How The Kids at Box Are Disrupting Software's Most Lucrative Game - Forbes

8/9/14, 9:20 PM How The Kids At Box Are Disrupting Software's Most Lucrative Game - Forbes
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How The Kids At Box Are
Disrupting Software's Most
Lucrative Game
This story appears in the March 4, 2013 issue of Forbes.
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Box cofounder Aaron Levie. Photo: Michele Clement.
Twenty months ago Aaron Levie, all of 26 years old, did something arguably
foolish, undeniably gutsy and entirely counter to the prevailing mood that
startups should be lean in the Internet age. Forty-five minutes into a routine
meeting with his board at Box, Levie blithely announced: I want to make a
small adjustment. We need to raise an extra $50 million. An awkward pause
followed. Box had previously raised $106 million, already a heady sum for a
Victoria Barret Forbes Sta!
I write about the people pioneering the technology industry.
company with just $25 million in sales and no profits. Levies early investor
and biggest booster, Josh Stein of venture firm Draper Fisher Jurvetson,
piped up: Im sorry, but you said $15 million, right?
Nope. Five-oh. A month earlier Levie, with the boards acquiescence, shot
down a $600 million offer from virtual-computing giant Citrix. That would
have given the guys in the room 3 to 50 times what theyd put into Box just a
few years prior. Now Levie was asking them to dilute their stake by some 15%.
He hadnt even told his cofounder about it.
They should have seen it coming. Levie is on a mission, and its an expensive
one: to be the Oracle of the next generation of enterprise applications. Box is
an online storage and collaboration service that finished 2012 with about $70
million in revenue, up 160% from 2011. Levie figures he can double that this
year, but thats not interesting to him.
Levie wants to create a transformative technology company for the mobile
era, one that will become the glue connecting any big companys myriad data
and documents across all of its disparate software applications and makes
them accessible securely on a tablet or phone. At that July 2011 board meeting
Box already offered a better mobile experience than anything Oracle, SAP or
Microsoft offered. But it had only five people selling to big companies, which
put it at a crushing disadvantage to the giants.
A two-hour cross-examination later the board gave Levie the go-ahead to raise
more cash to beef up the sales force, and he had no shortage of interest: His
$50 million ask turned into an $81 million round, and hes since raised
another $150 million, at a valuation of $1.2 billion. Box has amassed more
venture funding, $312 million in total, than any enterprise software firm in
the current startup boom.
Even he cant keep track of it all. Sorry, which round am I talking about? he
asks, nervously cracking his knuckles. Levie is perpetually fidgeting with
somethinghis iPhone, frizzy curls, jean cuffs, sneaker lacesin between sips
of endless cups of black coffee. He generally rises at 10:20 a.m. and tends to
fast through the workday, taking his sole meal at dinner, after a half-hour
power nap in his office lair, an 8-by-10 room with nothing but a scribble-filled
whiteboard, purple couch, two orange earplugs and an inhaler. He rarely
drinks alcohol, even though he regularly schmoozes at wine-soaked business
suppers, because after midnight is when he powers through e-mails before
collapsing at 3 a.m.
His board has been accommodating to his ambition, in part because of this
work ethic and in part because hes taking the dilution along with them,
betting together that they can make more owning less of something bigger.
While his frenemy in the consumer online storage world, 29-year-old Drew
Houston of Dropbox, has raised $250 million and kept an estimated 15%
stake worth $600 million, Levie is down to only 8% or so of Box, giving him
$96 million for his personal fortune. My what? he says, taking a mock puff
of the inhaler. Levies biggest extravagance: a BMW 3 Series he leased five
years ago. Im living the life I dreamed of as a 12-year-old. I dont have
hobbies. I want to build a big company, and this is it.
Hes chosen a formidable industry. Four companies founded decades ago
Microsoft, IBM, Oracle and SAPstill control half of the $270 billion business
software market, according to Gartner. All the others get scraps. The status
quo consists of expensive licensing deals, even more pricey setup costs
followed by ongoing maintenance and consulting fees just to keep the
software up to date. Yet the products theyre selling are largely archaic. Most
are stuck on servers talking to PCs and dont run on mobile devices, even
though 47% of American workers are using their smartphones for work and
16% are also using tablets, per Forrester Research.
The new wave of more-convenient-to-own cloud-based business software,
which began last decade with Salesforce, Netsuite and Workday, has swelled
to dozens of startups now hitting the enterprise market with flexible pricing,
mobile access and tools that make doing business as easy as using Facebook.
B2B software has also been a much healthier investment play. The IPOs of
Workday and Splunk went off brilliantly while consumer Web firms Zynga
and Groupon disappointed.
Levie built Box for this new world. A file stored in Box (this could be as simple
as a Word document or as complex as a 3-D rendering of a new building)
appears and can be shared (and in some cases edited) on any device with a
browser. Box has apps on all the major mobile operating systems. His vision
of ITs future cobbles together software from the new generation of players
with Box in the middle of it all acting as a data traffic cop so that any piece of
information from one offering can effortlessly be pulled from another
application. In his world the expensive storage hardware and collaboration
software suites from Microsoft, Hewlett-Packard, IBM, EMC and NetApp go
away.
Enterprise Software's Next Generation Of Leaders
Boxs not-so-secret weapon is its freemium business model. With Box you get
5 gigabytes of online storage and basic features for nothing. If you want
enhancements, better security and IT-department-level controls, Box is $15 a
month per person. Only 3% of the companys 15 million users now pay the fee,
but expansion of existing accounts is generating 40% annual revenue growth.
Box is already looking like the big-vision pitch Levie made to his investors
back at that fateful board meeting. The company is signing up four times as
many annual deals worth over $50,000 compared with what it did just a year
ago, from companies like Gap, Electronic Arts and Discovery. And while its
human sales force has surged to a couple hundred, more than two-thirds of
Boxs deals originate when someone in an IT organization notices Box
adoption and wants to wrap security and administrative controls around it.
The industry giants have noticed, too, and are quickly co-opting Levies
freemium, mobile-first approach. Salesforce launched its Facebook-for-
business product, Chatter, with a freemium model in 2010. Microsoft this
June acquired Yammer, a freemium social-tool-for-business outfit, for $1.2
billion, citing the firms business model as a reason for the purchase.
Meanwhile, Oracle, Microsoft, SAP, Netsuite and Salesforce have lined up to
partner with Box so that their salespeople have an answer to the inevitable
customer question about getting data to the plethora of mobile devices that
clutter a companys system.
All that action is what, literally, keeps Levie up at night. Says the now 28-year-
old: I have more gray hair than President Obama.
Some of that gray in his wavy tuft comes from a shockingly preternatural
entrepreneurial career. Levie grew up on Mercer Island, Wash., a leafy suburb
of Seattle where technology wealth from Microsoft and Amazon seemed to
flow through the air. At 8 years old he was distributing flyers offering himself
for weed-pulling, dog walking and anything else a neighbor might pay for. He
turned 10 the year Netscape was founded and spent his tweens browsing
online, typically until 2 a.m., and cooking up one new business idea a week,
which hed pitch to his father, Ben, a chemical engineer, and his mother,
Karyn, a speech-language pathologist. Honestly, it was tiresome, admits
Mom. He even told me I should start a company with some tool that other
speech pathologists need. I mean, I kind of stopped listening after a certain
point.
His high school classmates were more enraptured. While he obsessed over the
business models underpinning this new thing called the Internet, his buddy
Jeff Queisser, who lived four houses down, would haul over his 20-pound Dell
tower and CRT monitor for all-night coding sleepovers. Some 15 startups
ensued. There was an Internet kiosk for hotels and malls, a Web portal for
real estate listings and Zizap, which Levie describes as a really slow pay-to-
play search engine. They all failed, though Levie considers that word too
binary: Failure? I wouldnt put it that way. They didnt take off, sure, but I
got something out of every one.
Box cofounders Dylan Smith and Aaron Levie. Photo: Michele Clement.
Besides lessons, he built a team: His Box cofounder and key hires all hail from
Mercer Island High School: Queisser heads up technical operations, Dylan
Smith is chief financial officer, Sam Ghods oversees technology and Ashley
Mayer is head of p.r. We werent all buddies in high school, says Smith. It
was more that Aaron sought us out at some point and then united us in one of
his many causes.
Levie squeezed his way with a low-B average into the University of Southern
California as a business major. He exchanged startup ideas via e-mail with
Smith, who was starting premed at Duke University. One was a sort of social
network for college kids but limited to simply listing each students interests.
Levie also launched a site called socalendar.com, a directory of events in the
L.A. area. It flopped.
But the idea that got them both excited popped up in a sophomore marketing
class. Levie chose to research the online storage industry and instantly saw an
attractive arbitrage opportunity. He could charge $2.99 a month for 1 GB of
storage that cost him only a dollar.
In 2005 he persuaded Smith to launch an online storage company that
summer out of Smiths parents attic on Mercer Island. They rented servers
with Smiths $15,000 in online poker winnings to start it, then dropped off
business prospectuses at the homes of Seattles tech luminaries like Paul Allen
and cold-called two dozen VCs. Not one bit. Then Mark Cuban changed
everything. Levie had sent the dot-com billionaire and blogger a story pitch.
Cubans response: I want to invest. Six weeks later they had his check for
$350,000 for 30% of the company. Levie and Smith decided to drop out of
their respective colleges and head to Silicon Valley, driving Mrs. Levies
Nissan Quest to an uncles backyard cottage in Berkeley.
Customers were signing up briskly, but Levie felt there was still too much
friction in the act of pulling out a credit card to open a Box account. Some
quick math showed they could give away the first gigabyte and make up the
expense if only 3% of accounts upgraded to the $2.99-per-GB price. In early
2006 Box moved to the freemium model, and overnight they hit 50 times
the number of daily sign-ups. Great penetrationbut also a frightful cash
burn. Cuban wasnt happy with the equation, which mandated that investors
subsidize the freeloaders in the hopes of making it up later.
That October the venture capital firm Draper Fisher Jurvetson came through
with $1.5 million, some of which went to buy out Cuban entirely. While Cuban
has built a $2.3 billion fortune through some brilliantly timed moves, this one
proved a disaster, as his stake today, even without investing another penny,
would be worth $60 million.
Early on, though, it appeared Cuban would be proved right. Box came up shy
of $500,000 in revenue in 2006, and while consumers were begging for new
features, they werent willing to pay for them. Rivals were dropping prices,
and rumors began to swirl that Google and Apple would soon offer cloud
storage for free.
Box was still a tiny operation. Its two cofounders and some of their high
school crew slept on mattresses lining the floor of a garage next to their one-
room Palo Alto office. Levie jumped on his share of support calls, which
proved the ultimate market-research exercise. Many of their customers were
rogue office workers, storing and collaborating on files in the cloud without
their IT managers approval. Levie would ask them what new features they
wanted Box to add. Many said they would gladly pay 100 times what Box was
charging if it had security features and a dashboard that showed employee
usage. Box, the office workers told Levie, was simpler to use than a similar
Microsoft product called SharePoint. When Levie found out that SharePoint
made Microsoft $2 billion a year, he realized hed been targeting the wrong
customers.
In one of the great pivots in recent Silicon Valley history, Box ditched the
consumer play and became an enterprise software company in the middle of
2007. Again, he faced a dwindling pile of cash, and Draper Fisher wanted to
see another investor buy-in before recommitting. Levie went to 20 venture
capital firms, and none would touch Box because Levies track record and
knowledge of this new market were negligible, and the hoodie look that
worked for Mark Zuckerberg fell flat. (His revised uniform: dark blazer, jeans,
dress shirt and neon Pumas.)
Levie finally found a believer in then 29-year-old Mamoon Hamid at U.S.
Venture Partners. His $6 million infusion in January 2008 kept Box afloat for
another year while the founders retuned their features for the corporate
buyer, including the ability for administrators to delete accounts, track who
accessed which file and when, and control which groups can have access to
files and folders. Levie turned himself into a student of enterprise software.
He devoured industry classics like Thomas J. Watson Jr.s Father, Son & Co.
(Bantam, 1990), about the early years of IBM, and Matthew Symonds Softwar
(Simon & Schuster, 2004), an authorized Larry Ellison hagiography. I
immersed myself in it, says Levie. Literally: He lined the walls of his dingy
apartment with 4-foot-high posters of the logos of Oracle, Sun Microsystems,
Salesforce and Siebel Systems. (While faded, theyre still there. His girlfriend,
currently clerking for a federal judge in Arizona, isnt here often enough to
care, he says.)
A second epiphany came in April 2010 when Levie was sitting in his bedroom
watching the live webcast of Steve Jobs unveiling the first iPad. My
imagination ran wild, recalls Levie. The thing looked like a piece of paper,
and thats exactly what most businesses are still running their businesses on.
He instantly e-mailed Boxs engineers, ordering them to develop an app for
the device by the time it debuted in storesand they did.
Around that same time Procter & Gamble started sniffing around. Executives
at the consumer products giant were starting to use iPads and wanted access
to their files. And while it took 18 months of courting and customizing to close
the deal, having a product that worked smoothly for 18,000 of its employees
opened doors for Box at other giant companies.
Levie spent 2011 continuing his self-education. He e-mailed his favorite
pioneers in his industry with a simple, if ballsy, request: Spend one hour with
me. Tom Siebel, who founded Siebel Systems (acquired by Oracle for $5.85
billion in 2005), told Levie he once traveled to four states in a single day to
meet with customers. Craig Conway, who ran PeopleSoft when it sold to
Oracle for $10.3 billion, glanced at Levies calendar, saw roughly one
customer meeting and echoed that advice. Levie, focused on what was going
on inside Box, had lost the perspective, gleaned from IT support calls, that
had saved the company. He now meets eight customers a week, peppering
each with questions about whats working and what isnt.
This listening-tour process has done more than hone
Boxs strategy. Its honed Levie. The guy who turned off
dozens of VCs is now considered a model entrepreneur.
We saw everything exactly the same way, says Gary
Reiner, a partner at venture firm General Atlantic who
spent months doing due diligence before putting $100
million into Box last summer. Its like hes been doing
this for 20 years. I cant throw him a question he hasnt
already thought of.
Boxs Los Altos headquarters feel more like Facebooks
fun zone than Oracles stiff towers. Theres a bright
yellow slide, a room with ping-pong tables, unicorn figurines and lots of
scooters. Im not a scooter person, but this stuff matters for our culture, he
says. Staff doubled this year to nearly 700, with key hires from Oracle, Google
and Salesforce.
But for all the giddiness, danger lurks. Not a month goes by without some
mortal threat against Box. Virtualization giant VMWare announced plans to
offer file-synchronizing last summer. Salesforce, an investor in Box, is
launching a rival storage feature called Chatterbox. Dropbox has talked of
going more seriously after business accounts.
Then theres Microsoft, which has Box firmly in its sights. Levie got lucky by
originally competing with the Redmond giants SharePoint software. While
Microsoft bundles it with other offerings and has sometimes threatened price
hikes on existing products if customers signal they want to switch, SharePoint
is notoriously expensive. For every $1 customers spend on the software itself,
theyre spending on average $8.70 for outside firms (developers and IT
consultants) to get it to run. While it does considerably more than Box, such
as linking into inventory systems, its hard to use and doesnt work on mobile
devices running Googles Android system or Apples iOS.
That will change this spring when SharePoint will debut apps on Google and
Apple phones. This is a big turning point in the industry, says Jared
Spataro, SharePoints senior marketing director. Box, along with other
smaller companies, got there before Microsoft. But we always see customers
wanting fewer vendors, not more.
This article is available online at: http://onforb.es/12LfQS0
2014 Forbes.com LLC All Rights Reserved
Levies defenses, built in collaboration with his latest consigliere, Ben
Horowitz, founding partner of the Valleys hottest VC shop, Andreessen
Horowitz, which invested in Boxs $48 million round in February 2011, look
like this: Build a sales team that can look and act like Oracles while
preserving Boxs innovative, fast-moving culture, and make Box a viable
platform on which other software firms can connect and sell their file-related
technologies. The only way Levie will become the next Larry Ellison is to
insert Box at the nexus of a companys most important data. I have to do
everything, all at once, as quickly as possible, says Levie, gleeful about the
fact that he has bitten off more than he can chew. If I had a clue how this
industry worked, I would not attempt to do what weve done. I was blissfully
ignorant.

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