This special episode of CXOTalk is being broadcast live from the SaaStr Annual 2016 conference stage.

Zach Nelson, CEO of NetSuite, has led the company from small size to becoming a public company with almost $1 billion in revenue. In this episode, he describes SaaS company growth and the challenges along the way. 

Mr. Nelson has led NetSuite to be one of the leading software-as-a-service companies in the world, where, under his leadership revenues have grown ten-fold, the workforce has quintupled to more than 500 employees and its customer base has expanded to thousands of companies. He has been a Director of NetSuite Inc since July 2002. From 1992 to 1996, he held various positions, including Vice President of Worldwide Marketing at Oracle Corporation. He was employed by McAfee Inc. (a/k/a Network Associates, Inc.) (now a part of Intel Corporation) from March 1996 to October 2001. Mr. Nelson joined Networks Associates Inc in March 1997 as the Vice President and General Manager of Network Management. From December 1999 to April 2001, Mr. Nelson served as the Chief Executive Officer and President of myCIO.com. Since April 2001, he served as the Chief Strategy Officer of myCIO.com.

Growing a SaaS business, with Zach Nelson, CEO, NetSuite

Michael Krigsman:

(00:10) CXOTalk live. I’m Michael Krigsman and I am the founder of CXOTalk dot com. CXOTalk brings together the most innovative people on the planet for in depth conversations, and today we are honored to speak with Zach Nelson who is the CEO of NetSuite. Zach how are you?

Zach Nelson:

(00:34) Great to be here, this sort of reminds me of the founding of NetSuite. We were founded above a liquor store so we haven’t gone very far.

Michael Krigsman:

(00:42) So you’re returning to your roots. You know and I should say this, this is episode number 155 of CXOTalk. So Zach, tell us about NetSuite, what is NetSuite, what do you sell, who’s your market?

Zach Nelson:

(00:55) Well I’m sure many of you know NetSuite maybe use NetSuite. The founding story is interesting and I think arguably we were the first cloud business application companyfounded back in 1998, so it was a long time ago now. But our founder Evan Goldberg, still our Chairman, still our CTO that had founded a company that competed with the technology that became Flash. Macromedia bought Flash, his company went out of business and so he and Larry Ellison sat down to talk about what Evan wanted to do next.

(01:25) Evan was an incredible developer from Oracle and Larry had funded the first company. Even said, you know it’s really hard to run a small business. I have all these systems and in particular I have a problem with managing my salesforce, so I think I want to go and build a version of Seibel but make it more for small and mid-sized businesses. And Larry said, well that’s a great idea, but the problem with Seibel is there’s no customer data in Siebel. All the customer data is in the back office, what they bought, how they paid, was it shipped to them etcetera. So he said build the back office first and then build the suite and applications around it.

(01:57) The second thing he said was, and by the way deliver it over the internet because that’s how all software’s going to be delivered. And the last thing he said, which was a five minute conversation was, and make sure it has a web store on it because people are going to want to buy things on this internet. And really that’s the architecture of NetSuite today, and as an aside there was one other guy involved in that conversation named Marc Benioff and He went off. And two weeks later called back and said I’m going to do that Seibel online thing and that became Salesforce dot com, so both of the leaders today were founded literally in the same conversation with Larry Ellison.

Michael Krigsman:

(02:28) So this was 1997/8

Zach Nelson:

(02:33) Yeah and it was amazing in 1998 nobody believed complex applications would be delivered over the internet.

Michael Krigsman:

(02:40) And that internet thing you know and SaaS were toys.

Zach Nelson:

(02:43) That’s right. If you think about it, and if you think about the EBay’s and the Amazon’s of the world were the first generation software to service applications if you will, they weren’t toys. They’re the world’s largest businesses today, so it was pretty obvious that – at least in my mind, that everything was going to move to the internet.

Michael Krigsman:

(03:00) Okay, so today NetSuite is heading up on $1 billion in revenue, but you joined the company in 2002 when the company had less than $1 million in revenue and you went public in 2007. So take us through the stages of the development of NetSuite.

Zach Nelson:

(03:24) You know I joined NetSuite and my last job was at MacAfee and actually my last job at MacAfee 1999/2000 were taking our security products and putting them onto the internet. So we actually had a start up called MacAfee dot com, which ultimately went public which was a B2C version of the anti-virus delivered over the internet. And I ran a division called mycio dot com which was a B2B version of MacAfee dot com, and from that experience I realized really quickly that all software was going to be delivered this way, so I left MacAfee and began looking for companies doing business software on the internet.

(03:55) There were two at the time, one was called Salesforce, then at the time Net Ledger. One had a CEO; one didn’t have a CEO, so hence here I am today. But as you look at the sort of stages that we’ve gone through are sort of big categories. You know from 2002 to the IPO timeframe it was really about defining the metrics that defined our business, and within those metrics figuring out where the levers were that we could pull to accelerate the business.

(04:21) So on the sales side, how many deals could a rep do in a month or a quarter and at what average sales price. So that was pretty simple math the top on . For us it turned out they could do one or two deals a month, so how did you grow your business? You added sales reps in our case, so that was a huge driver of our business.

(04:38) The second element on the go to market side on the services front, unlike simple SaaS applications these were critical applications. Even though we were selling to small businesses at the time, so services became very important and the big challenge there was how do you do a big SAP like implementation and with many many zeroes missing off the purchase order, and so there were product things you did as well as repeatability things that you did.

(05:01) On the product side you know that’s evolved over time but those of you who are in SaaS startup companies, you know Evan and the team used to push software live. One Christmas Eve, Evan likes to talk about someone’s webstore had a problem and he went on, five minutes fixed it and pushed it during the middle of transactions. Well of course you don’t do that anymore, but you know, lots of releases to sort of very structured release processes as customers get more and more effective.

(05:28) So defining your metrics, driving them, and as you change the business measuring the old metrics compared to the new metrics is very important. So having a good view on – not losing your historical metrics is super important. The second sort of stage is really post-IPO, and when you go public you want to make sure actually that you have enough control over the business, that you’re not going to miss your numbers coming out of the gate, in fact grow the numbers. So I think it’s really mostly about executing in a big way at that time. And probably one of the most important parts of execution is retaining your people. You know you build these great organization you go public then you don’t want those people to walk out the door and be picked off by somebody else.

Michael Krigsman:

(06:06) So you’re initial set of metrics were all about deal size and how many deals we’re closing and how many salespeople do we have, and eventually you started looking at internal metrics in addition to the external facing metrics.

Zach Nelson:

(06:20) Yeah absolutely as a company, and one of the core – and I think we did this very well and I’m really proud of what we done here is we looked at our top 50 employees because those are who your competitors are going to come and poach, and we’d already been there for 10 years already, everyone had already invested over quite a bit of stock, it was how do we retain these people? And of course there’s non-financial things you do to retain people and then there are financial things that you do to retain people. So I think we put in a great system of really using an application call SpiraLinks, and the CEO SpiraLinks is here, Julie Southern and my view of the world was there’s cash comp and there’s stock comp and Silicon Valley is driven by stock comp. And one of the beautiful things this application did for us it gave us the availability to view the vesting of every employee over time. So we knew when people were falling off cliffs. We knew that developer was going to go from a million dollars investing to zero. And you knew they were looking for a new job when it was zero, so this has been an incredible tool that we continue to use now as a 5000 person group.

(07:19) The other thing that we did was when you go public the first thing Wall Street ask you is what’s your next engine of growth, so we had teed up several next engines of growth. We knew they were going to work before we went public. We hadn’t told the world about them, but it was very important as we went public to have next generation ideas. In our case it was multi-company, consolidation, and e-commerce. But we knew that they were going to work and we could really accelerate them in the face of public markets so we could deliver on the expectations of our investors.

(07:51) And then third and this is sort of the stage we’re in now is I call it scaling at scale right. We’re a 5000 person company you know on track to something like a billion this year in revenue. Last year we had at 1400 employees, it’s an incredibly different challenge obviously to grow basically a NetSuite a year in many metrics at this scale. And I would say one of the best things we’ve done and one of the things I’m proudest about that this audience might look at is we build a distributive company very early on. When we were small we knew we had to get out of the Bay area for a whole host of reasons. And so probably in Silicon Valley we had maybe 400 employees but we have 5000 employees in the company. So we built a distributive organization and not just in the US but globally and very early on and that makes the challenge of hiring people much easier when  you’re hiring a thousand people in one office and hiring a thousand people in 20 offices.

Michael Krigsman:

(08:42) So you’re thinking about a multilayered set of challenges today and objectives today, whereas in the beginning again it was all about the sales.

Zach Nelson:

(08:56) The good news is all those things we did in the past are still the basis of what we’re doing today. So we still look at our metrics and say how do we change these metrics or do we need new metrics to drive the business. So that’s really the foundation of the company is what we did in those early years to grow.

Michael Krigsman:

(09:11) Okay so tell us about the metrics back then especially focusing on sales, how has that changed and how has your customer base changed over this time.

Zach Nelson:

(09:23) You know the biggest thing that’s changed over time was that NetSuite was originally designed for small mid-sized businesses. That DNA, cracking the code on how you sell complex applications to mid-sized companies is something almost no other company on the planet has done. Most companies start by running out to the enterprise because it’s an easier sales model. You know, there’s 500 companies in the Fortune 500 the last time I looked and how do you sell to them, you hire 500 reps and you go after it. When you’re selling to the fortune 5 million it’s a very different proposition; you can’t hire 5 million reps to get at them.

(09:56) So that model is firm and I think is by far the best model for sales and services model for mid-market complex business applications. What happened was we grew and we felt we were bringing the power of our enterprise systems to mid-sized businesses. And for those of you who run mid-sized businesses you know it’s harder to run a mid-sized business than to run a large company. In fact I worked at Oracle, I made million dollar mistakes and I got promoted. At a mid-sized company you make a $10,000 mistake you might be out of business it’s a very different world.

(10:29) So bringing the power of those large enterprise systems down was important, and what’s happened is those large enterprises now want the agility of a small business in their business. Just as an example, AMEX Global Travel is probably one of our largest customers. They rolled out in nine months, 30 countries, 120 currencies all live in nine months. You can’t do this on old ERP systems that’s the sort of agility that the larger companies are looking for.

Michael Krigsman:

(10:53) So as you went upmarket from smaller companies to now you sell to very large companies, what did you have to do inside NetSuite to accommodate that change.

Zach Nelson:

(11:09) We had to extend the models I talked about in the very founding’s of the company, the sales model, the service model, and the product model. My best example of the problem with the mid-market sales model applied to the enterprises the following one. We’ve gotten our first deal, it was a SAP replacement with a large multi-billion dollar company and they wanted to buy NetSuite. And so the SEO at the company said SAP has just come back in with another $80 million bid. Stuff doesn’t work and they want to charge us another 80 million to make it work, and great, I told him what did you tell him what we cost? Did you tell him we were 40 million over five years or what was it? He goes no, $400,000, that’s what I told him. And that’s when you knew that a mid-market rep would take an enterprise deal and turn it into a mid-market deal.

(11:56) I’m not talking about gouging people, what’s the value that we’re delivering that company, we’re delivering more than $80 million of value right. Arguably SAP didn’t work in that world. We should have been paid 80 million.

(12:08) And so we had to add a new story to the house; an enterprise sales organization, an enterprise service organization it was very important, and the hard thing about doing that is again, this mid-market DNA we have it so hard to figure out how to sell and service to the fortune 5 million. I did not want to lose that. So you really have to create a new company that’s targeted to the enterprise needs, the enterprise goes to market. And you know some of the things we change on the go to market front on that side was for the enterprise salespeople, we don’t pay them on services at all. We want them to go to market with the GSIs and the Perreaux’s of the world, Deloitte so a lot of things that you change as you begin to look at that segment of the market. But the important thing for us was to make sure they were distinct companies because it’s a completely different sales and delivery model.

Michael Krigsman:

(12:53) So you talk about services but for many SaaS founders the goal is and the ideal is put the product out on the website, people sign up with their credit cards, you never hear from them again, and the money is flowing and flowing in, but with NetSuite your product is complex. Your suite it’s ERP and it doesn’t work in that simple pure way.

Zach Nelson:

(13:18) Yeah, I mean it would be great if every application were a Google search box, and you just typed in, but that’s just not the way it works. I think as you talk about our company and your company, there’s going to be differences, and there’s going to be similarities. At the end of the day running a business is still a complex thing. You know people want to sell over the internet, you use the internet to reach customers, but that doesn’t mean going from order to cash gets any simpler.

(13:41) That was sort of one of the first phalluses. That was the first phalluses of client server applications if you recall. There were back office guys lay SAP and Oracle, there were millions or CRM vendors and the customer would say, well does your application work with that? oh yeah, it’s an API. You can tie Seibel to SAP no problem.

Michael Krigsman:

(13:59) Yeah it just works.

Zach Nelson:

(13:39) Yeah it works and of course it doesn’t work because the data’s complex the data’s linked. That was sort of the first big lie of the SaaS world to; oh you can just tie this application to that application – tie 20 applications together. And certainly the web services make it easier to connect applications. The challenge is it doesn’t make it any easier to synchronize the data and that’s what business is all about is synchronized accurate data. And the problem is once you have data in two places and it’s wrong in one of them, you just don’t know which one.

Michael Krigsman:

(14:28) You’re a business process company it’s not a consumer app.

Zach Nelson:

(14:32) Ultimately.

Michael Krigsman:

(14:35) So this whole services thing, what did that do to the company, the recognition that you need to build up this large services business inside the software company, what did that do to NetSuite?

Zach Nelson:

(14:48) Well I would say if you looked at our model while our customers are doing complex things with the software, we would have rather not built a services organization. However we had to because you know we had to get the customers live, the whole idea I’m speaking to the choir here was to make sure the revenue recurs. And so if the customer doesn’t get live the revenue doesn’t recur.

(15:06) And at the time that we started the company, not only did the world not believe this was going to be the future, but especially the mid-market, this thing called the bar channel, definitely didn’t think this was the future. There whole revenue screen was tied to the stone-age applications they were shocking into life every week for customers.

(15:24) So we had to build our own services because there was no other alternative, and so we did it differently than our services business would. We felt services was an investment in the recurring, and so we told our customers, our investors today we don’t tend to make any money on services; it’s an investment in the recurring, and we make a little money on our services today but it’s really a necessary evil, not saying the services are evil. We’re a software company, we had to have services and I’m really happy to say that 40% of our business now comes through channel partner. So that channel that was reticent 10 years ago is now driving our business today. That transition has happened but that was not there when we started the company.

Michael Krigsman:

(16:04) So services then is the lever that drives the recurring software sale.

Zach Nelson:

(16:10) In our case yeah, and that was another interesting thing about our model, just to talk about history here. You have a lot of startups here and they want to reduce cash burn and the problem with running a cloud company is you have differed gratification, instead of being paid upfront you have it over 10 years so you actually burn through more cash. So in the olds days we used to do three year deals, so you can imagine how hard the sales model was. We were $99 per month, but you need 36 months upfront and that was really to reduce the cash burn. That’s not really the way you want to build a sustainable business.

(16:44) And today, we changed our sales model many years ago to say you know, the way to align our interest with our customers interest is to do only one year deals, because now we’re incented to make sure that customer gets live and they’re incented obviously to get live as well. So that’s a much better alignment. But in the early days when you’re trying to conserve equity and cash burn you do funny things.

Michael Krigsman:

(17:06) What are some of the metrics that you use to correlate things like service and renewal rates and customer satisfaction and your ultimate recurring revenue.

Zach Nelson:

(17:15) Yes so on the renewal rate it’s interesting. When you have companies that span very small businesses to very large businesses, obviously this end of the market churns much more quickly than this end of the market. So we’ve always focusses on revenue churn, right. Infact now our revenue churn is every year we say that it can’t get lower and then it gets lower again. You know the bad side of revenue churn is churn and down sell and those are the negative inputs, and the positive inputs are upsell and year over year our upsell is more that our churn and down sell. So again as you all build company models upsell is a very good thing and you need things to upsell to replace the inevitable, even in a sticky application like ours, churn and down sell so that’s a very important piece of the model.

Michael Krigsman:

(18:02) Tell us about the essence of success in upsell, how do you do it successfully.

Zach Nelson:

(18:08) Well the customer has to be happy first of all to want to add more things. You also have to target the right group of customers, right. Some upsell just comes naturally. I think we’re probably the platform for 70 to 80% of next generation businesses such as here in the audience, so when they go from 50 employees to 500 employees it’s a beautiful thing. So choosing your markets wisely is another important piece.

(18:30) And I would say the third piece, and it goes back to my story of taking an $80 million deal and turning it into a $400,000 deal is really to determine what are the components of your application that bring value to customers, the things that they’re willing to pay for it.

Michael Krigsman:

(18:44) I was going to ask about the link back to the product in this.

Zach Nelson:

(18:45) Yeah, and it’s really key and the way we used to look at it was we’re unusual from a SaaS model standpoint, because if you talk to most SaaS companies they talk about per user per month revenue. And we certainly get per user per month revenue. But we get far more revenue from the functionality from our application. So for example we introduced revenue recognition, we’re not going to add any more users in the finance department. Infact they will probably fire the four guys and redeploy the four people running the spreadsheet but we are bringing them enormous value.

(19:15) So when you look at does the functionality add users or in some ways subtract users and add automation value, we price that separately.

Michael Krigsman:

(19:24) Let’s talk about the competition

Zach Nelson:

(19:28) Is there any?

Michael Krigsman:

(19:29) I’ve heard that there are other companies selling ERP.

Zach Nelson:

(19:35) There are definitely people selling ERP, there are very few cloud – I mean the amazing thing about our position in the world it takes a long time to build this stuff.

Michael Krigsman:

(19:43) Well I was going to say it seems like every ERP company in the past that’s now presently alive is saying we’re cloud, right and that’s the common reframe.

Zach Nelson:

(19:55) I love it.

Michael Krigsman:

(19:58) Why do you love it? These are your competitors?

Zach Nelson:

(20:00) Well this was another Larry Ellison story way back when, when he said the thing that made Oracle take off was when IBM declared they had a relational database. Of course they didn’t have a relational database it was nothing close to Oracle. So people began to look for a relational database and it was basically only one.

(20:15) So the same things happening here. If you look at NetSuite today, we’re top 10 in financial market share. We’re number 10, but by far the fastest growing. If you look to the left of us, all these people claiming cloud, it’s the graveyard of software. You know Microsoft grade planes, Epicor, Infor I mean these are just ugly ugly products. They are I mean you use this stuff; I mean you can’t use it, it’s completely unusable.

Michael Krigsman:

(20:38) He doesn’t mince his words does he?

Zach Nelson:

(20:41) So you can call it – I mean there in the first generation of cloud-washing, look you can host our application – none of it works. You have to re-write these applications from the ground up and by the way you have to do it correctly. You know, you look what SAP did with Business by Design. They spent $3 billion on this thing and instead of copying NetSuite they thought they knew better and the thing was a massive $3 billion flop. It doesn’t really exist anymore, so it’s not just desire but you actually have to have that to execute, and it’s very difficult for the guys on the old applications to execute.

Michael Krigsman:

(21:00) But in fairness some of these competitors like SAP do have a lot of revenue.

Zach Nelson:

(21:14) Well they have a lot of revenue, but even today when SAP talks about their cloud applications it’s all products they’ve required. They have not build a single cloud base, its success factors and can concur you know where is there cloud base ERP offering; it does not exist.

Michael Krigsman:

(21:28) when you think about the differentiation, when I look at EPR websites it seems that most of the ERP vendors are giving very similar marketing messages. So how do you differentiate – obviously you’re growing very rapidly so you’re doing it really well, how do you differentiate NetSuite against both these established companies as well as there are quite a number of smaller cloud based ERP companies that have sprung up in the last number of years as well.

Zach Nelson:

(21:56) Well in truth we never built any ERP systems. We built a system to run a business and the system they run their business on first and foremost is the back office. We have enormous differentiation in terms of how people use that application. If you look today we have a thriving business in Omni-channel retail. You don’t buy SAP to do Omni-channel retail. Our system does it sort of as an accident of the architecture.

(22:22) We discovered very early on you know our customers have their inventory data, their warehouse date, their order of management data, their customer data. It’s all sitting in that suite that was built on the internet so instead of making it look like a business application we said, well couldn’t our customers just put their website on top of that same data and low and behold they could.

(22:37) So it all comes back to the founding vision of our company and the founding visions of your company that the thing that you start to build 20 years ago really defines where you can go in the future. And this idea that Larry and Evan had of building a system to run a business which nobody had ever done and which today still no one has done. You look at how you run your businesses, how many applications do you have tied together, that’s still there big idea. That’s what gives us leverage over other ERP vendors.

(23:03) It’s not about taking people soft and putting it on the cloud, that’s a failed you know 1980s architecture. It’s about enabling a company to do something very different with their business and I think that’s the platform we’ve built.

Michael Krigsman:

(23:16) So the ultimate success point then is the reference backed to the original vision of the company and you’ve executed it and you’ve expanded it in many ways.

Zach Nelson:

(23:27) Yes, you know I’ve gotten philosophical as I’ve been in this job for almost 20 years now, but done some research and there was a researcher from Shell that said, what really makes for the longest lived companies, a guy name (Erie De Groot?) did the study and he found three things to the longest lived companies, and the number one thing was the vision of the company. And the example he used was the Dutch-West Indies Trading Company which is arguably the oldest company on the planet. And he said if they had called themselves that they were the Dutch-West Indies Spice Company, they would have died when the spice trade died. But they were a trading company so they built there core DNA around trading and they grew and grew and grew. So your initial choices and how you build your business really is super important.

(24:09) The second important piece that he found was financial management, and people always look at a cloud company and say well doesn’t that mean you should be profitable? Well no. it means you should invest wisely. And I think that’s something we’ve done as a company particularly well. I mean we raised $100 million before we went public and that’s almost bootstrapping it today you know. A lot of companies are raising $500 million or a billion dollars to run these companies, so as we invested heavily in sales and service and marketing because we felt that that was the important place to invest and it’s paid off a wise investment.

(24:37) And then finally I talked about this in my sort of my middle section, the third important piece was the people, and who you hire, the jobs you put them in, and how they grow with the company. So that’s what we really try to focus on and that’s where those three things, vision, financial management, and the people that we bring on-board.

Michael Krigsman:

(24:54) Fantastic, it’s been quite a journey.

Zach Nelson:

(24:56) It has been.

Michael Krigsman:

(24:58) Thank you so much, everybody Zach Nelson.

Companies Mentioned in today’s show

Amazon                                   www.amazon.com

AMEX Global Travel                www.americanexpress.com/Travel

Deloitte                                   www.deloitte.com

EBay                                        www.ebay.com 

IBM                                         www.ibm.com

McAfee                                   www.mcafee.com

NetSuite                                  www.netsuite.com

Oracle                                                 www.oracle.com

Salesforce                               www.salesforce.com

SAP                                          www.sap.com

Siebel                                      www.seibal.com

SpiraLinks                                www.spiralinks.com

 

Zach Nelson:

LinkedIn           www.linkedin.com/in/zachnelson

Twitter                        https://twitter.com/ZachNelson