The Box IPO has raised the stakes in the battle for cloud market share. As shares of this software-as-a-service (SaaS) company rose following its public debut last Friday, it’s drawn new attention to the cloud business.
After being priced at $14 per share last Thursday night and going public on Friday, Box promptly climbed 65 percent, giving it a first day market capitalization of about $1.6 billion. That’s a nice first-day pop. The lead underwriters, Morgan Stanley, Credit Suisse and J.P. Morgan, did their job.
Box is pitching itself as the new software collaboration suite of the cloud. To Box’s credit, it’s growing fast and has a huge customer base of more than 44,000, and with its huge footprint in the cloud, it could find many ways to sell premium services into these customers. There is no doubt that you could also construct a path of growth for this company giving it a $10 billion valuation.
The biggest problem is no secret: Box is burning through tons of cash on sales and marketing in order to build this huge customer base. It’s never been profitable, and did an IPO to raise even more money. The company has total cumulative losses of $361.2 million and lost $120 million in calendar year 2014. Box’s losses are greater than those of 99.6 percent of the IPOs in 2014, according to research firm Renaissance Capital.
Leading venture capitalists seem unfazed by this. They see it as a affirmation of the move of nearly all IT-driven business models to the cloud; it’s time to invest so that you can acquire market share and “grow your way to profits.”
In the end, it comes down the the allure of the Box promise: an entirely new model for business software built from the ground up for the cloud.
“I think of Box as a SaaS business (like Salesforce or NetSuite),” said Mike Volpi, a former Cisco M&A executive and now a general partner at Index Ventures (which was not an investor in Box), when I asked him about the Box IPO in an email. “In that context, the market seems increasing receptive of these subscription-based software businesses. Obviously, I am a believer in them, so I generally think it’s a good thing that the Box IPO was well received.”
Tomasz Tunguz, a partner at Redpoint Ventures, said he conducted analysis that shows that Box is among the fastest growing SaaS companies. Box’s revenue grew 110 percent in the last 12 months, about twisce the average rate of 53 percent for other SaaS companies in their ninth years, according to information that Tunguz posted to his blog. The two closest companies in terms of growth rate are LinkedIn and Demandware.
Tunguz offered some other tidbits on Box that weren’t quite as flattering. Box’s burn rate is twice as large as the next comparable firm, and nearly 10 times the average, he points out. It spends 137 percent of its revenue on sales and marketing. Its customer acquisition costs are among the worst in the industry, writes Tungus.
So if anything, even if Box hasn’t made money yet, it’s now the standard bearer for high-octane growth (and burn rate) in the enterprise software world.
And despite the burn rate, Box made it to an IPO and has done a good job of marketing itself as the new cloud darling. Box’s S-1 statement reads like the Magna Carta of cloud. Here’s an excerpt:
“Trends such as Cloud, Mobility and the Proliferation of Data are Changing How People Work. Several technology trends have driven down the cost of storage, enabled faster, more powerful applications and increased the number of connected devices, paving the way for cloud and mobile to transform the way that people live and work.”
“Box provides a cloud-based, mobile-optimized Enterprise Content Collaboration platform that enables organizations of all sizes to easily and securely manage their content and collaborate internally and externally… We have built our platform to enable users to get their work done regardless of file format, application environment, operating system, device or location.”
The most important takeaway from the Box IPO might be this: The cloud is now thought of as the main front in nearly all technology battles, and huge amounts of money are at stake. The rise of Box and other cloud-storage systems such as Dropbox, Microsoft Office 365, and Google Drive have ratified the new virtualization paradigm, in which all of your business services run “out there” in the cloud.
That won’t be bad for the network space, and it will certainly drive more attention to cloud-friendly architectures such as software-defined networking (SDN) and network functions virtualization (NFV). SaaS companies such as Box are going to use IPO funds to invest in more infrastructure, and somebody’s got to provide those servers, switches, virtualization software, and security code.
Would I buy Box shares? Heck no. It’s hard to embrace Box IPO as an investor, and I’ve written many times that speculative IPOs such as these are to be avoided until at least six months down the road, when the insider lock-up has expired and you have more visibility into the company’s financials.
But if you are a cloud networking enthusiast, think of it this way: Box is spending a lot of money to tell the cloud story, which helps the market.