It usually takes a lot to get Aaron Levie to sit still for an hour. But sometimes all it takes is a bowl of pho.
When he’s not traveling, Levie, the 29-year-old CEO of the cloud data storage and collaboration company Box, usually has dinner at a Vietnamese restaurant that’s a two-minute walk from the company’s headquarters in Los Altos, Calif. And if you’re unaccustomed to pho (pronounced “fuh,” not “foe”), the Vietnamese soup with rice noodles and meat, Levie will insist on ordering for you: Chicken pho with an extra helping of noodles.
“You’re going to have to trust me on this one,” he says.
Two bowls arrive, and Levie attacks his greedily. Expertly gathering up a mass of noodles with chopsticks, twisting his arm in a stirring motion, he seems determined to cram as much as he can into a single bite, as if time is short and he might not get another.
Levie’s voracious appetite mirrors that of Box. Under his leadership, Box has snatched up market share in the cloud storage industry, growing its annual revenue by nearly 500 percent over the past four years, and has built a base of 34,000 paying corporate customers and 25 million individual users. In short order, it has become the No. 2 player in the market, behind the far larger Dropbox.
In an interview with Re/code last month, Levie sketched out Box’s long-term plan, one that he argues can get the company on a path to sustainable growth, though it won’t be easy and Box will likely not be profitable for some years.
But that growth comes with big costs. Box’s filing with the Securities and Exchange Commission on Monday ahead of its initial public offering shocked some observers with the sheer size of its annual loss relative to revenue. For the year ended Jan. 31, Box finished in the red by $169 million, more than twice the prior year’s loss. After backing out research and development costs, the company’s operational burn is north of $17 million a month, more than twice what had been speculated previously.
Rapid Growth, Ballooning Costs
The big driver of those costs is people. For the last two years, Box has been staffing up at a rate of 25 per month. As of Jan. 31, it had 972 employees who serve 25 million customers, among them about 34,000 paying enterprise clients. At Dropbox, the company to which Box is most often compared, there are 621 employees for 200 million individual users.
Last year, Box spent $171 million on sales and marketing. Put another way, for every dollar in revenue that Box brings in, it spends about $1.38.
These costs are only likely to grow, and the headcount is likely to balloon, Levie says. Asked to name his single biggest managerial problem, he said, “I can’t grow a sales force that’s big enough in time for when I need it.”
He readily admits that it looks troubling, but the opportunities are too big and the competition too fierce to do it any other way. The cloud business is still a land rush. Indeed, more established players like Salesforce.com and Workday have yet to turn a net profit on it and seem to treat the notion of doing so as beside the point for now.
“I would be the first to say we’ve been aggressive, but there is simply not another logical way to attack the market,” he said. “If you assume this market is going to be worth tens of billions, if it’s that big there can only be two, maybe three leaders. So we’re incentivized to grow as fast as possible.”
Over time those costs may level off a bit. During the next 12-18 months, Box will begin to shift its sales efforts to third parties. Long a foundation of enterprise IT companies, channel sales partners like Ingram Micro, CDW and Insight Direct will sell Box’s services to their customers. Its biggest channel partner so far is AT&T. If your company just bought a fleet of iPads from AT&T, chances are you’re using Box to share files among employees, and that AT&T closed the deal.
It may not sound that important, but the channel business has the potential to be significant, and at many large companies, it makes up the bulk of sales. At computing giant Hewlett-Packard, channel sales account for more than 70 percent of revenue. They’re also significant — though not broken out in financial reports — at software companies like Microsoft and Oracle.
There’s also a natural competitive opportunity within the channel. When a company adopts Box, the product it is most likely to replace is Microsoft Sharepoint, the software giant’s collaboration suite. More often than not, Sharepoint is sold through the channel. Where better to attack it? Within 18 months, Levie wants channel sales to account for between 20 percent and 30 percent of revenue.
Powered by Box
Meanwhile, Box’s steadily growing sales team will fan out and start to specialize in selling into specific industries: Insurance, finance, health care, pharmaceuticals and so on. The joke among Box’s board of directors is that Levie has yet to encounter a business segment he doesn’t think Box should try to dominate.
“I like to do lots of things, and that’s maybe my one fatal flaw,” he said. Asked if he sees any sectors he doesn’t want to attack, he laughs. “Did my board put you up to asking that question? Is this an intervention?”
And what will Box sell them? A platform. If you buy the argument that every company will be building at least some custom software to handle some portions of its business, Levie wants Box to be the platform they build it on. Take the auto insurance business. Claims adjusters are using smartphones to photograph accident damage and uploading the pictures to their own custom applications. “When they build that application, we want Box to be the platform that powers it. … Over the long run this is more important than anything else we’re doing,” Levie said.
A big step in that process took place today as Box’s Developer’s Conference got under way in San Francisco. The company announced a new platform service that will allow its customers to build their own apps that take advantage of Box’s file-sharing capabilities.
Over time, Levie is betting that companies that first come to Box for the basic sharing and collaboration features will start using it as the basis for their own applications. Box will become an “ingredient brand,” a critical component that companies choose when they build their own software. Those applications will be “Powered by Box.”
The evolution of Box from a simple storage company to a model for how companies can make better use of their information by storing and working on it in the cloud was an eight-year journey that Levie stumbled into after failing to get into film school.
The company that became Box started out as a business school project at the University of Southern California, where Levie studied. “Senior year in high school I got really into film. I applied to film school, but I didn’t get in. So I decided to go to USC anyway and study business and see what I could do with that.” The plan was to find an intersection of his three passions: The Internet, entertainment and business.
During his sophomore year, a class project to study the online file-storage business — which at the time barely existed — led to the idea to create the company. “There were just a few zombie companies doing online storage that were sputtering on, but all the technology that prevented them from succeeding in the 1990s had gotten better by 2004.” Storage was cheaper, Internet connections faster, Web browsers more capable than ever before. “And yet there were no companies doing anything with storage. Yahoo Briefcase offered like 10 megabytes of space.”
He then called 10 companies and asked them where they stored their data. Most of them used computers in their offices. Nothing online. Sensing opportunity, he teamed up with a handful of high school friends from Mercer Island, Wash., outside Seattle where he grew up. They built prototypes and hacked together a service, which they first called Box.net.
One co-founder was Dylan Smith, now Box’s CFO, who was attending Duke University. “Dylan was getting really good at online poker. So he had like $12,000 and was the richest person I knew,” Levie said. Once they got the early service running, they hit up tech bloggers at Engadget and Gizmodo to try the service out and write about it. Gizmodo even held a contest offering winners a free 20 gigabyte storage account for life. “People started showing up.”
A few early investors from the Seattle area offered seed funding. One notable early name was Mark Cuban, the billionaire who sold Broadcast.com to Yahoo for nearly $6 billion in 1999. He put in $350,000, but it didn’t last. “Mark got it and then didn’t get it, so he pulled out,” Levie said. Box offered free accounts — and still does — in order to attract paying customers. Cuban didn’t like it.
At about the same time, Box attracted the attention of venture capital firm Draper Fisher Jurvetson, which led a $1.5 million Series A round in 2006. In 2008, U.S. Venture Partners led a $6 million B round. Over the next five years, investors as varied as Andreessen Horowitz, Salesforce.com, SAP, General Atlantic and Telefonica poured $312 million into Box. Its most recent implied valuation is said to be in the neighborhood of $3 billion. With the pending IPO, which should happen this spring, Box hopes to raise $250 million more to fuel more growth.
Its far larger rival has taken notice. Dropbox — which grew to its enormous size primarily as a consumer-facing service, only to discover that it had customers in some four million businesses — has an increasingly ambitious enterprise strategy of its own.
While Box may have a more fully formed enterprise strategy, Dropbox has the undeniable power of numbers. It also has more money. Last month, Dropbox raised $350 million at an implied valuation of about $10 billion, and it is angling for an IPO of its own. And while Dropbox hasn’t yet sketched out its plans in so much detail, what’s clear is that it’s going in a similar direction to Box, though it may take its time getting there.
Levie doesn’t intend to sit still. He is betting that the head start into the enterprise will be an advantage for Box as the cloud gets smarter as a result of companies adding more kinds of data. The cloud will learn from the patterns in this data. That’s unique among cloud software, he said. Nest, the smart line of smoke detectors and thermostats recently acquired by Google, is, Levie said, “smarter than 90 percent of the cloud software products out there because it learns your behavior.”
Over the next six to 18 months, Box’s platforms will start to show signs of getting smarter. Logical connections, some of them not readily apparent, will start to emerge between buckets of data that aren’t necessarily related. “If you’re a drug company and you use Box in your work processes, it will start to connect the dots for you between processes and teams that weren’t connected before,” he said. “It will show you connections you never knew existed.”
There’s a fundamental shift in the way that corporations build and use software, and Box can play a vital role, Levie said. “There is so much more you can do with enterprise software than you could ever do before. We’re in a phase of non-zero growth in enterprise software because I think you can just do so much more with it. I just don’t see how we can’t grow.”
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