From Computer Business Review, a sister publication.
The object database companies have struggled to achieve critical mass. Will listing on Wall St help?
Half a decade ago, a new breed of database management software vendors proposed that the scope and flexibility of their object-oriented approach would render relational database systems obsolete. It was a bold promise, and one that has turned out to be completely hollow. At that early stage, venture capitalists salivated at the prospect of the emergence of a new database major like Oracle, and poured cash into these object database start-ups. Their bets – on Object Design, Versant, Servio, Objectivity and others – assumed a huge return on the investment when these companies when public or were bought out by larger vendors. But little went to plan. The industry spluttered along, and, even now, amounts to less than $100 million. But getting to this point, they have burnt their way through even more than that.
Last month, the two market-leaders – Object Design and Versant – debuted on Wall Street, but in doing so they exposed just how ugly their financial past has been, as well as their strategies for survival and eventual prosperity. Object Design, the clear number one in the sector with 1995 revenues up 28% to $32.7 million, raised $19.5 million net with its initial public offering (IPO) of 3 million at $7. That price was cut in the build up to the IPO from a target of around $10 – a reaction to W all Street’s worries about the contents of its prospectus. Of greatest concern was a weak financial history and a fluid strategic direction. Over the past five years, the company has run up losses of $38 million, only attaining profitability in the last two quarters. More dramatically, during the past nine months, a completely fresh management team has steered the company towards a new – and still untested – business model. They have moved the company away from its historical focus on market niches that require database systems that are beyond the capabilities of relational. Instead, Object Design has focused on potentially more lucrative pastures – the Internet and intranets.
There was another imperative: to have a shot at an IPO, Object Design had to drastically cut its expenses and show it could be profitable. In the second half of 1995, a company-wide program of cost-cutting involved shedding a quarter of its employees, slashing $2 million from the quarterly sales and marketing budget and taking r&d down by a fifth. Those efforts prime the company for what it believes is the killer application that has for long eluded the industry. The notion is that the object data handling capabilities of products such as Object Design’s ObjectStore will prove attractive to companies wishing to store and manage multimedia Web data, such as sound, graphics and video. Such capabilities are certainly beyond those of today’s relational databases. But vendors like Informix with its Illustra/Online combination and Oracle with Oracle8 are promising that an object/relational mix can soon solve just those problems without the kind of threat to performance and lack of scalability that pure object databases pose. In any case Object Design’s Internet software has only been available since March of this year.
The change of direction has also meant the scrapping of Object Design’s biggest contract. In 1993, IBM bought 14% of the company and committed to use ObjectStore within several key products. That arrangement netted Object Design $15.7 million in revenue. The Object Design focus on the Internet is very different from how Versant portrays its future. Although it sees some potential in that market, it will remain focused on the telecoms sector and a few other vertical industries – finance, health care and energy. But its vulnerability there is still transparent. In the last few quarters 40% of its revenues have come from a single customer – telecoms giant MCI. And like Object Design, Versant has a poor record of profitability. In its eight year history, there is only evidence for three profitable quarters. Nevertheless, the company has a more consistent – and higher growth rate than Object Design, although its revenue base is a third less. In 1995, it chalked up $11.9 million in revenues, up 44%, with net losses of $1.2 million. But over the years Versant has accumulated a deficit of $23.4 million. That compares to the $16.6 million raised at its IPO. The more consistent track record and strategy of Versant has gone down well on Wall Street. Late August, its shares had doubled in value to $16 from their IPO starting point. The immediate prospects of Object Design were being viewed in a different light: its shares are still stuck at $8, a fraction above the IPO price.
