Box prices tonight.
The Box IPO: What Went Wrong The First Time
Alex Konrad Forbes Staff
1/22/2015 @ 3:15PM
On March 24, 2014, David Eckstein pushed the button to send the S-1 form for his then-employer, Box, to the Securities and Exchange Commission. The move had come nearly two months after Box had secretly filed and after many weeks more of planning. But Eckstein and the rest of the Box IPO brain trust were still blindsided by the market’s immediate and unenthusiastic response.
Now a full year after Box first opened its dance with the SEC, the company’s IPO on Friday is one with several story lines that make it a must-watch bigger than actual size of its raise or eventual market cap. As the tech community and Wall St. anticipate Box’s day in the spotlight tomorrow, here’s what went wrong the first time–and how Box learned from each misstep.
By proving off in its timing by just a few weeks, Box cost itself a year.
When Box looked around the market in Jan. of 2014, it saw busy IPO activity on all sides. 2013 had been a banner year for tech IPOs, with the highest volume since 2000. Consumer companies like Twitter and Zulily shared the spotlight, but enterprise was awash with successes like, FireEye, Nimble Systems, and Veeva Systems, while 2012's vintage led by Workday and Splunk kept chugging along.
Add it all up and it looked like all systems go for Box, a better-known name in the public eye thanks to CEO Aaron Levie and an “incredible marketing machine” that kept it in the conversation with the more consumer-friendly Dropbox. But Eckstein, now senior director of finance for cloud security startup OpenDNS, says that in hindsight the volume made it harder for Box to standout. The market sensed a few companies trying to cross the road to safety while traffic was favorable, and when one stock got hit, down went the whole gaggle.
“There was a lot of IPO exhaustion, where it seemed like an endless flow,” Eckstein says. Had Box gone public just two months sooner, when it first secretly filed, it may have taken a hit in the spring run against enterprise stocks, but would have raised the $300 million-plus it needed and been able to move forward.
Instead, Box raised $150 million and had to pause the clock. It had an even bigger miscalculation to address. Investors and the media jumped on Box’s financials when they were made public for its high sales and marketing spending and what appeared a distant gap from its revenues to eventual profit. The backlash appeared to take the company by surprise. Of course, Box knew its own numbers, and recognized that it was spending more than others on the IPO trail.
But where Box’s IPO team saw higher spend, they also saw a much larger total addressable market for enterprise collaboration, Eckstein says. And the company’s venture investors and hired bankers kept telling the company that what people cared about the most was billings growth. How do you pick up the pace on revenue? You hire more sales people.
“We built a model and a company that was perfect for one market,” Eckstein says. “Then the market changed.” As enterprise stocks tanked, a backlash occurred. The market suddenly cared more about a company’s path to profitability, even for huge market leaders like Salesforce.com CRM +0.5%.
“You’re catering to a different audience when a company goes public,” says Roger Lee, general partner at Battery Ventures and a longtime tech investor. “Wall St. is a different psychological animal that pendulums between fear and greed, and this time there was a shift from growth to value.”
Category-defining companies can buck negative headwaters and get more leeway even in such a market climate, Lee says. Last year, investors didn’t think that was Box.
Eckstein left Box before the company turned the green light back on for its IPO, but he’s bullish now that the company will get things right when it finally lists. It has a strong macro-economic backdrop with an improving housing market, cheap oil prices and improved consumer spending that should limit investor skittishness even when stocks dip a bit, and as a Jan. IPO, Box will get outsized attention as the first big tech IPO of the calendar year. Lee, too, expects a strong IPO, stressing Box’s ability to grow revenue from its existing customers at a compound rate. “You can create an incredible tailwind that we don’t see very often and that Wall St. doesn’t fully appreciate,” he says.
But both will be watching closely in large part to see if Box finally clears the trials it walked into in 2014. To Lee, the Box IPO will be a test of whether the market will reward a company that took the high-growth, high-cost approach of Salesforce to a more extreme level.
For Eckstein, the Box IPO will be a relief. For himself, and all the employees and friends still at the company who’ve worked on the process for many more months than they originally thought. “This IPO has hung like a cloud over the company for years,” he says. “The money is nice, but this is about being able to move on. It will be a big moment for the people who built it.”
Of course, the rocky journey to public offering won’t end with the first day’s trading. But Box’s hard lessons on taking a hyped-up company public might make the path a bit smoother for those who follow.
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