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Larry's Kids

NetSuite, Oracle, and SalesForce.com- all spawned by Larry Ellison- are entering a high-stakes battle to sell you software that gives you unprecedented control of your company.
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Al Mcgorry is a small-business man who thinks big. So in 2002, when this CEO of a 12-person software consultancy in Sacramento heard of a new, inexpensive service called Oracle Small Business Suite, he thought that Oracle's CEO, Larry Ellison, was finally offering a scaled-down version of the software that its big, multinational customers use -- at a cost of a quarter of a million dollars and up -- to run their businesses. But unlike traditional Oracle products, this one was simple to use, integrated, delivered over the Web, and at only $49 per month, surprisingly affordable. McGorry was hooked.

The fact is, it wasn't an Oracle product at all. This innovative new business software solution was the work of a small San Mateo company called NetLedger (later NetSuite) that was launched in 1998 by Ellison and a young protege, Evan Goldberg. NetLedger got to use the Oracle name at a time when upstart Internet companies needed all the branding advantages they could get. In return, Ellison got a foothold in the small to midsize business space. It was an inspired partnership. So much so that NetSuite reached No. 12 on the Inc. 500 this year, with four-year growth of 5,763%. Its 2003 revenue was $16.5 million, and 2004's number will approach $50 million. And if you ask Goldberg and his team, they're just getting warmed up. "This is a massive, massive market," he says, citing the nearly seven million small to midsize businesses in the U.S. alone.

It's a fact not lost on Ellison. At the same time he was funding NetLedger, he was also helping bankroll another Web-based software company targeting small and midsize businesses: SalesForce.com. And now, years later, Oracle has launched its own product -- which bears more than passing resemblance to NetSuite's -- aimed at the small and midsize market. That gives Ellison a stake in three companies that are, or soon may be, fighting a turf battle for the small to midsize business dollar (he owns more than 50% of NetSuite; Goldberg, other employees, and venture capitalists own the rest). If you're Larry Ellison, those are pretty good odds.

And if you're Al McGorry, the competition is pretty good for you, too. For McGorry, the NetSuite product, which started as a simple competitor to QuickBooks, delivering accounting software over the Internet via subscription, has made a huge difference in his business. Instead of buying software on disks that you (or well-paid engineers) load onto your computers, the software is accessed over a Web browser, allowing you to log on from anywhere. All of your employees can access real-time data, which is backed up every night on class A servers. There are no upgrades to buy, and there's far less maintenance.

And the software is constantly growing, adding the ability to manage contacts, keep appointments, track sales, manage employees and payroll, manage customer orders and inventory, and build and maintain a website. As the service evolved, the name of the company was switched from NetLedger to NetSuite to reflect its lineup more accurately. "Everything just fits together," says McGorry, who had been using at least four different software programs -- none of which were integrated like the Oracle Small Business Suite -- to do the same thing.

But then in 2003, McGorry's annual cost for the suite doubled to $1,200 a year ($99 per month). And in 2004, he had to write a check to NetSuite for $7,200 ($399 per month for one user; $99 per month for each additional user). That figure allowed him to increase the number of users from one to three, but it's still an eightfold increase in his annual payment, which is always required up front. An avid reader of Internet technology bulletin boards, McGorry says that many in the small-business community were apoplectic each time the price jumped. "People were ripping them apart in these user-community forums," he says. "My God, there were a lot of defections."

Still, McGorry says NetSuite makes sense for his growing business, Capital Datacorp, which has annual revenue just shy of $5 million -- especially since it has engineers who work almost exclusively in the field and other employees (including himself) who occasionally work from home or at a customer site. On a recent trip to the Alps, McGorry, thanks to NetSuite, was able to duck into a tiny Internet cafe and get up-to-the-minute sales figures.

To goldberg and zach nelson, NetSuite's CEO since 2002, customers like McGorry are proof that they're on to something. Trying to keep up, they hired nearly 100 new employees in 2004 -- most of them sales staff -- bringing the total to about 300. They're already expanding into Europe, Asia, and Australia, having established sales offices in Canada and the U.K. in the past year, and they're working on translated versions for countries from France to China.

In advance of an IPO planned for late 2005 or early 2006, they're on a tear to grab market share, and their confidence is riding high. "This is a CEO's fantasy product," says Nelson, a nearly evangelical promoter of NetSuite. As he demos the software, his enthusiasm is infectious. When it comes to competitors, he patently dismisses them, regardless of their size (like Microsoft and its Great Plains product) or market share (Intuit's QuickBooks, the 800-pound gorilla of small-business software). Nelson is, rather boldly, even dismissive of Oracle's ability to move into the smaller market space. And yes, that's his boss's other company he's talking about. NetSuite is like the Chihuahua that thinks it's a German shepherd.

But it's a fast-growing Chihuahua, and NetSuite has one big advantage. While its competitors targeted specific slices of the market (QuickBooks focusing on accounting, SalesForce.com on sales-force automation), NetSuite was first out of the gate with all-in-one business software delivered over the Web. Is there even anyone else in the race? "No, believe it or not," says Yankee Group analyst Sheryl Kingstone. "Not the way they do it."

Ultimately, the company's greatest challenge may be its ability to retain its small-business focus. Can a company that's owned by one of the wealthiest men on the planet, a company that's growing spectacularly, expanding globally, and competing against the likes of Microsoft and Intuit, stay close enough to the small-business mentality of its customers to truly understand them? Goldberg says that one of the company's advantages is that it's run entirely on NetSuite software, which forces it to evaluate its own product daily in a real-life setting. But will NetSuite be a candidate for its own software if it keeps up this pace? "It's an interesting question that we think about," says Goldberg. "Will we still be using NetSuite when we have 10,000 employees?"

Early in his career, Goldberg's own focus was on big business. He went to work for Oracle as a database architect in 1987, right after earning his degree in applied mathematics at Harvard. Then, after eight years, Goldberg -- with the blessing and backing of Ellison -- set off with three other Oracle employees to create his own multimedia software start-up in San Francisco. An early, ill-fated competitor to Macromedia Flash, the company was called mBed. It never connected, but as Goldberg struggled with managing his fledgling operation, he began to sense a greater opportunity. He had gone straight from software genius to CEO and was now dealing with employees, sales, and all sorts of start-up issues. And he needed help. "The main thing I learned," says Goldberg, "is that, if you were a small or growing business, the tools that were available to you were extremely limited."

Goldberg called Ellison in 1998 to suggest that they create small-business applications. Ellison encouraged Goldberg to focus on accounting but to do it, unlike QuickBooks, over the Web. "Larry really was, even at that point -- and this is in 1998 -- sure that this was how all software was going to be delivered," says Goldberg. "And he was trying to transition Oracle to do that for big companies." Goldberg wanted to pursue sales-force automation, but Ellison pushed for accounting first, arguing that that's the core of all small businesses. Accounting it was. "The entire vision of the company," says Goldberg, "came together in about five minutes."

Thus, NetLedger was born in late 1998 in a small office south of San Francisco above a hair salon and an Indian restaurant. Goldberg says that while the first four employees were all ex-Oracle, the next 50 were deliberately not. "We really knew," he says, "that because we were delivering software for small and midsize businesses, we needed a different culture at the company. We needed different blood." The company was launched on QuickBooks and stuck with the Intuit product -- for the first two months. "I remember that day when we imported the QuickBooks file [to NetLedger's nascent online software program], and our business was sitting there, right on the Web," he says. "We could see everything that was happening. That was a great moment."

The first product, also called NetLedger, debuted in 1999 at a cost of $4.95 per month. At that price, Goldberg got NetLedger in a lot of hands, which was the goal. One of those early customers was Rene Vandockum, a small-business man running a San Diego company called Racebolts.com, which imports and sells titanium nuts and bolts for motorcycles and racecars. Vandockum dropped QuickBooks because of NetLedger's integration, tying together the front and back offices. But the software was hardly perfect. "Back then," he says, "it was down a lot, awfully slow, and every time a new version came out, the whole thing crashed." But it was cheap, offered good (and free) customer service, and was constantly improving and adding features.

It was during this early phase that Goldberg was stunned to learn that his friend and former colleague at Oracle, Marc Ben-ioff, had decided to target the same market. "He came in three months after we started NetLedger and sheepishly said, 'Yeah, I'm doing a company. I'm going to do sales-force automation for small businesses delivered over the Web.' " It was precisely the plan Ellison had talked Goldberg out of pursuing. Benioff's business -- launched in 1999 with a $2 million investment from Ellison -- became SalesForce.com, which is now the market leader in the category and has a post-IPO market cap of $1.7 billion. "He went a different route," says Goldberg of Benioff, "with a different approach that allowed him to get to market quicker -- but focused on a more narrow area."

I've always allied myself with somebody who lives and breathes sales and marketing so I can live and breathe technology."
-Evan Goldberg

The news brought a heightened sense of urgency. By 2000, NetLedger had launched its Web-store application. By 2001, it had delivered its own sales-force-automation application. With that came the realization that it no longer made sense for Goldberg to serve as both CEO and chief technology officer. "My whole career," he says, "I've allied myself with somebody who lives and breathes sales and marketing so I can live and breathe the technology and product design." He knew he needed a professional CEO. His first choice lasted just a year and is now a VP at Intuit. After Goldberg dispatched a headhunter to try again, the executive recruiter sent an e-mail to virtually every executive at Intuit with a subject head reading: "Larry Ellison." The message said Ellison was starting a great company that was going to be huge. "I actually know some people over there," says Goldberg, "and Steve Bennett [the CEO] wrote me and said, 'Interesting way to recruit." Despite the aggressive approach, no successful candidates turned up.

In early 2002, Goldberg called Nelson. They had known each other at Oracle, and once they started talking, says Goldberg, "it was immediately apparent that this was exactly who I wanted -- he was the yin to my yang. And he gets into the company in a way that makes it really, really fun to work here."

Five years older than Goldberg, Nelson, 43, had already been on the scene in Silicon Valley when Goldberg arrived from the East. A graduate of Stanford, Nelson had bounced from Motorola to Sun Microsystems and eventually to Oracle, where he became VP of worldwide marketing at 31. But four years later, he left to join Network Associates, the security software company now known as McAfee. It was there that he morphed from marketing guy to chief executive, becoming CEO of McAfee's business-to-business online security firm MyCIO.com.

At McAfee, he developed a reputation for outlandish marketing stunts. It started with obtaining the naming rights for Oakland Coliseum, where the A's and Raiders play. Network Associates Coliseum proved to be an unpopular stadium name, but it was a marketing coup. In fact, the A's are now a NetSuite customer, and Nelson has already negotiated for ad space behind home plate. But he doesn't want to stop there. "Someday we'll have our own arena," he says. "That's my goal."

At MyCIO, Nelson pulled off another stunt, draping the company's entire 11-story building -- a la Christo -- in a billboard. "It was at the peak of the dot-com craziness," he says. "We broke every ordinance known to man. You could see it from five exits away. It was beautiful." Just before the company was set to go public, though, the bottom fell out of the market. So, here was Nelson, a former Oracle marketing whiz with CEO experience, looking for a new gig. And he had one other important advantage. Goldberg knew that any CEO he brought in would have to pass a crucial test: the Larry test. "And that's a relatively high bar," says Goldberg. "But Zach obviously had had a lot of exposure to Larry [at Oracle]."

While Ellison rarely sets foot in the offices at NetSuite, he is a constant presence. The background image on Nelson's PC is a photograph of Ellison at the helm of his America's Cup boat. "When Larry calls," says Nelson, "everything stops."

And he calls regularly, usually toward the end of the month as sales results are coming in. He often advises Nelson on topics such as sales structure and how to get to market. He calls Goldberg about products, especially the "dashboard" -- the system's front page, which brings critical bits of data such as new sales, year-over-year figures, appointments, etc., onto one easy-to-read and customizable page (see photo on page 69). "When we launched the dashboard [in 2002]," says Goldberg, "Larry called me and said, 'Okay, now you finally have something in your product that I want to use.' And ever since then, he logs on basically every single day to see how we're doing. He's effectively the product manager."

When Nelson joined NetSuite, he asked Ellison how anyone could run a business without such a product. "Larry said that CEOs historically have been able to make decisions based on 1% of the data that they actually need to make the decision," says Nelson. "Here, we give you almost 100%."

Larry has a wealth of knowledge, and he's not shy about sharing it. I call him belligerently consistent."
-Zach Nelson

Sitting in Nelson's spacious San Mateo office with a yin-yang glass coffee table in the middle of it, Goldberg says to Nelson: "I remember that the first thing you said to me when you got done talking to [Ellison about joining the company] was, 'He takes this thing very seriously." That would surprise no one who knows Ellison -- or has watched Oracle's pursuit of PeopleSoft. "Larry has a wealth of knowledge about what works and what doesn't, and he's not shy about sharing it," says Nelson. "He's very focused. I call him belligerently consistent."

All of which makes NetSuite's evolution toward higher prices and bigger clients and Oracle's turf even more interesting. As NetSuite works hard to broaden its customer base, seeking larger and larger clients, is there a danger of leaving smaller customers behind? Racebolt.com's Vandockum certainly thinks so. With only one employee and annual sales of around $100,000, he's stayed with NetSuite through years of missteps and growing pains but says its pricing structure is shutting him out just as the product is hitting its stride. Over five years, he's seen his annual payments go from about $80 a year to $1,800 a year and claims NetSuite wants nearly $8,000 next year ($4,800 for the main user, plus $1,800 for a second user, and $1,000 for an annual live tech support package that used to be free).

Vandockum is considering letting his contract with NetSuite expire in May and returning to QuickBooks Pro. One reason: He says computer-based, as opposed to Web-based, software means faster response times to questions when customers are on hold. QuickBooks Pro will be a one-time $250 purchase, and Caldera Volution, a Linux-based website builder he'll use for his online store, will charge $70 a month. But he's dreading the change. "The switchover is a big drag," he says. "It's a lot of work."

While Nelson is adamant that NetSuite is not abandoning small businesses, he emphasizes that the company is targeting "growing" businesses. Seventy percent of its customers have fewer than 100 employees, but NetSuite is also signing up 400- to 500-user customers that are divisions of companies such as Weyerhauser and DuPont. And it just landed its first 1,000-user account. Still, Nelson acknowledges that the price bumps have been tough on smaller customers. Of the $399-a-month fee, he says, "Most small businesses, we know, can't afford that."

That's why NetSuite introduced NetSuite Small Business in August -- priced at $99 per month for the first user and $49 per month for each user after that. The product has been positioned for businesses that have outgrown QuickBooks, and the price does make it far more attractive to smaller users -- but some longtime users will undoubtedly be disappointed. NetSuite has helped even the smallest of companies grow more sophisticated, and these clients have been conditioned to expect more. The Small Business version, for example, doesn't satisfy Vandockum's desire to customize his website. Capital Datacorp's McGorry can't see himself giving up the features he loves for the cheaper, scaled-down version either. Nelson is quick to say that he hopes to retain Vandockum as a customer and may consider offering some limited higher-level functionality, such as website customization, at a reduced price. "The last thing you want to do is see a customer leave," he says. "I bet we'll work it out."

But there are skeptics -- especially at the competition. Although NetSuite recently built an ad campaign on poaching QuickBooks customers, Bill Lucchini, director of QuickBooks Enterprise at Intuit, says he doesn't consider NetSuite to be a small-business company anymore. "I think of NetSuite as a midmarket company," he says. "If you want to put 10 users on its system, you're talking over $6,000 a year, and that's just not a small-business solution."

Like NetSuite, QuickBooks is segmented into multiple products, depending on the size and needs of the businesses. They range from the new $99 SimpleStart program to the $3,500-a-year QuickBooks Enterprise software, which targets companies with 20 to 250 employees (with live tech support built into the price). And Intuit now offers its own Web-based small-business solution, called QuickBooks Online, for $19.95 per month.

Nelson dismisses Intuit's new offering as a "neutered version of QuickBooks Enterprise." He is equally dismissive of SalesForce.com's move into the midsize market. "There's only one thing you can't do with SalesForce.com: sell anything," he says. "SalesForce.com is about managing leads and prospects. The minute they become customers, all that data leaves SalesForce.com."

For his part, Marc Benioff professes scant respect for the suite model. Which is all the more surprising because it's a model that Oracle has embraced, and Ellison, of course, helped fund SalesForce.com and still retains a small stake -- although he did step down from SalesForce's board in 2001 because of product conflicts. At NetSuite, Ellison relinquished the title of chairman in March 2003 but remains on the board. But the sibling and oedipal rivalries may just be getting started.

Last summer, NetSuite shed the last vestiges of the name Oracle Small Business Suite, which had been slowly reduced to about 5% of the company's sales. Nelson says this was done to allow NetSuite to establish its own identity. But it also likely had something to do with the fact that in September, after years of testing it overseas, Oracle released its Oracle E-Business Suite Special Edition. Oracle is explicitly targeting small to midsize businesses with a full suite of integrated business software delivered, of course, over the Internet. The difference is that instead of renting the software in perpetuity, as with NetSuite, customers purchase a one-time license (the minimum order is for 10 users at approximately $2,000 each) and then pay local resellers to maintain the software.

Nelson denies that there's any real competition between the two Ellison-controlled companies, saying they only cross paths a couple of times a month. But with its first 1,000-user deal in the bag and another in the pipeline, there are sure to be more and more awkward moments in front-office waiting rooms when Oracle's salespeople walk in and NetSuite's walk out. "We're going to continue to march upstream," says Nelson, "still servicing small businesses but also reaching much larger companies over time."

But, according to the Yankee Group's Kingstone, both NetSuite and Oracle have their work cut out for them. NetSuite's challenge is that new customers have to dump years' worth of expensive software to use them. And the bigger the company, the more entrenched they are. As for Oracle grabbing a slice of the small-biz pie? "They have never been able to pull that off," says Kingstone. "In the back-office, yes, in the front-office, no." Of course, Oracle's new E-Business Suite is only just getting started here in the States.

When big businesses want to innovate, what do they do? They take a bunch of guys, throw them out, and let them create a small business."
-Zach Nelson

Ellison declined to be interviewed for this article, citing the desire to avoid any perception of conflict of interest, as his three kids duke it out in corporate boardrooms across America and beyond. It's hard to know if he's conflicted or overjoyed. But it's even harder to imagine that any of his progeny would have set off down this path without at least his tacit approval.

The executive overseeing marketing for Oracle's small to midsize business market, Frank Prestipino, downplays any rivalry, but his words about NetSuite's product aren't entirely brotherly. "If financials are all you'll ever do," he says, criticizing NetSuite for not being as customizable as Oracle, "and you don't care what your general ledger is going to look like, and you'll take whatever comes, then great, that's the thing for you."

He also suggests that NetSuite's rental model is ultimately more expensive than buying the software outright, and points out the lack of manufacturing-systems software in the suite. But does he expect to see NetSuite pop up more frequently as a competitor, as NetSuite moves upmarket and Oracle moves down? "Yeah," he says, "I would say so."

But for all NetSuite's drive to go after bigger fish, Nelson zealously espouses the small-business model and its contributions to society. "When big businesses want to innovate, what do they do?" he asks. "They take a bunch of guys, throw them out of the building, and let them create a small business."

That, of course, is pretty much what Larry Ellison did with NetSuite and SalesForce.com. But how much longer will each one be happy serving its own niche? "That's always been true with software," says Nelson. "Everybody wants to be where they're not."

Rob Turner, who wrote about celebrity entrepreneurs in Inc.'s December issue, can be reached at dashboard@inc.com.

Last updated: Feb 1, 2005




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