NetSuite Goes Public

According to Red Herring, shares of Larry Ellison's NetSuite (ticker symbol "N") edged higher today in its New York Stock Exchange debut after a $161.2 million auction drove the IPO share price to $26, double the $13 initially set by underwriters as the bottom rung of the expected price range.

NetSuite, which makes on-demand order management software for small and medium-sized businesses, has yet to post a profit, recording a net loss of $35.7 million in 2006 and $20.6 million for the nine months ended September 30. Revenue, however, increased from $47 million in the nine months ended September 30, 2006, to $76.8 million for the corresponding period in 2007.

But Mike Fitzgerald, a venture capitalist whose firm has invested in similar software-as-a-service companies, said profits eventually fall to the bottom line.

"NetSuite is a $100 million company growing at 60 to 70 percent per year," he said. "A lot of SaaS companies are in this mode: Relative to the money they bring in each quarter, they have to spend a lot on sales and marketing. That revenue stream has to build up.... Eventually that marketing expense is dwarfed by the size of the customer base."

NetSuite plans to use $8.0 million of the IPO's proceeds to retire an outstanding loan of $8.0 million from Tako Ventures, an investment trust controlled by Ellison, according to regulatory filings. The company also says it will use the proceeds for capital expenditures of between $10 million and $15 million and for working capital and other general purposes.

Credit Suisse and W.R. Hambrecht managed the IPO using a modified Dutch auction format to find the top price at which all the offered shares will be sold. The Dutch auction format, which is rarely used, gained attention when it was adopted for Google's IPO in 2004.

The format arguably delivers good value to selling shareholders such as Mr. Ellison while leaving little room for the share price to climb once public trading begins.