hill?” And I say, “Lenny, you’re kidding me, right? That’s Steve Carlton. He’s maybe the greatest left-hander in the history of the game.” Lenny says, “Oh, yeah! I knew that!” He sits there for a minute and says, “So, what’s he got?” And I say, “Lenny, come on. Steve Carlton. He’s got heat and also maybe the nastiest slider ever.” And Lenny sits there for a while longer as if he’s taking that in. Finally he just says, “Shit, I’ll stick him.” I’m sitting there thinking, that’s a magazine cover out there on the hill and all Lenny can think is that he’ll stick him.’”

It'll be interesting to see whether Dykstra [i.e., the trader] or Beane [i.e., the analyst] have the greater success as financial strategists going forward. 

 

Related Threads:

• NetSuite: Oracle's next meal or Street's SaaS darling?
• Netsuite Ponders IPO
• Reviewing the Next Big Things from Enterprise 2006
• Zach Nelson discusses future of SaaS
• NetSuite-ening the Pot?
• Private Company Spotlight: NetSuite

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NetSuite: Oracle's next meal or the Street's next SaaS darling?

Phil Wainewright today asks whether NetSuite will become part of  Oracle's M&A rampage or whether Larry (NetSuite's largest shareholder) will instead allow the company to come public, as many have expected.

Phil isn't alone in asking the question. I've asked it several times in the last few years. But the one thing neither Phil nor others [myself included] have considered is whether or not Evan Goldberg, Zach Nelson and the other NetSuite stakeholders have provisions against an Oracle takeover. While Ellison has a majority equity stake, that doesn't preclude the other founders from having some type of provision within the partnership documents that gives them leverage in any negotiations with Oracle.

Given the importance of SaaS and Oracle's willingness to embrace the maturation of the traditional perpetual license model; I can't see how NetSuite would be allowed to come public UNLESS there are provisions in place that preclude Ellison from forcing the issue.

Related Threads:

• Netsuite Ponders IPO
• Reviewing the Next Big Things from Enterprise 2006
• Zach Nelson discusses future of SaaS
• NetSuite-ening the Pot?
• Private Company Spotlight: NetSuite

Note: At the time of this writing I, and/or funds I maintain discretionary control over, did not maintain a position, long or short, in ORCL.

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