Box.net:
This 26-Year Old Founder Is Raising $100 Million To Take On Giants Like Microsoft
Matt Rosoff
Business Insider
Aug. 29, 2011, 2:07 PM
Aaron Levie is unusual for a 26-year-old CEO—he's much more excited about business software than consumer products like Foursquare.
Levie founded Box.net, an online service for sharing and collaborating on documents and other files, in 2005.
About three years in, he looked at the company and saw a split between consumers and business users. He realized he would have to choose one or the other, and banked on enterprises.
It turned out to be the right move: Box.net has made the turn from being used by individuals and small departments to selling directly to CIOs, and is winning contracts away from giants like Microsoft—the company just got an 18,000-seat deal with Procter & Gamble.
In fact, the company's customers are growing so fast that Box recently filed for a new $35 million round—just months after closing a $48 million round in February. The company is on track to have more than $100 million in funding at a $500 million valuation. It's also overflowing its current headquarters with more than 240 employees, and is planning to move into a new space early next year.
We caught up with Levie last week to ask him about Box and why enterprise startups are the best-kept secret in tech.
Here's some of what we talked about:
Why most startups are focused on consumers. "When you're 22 years old or 25 years old—the Y Combinator demographic—you have no context for the enterprise. If you're in your early 20s and you're hanging out with a bunch of other people in their early 20s, nobody has a sense of the kinds of problems that 'real workers' run into every day. They're running into a completely different set of problems like 'what's the party going on right now that I should be going to? What are my friends looking at on the Internet that I want to read? How do I share photos and videos?' That's their frame of reference for life." Selling to businesses is much more exciting—and a better business. "In the consumer market, we were making it easier to get to a file from a device, or another computer, or to be able to look up your photos. That was very interesting, but it wasn't 10x innovation. Within the enterprise, if you compare Box to something like IBM Filenet, or Microsoft SharePoint, you get almost a 10x improvement on productivity, speed, time to market for new products. So we saw an opportunity to create real innovation in that space and that's what got us excited....We think the market for enterprise collaboration will be much larger than the market for checking into locations on your phone." Companies should focus on what they're good at. "A jack of all trades is a master of none....What you saw with the suite product from Microsoft [Office 365], they're trying to bundle ERP, CRM, collaboration, e-mail, and communication all as one package. If you go to the average company in America, that's not what they've implemented. They've implemented Salesforce as their CRM, Google Apps for email—a large number of them, in the millions—they'll be thinking of Workday or NetSuite for their ERP. Each of those companies is or will become a multibillion-dollar company just focused on that best-of-breed aspect of what they're trying to solve." Which is why Google+ will fail. " Google wants to move into social. Do you really think they're going to be able to do that? My bet is no. I think that Facebook will block them out. Maybe if Google buys Twitter, that could work. But the way our brains work and the way companies can manage areas, the companies that tend to succeed do when they have that level of focus....The dynamic with social is you tend not to have products with 30% market share. It's all or nothing. Email works because we have open standards that let you communicate across any email client. But with something like Google+, you really are going to have 5%, Robert Scoble and you and some other digerati, but unless you get over that curve to my mom, you're really going to have a hard time getting the full scale you need." Time is on his side—and working against Oracle and Microsoft. "Companies that keep customers captive because of contracts aren't always the hardest to disrupt. Ultimately, it doesn't create a great customer-vendor relationship. There's a lot of fractures in the market where that exists. I wouldn't mind being a Workday or a NetSuite going up against Oracle customers because Oracle has had now 20 years of these very difficult tenuous customer relationships. There are literally lawsuits from vendors to customers and customers to vendors in that industry. It's kind of a crazy industry because there's this asymmetry where you'll sell software to an enterprise, and they will pay you regardless of whether that's successful or not. That's entirely unlike SaaS where customers will only pay us if we're successful." One reason Steve Jobs will be irreplaceable. "I think for the next 5 to 10 years Apple will perform just fine. But what was the next device category that he would have created—it won't come to the market with as much credibility. Just think about our company. Within minutes of watching the iPad keynote last January, we put a team on building an iPad app....for no other reason that Steve Jobs was behind it, we felt confident that we could build an app for this thing because he will make it go to market....If you only follow him every time he did something, maybe 20% of the time you'd go down the wrong path, but the vast majority of the time you'd be successful." Here's the full interview:
Business Insider: You're raising a big round, right?
Aaron Levie: We are in the process of doing a fund raise, it will bring up the total to over $100 million, but we've only done about $18 million of that piece.
BI: But you're hoping to raise $35 million this time.
AL: The SEC requires you to state how much you anticipate raising, so that's a fairly flexible number, but that's what we're saying.
BI: How's business? Are you cash-flow positive?
AL: I can't talk about that part, but I'll give you a little context. We did our Series D in February of this year. It's an imperfect process when you're a startup, you try and map out what kind of revenue targets and user targets you're going to hit. In December of 2010, we're modeling what we're going to try to do and we decide we're going to raise a Series D to fund that growth. That was February 2011. Subsequent to that, in Q1 and Q2 we exceeded our numbers on key targets—whether it was revenue, or deal sizes—even from what we planned only a couple months ago. So we could see the amplitude of our business changing. With a business like ours where you need a lot of infrastructure, you're doing customer acquisition up front, where you're building out a pretty large organization, that has implications from a cashflow standpoint. So we decided we would raise additional capital to grow even further.
BI: Was that mainly from the Procter & Gamble deal?
AL: It's a proxy for the market in general. P&G is the one we wanted to put out there publicly, it's 18,000 users on P&G. That's representative of this massive change that's happening in this market. Two or three years ago, we primarily sold to departments in businesses, teams in organizations. With the P&G deal and this new category of sales we're doing, we're selling to the CIO. They're really seeing this as infrastructure, as part of the organization. That changes a lot of things. It changes the technology we have to build, and it changes the deal structure that you're working on.
BI: You said you're spending a lot on infrastructure. So you're not one of those startups that runs everything off Amazon Web Services?
AL: We are not your traditional "everything's on Amazon" company. We use their cloud for key pieces of our process, but we have two data centers. If you think about it, a Procter & Gamble, the kind of security and compliance requirements they have to store data off premise, they have to be able to really make sure they can go audit, they have to know all the processes that go into the infrastructure. That's something we can't get out of working with an outside vendor. We have to do that ourselves.
BI: I also noticed that you're hiring a lot of direct sales people. That's quite different from typical cloud-based business startups where everything's self-service. Why do you think that approach is right for you?
AL: For products purely used by individuals and teams, self-service is brilliant. If I'm a user of a piece of technology and I just want to start to use it, I either I want a free version or something I want to pay for with my credit card. Same thing if I'm a small group or a team, I want to get on that technology. We have that—we have a freemium business model, and that's the biggest driver of our business, the free product.
With the kind of technology we're selling, we're also being implemented as THE sanctioned and provisioned tool for the whole enterprise. You can't do that through a Web interface. That's actually true, high enterprise-grade consulting, you have to work with that CIO and say "how are we going to come up with an implementation strategy for your organization? How are we going to make sure it's integrated at the right depth with your internal processes and technology. That can only come if we have a very sophisticated sales and service process with your client.
BI: Do you work with big systems integrators like Accenture?
AL: We're still a fly buzzing around in their world. We'd like to become a bigger one.
[At this point, somebody tries to come into the conference room where we're having this interview. Levie very politely asks them to go somewhere else.]
AL: Actually, that's the only thing I exploit. I don't do the special parking spot, I sit right next to the QA team, but I do exert power over using conference rooms.
BI: Who do you view as competitors in the startup space? Is Dropbox a competitor?
AL: I see them as a complement and competitor. We have plenty of people who use both of our products. We tend to be an active collaboration service on top of storage. We fundamentally have to store data and lots of it, because what you're collaborating around is content. But the interface, the value that we sell to organizations is that you can share this information rapidly. So the way I think about it is, Dropbox is great for synchronizing the few devices you use around. We're really a product that helps you share information around lots of people, lots of devices, lots of applications. To the end user, we overlap because we also make it easy to get to your information from anywhere, but that's really where they stop and we begin. They also go much deeper into things like consumer technology—how do I integrate with my Xbox and video player?
So the biggest player in this space is Microsoft SharePoint. That's what we're really focused on going after.
BI: What about Jive? They also do cloud-based collaboration.
AL: We love Jive. They're more social collaboration. While you can be social on Box, that's not our overwhelming value proposition. It's really around content scale. Say your sales organization has 50,000 contracts and you want to share and search them—that's what we excel at. But if your sales team has ideas of new products to get to market, that's more of what Jive is doing. Or Yammer, or Chatter (from Salesforce.com).
BI: What about Salesforce? It seems like you might start to run into them at the margins.
AL: The space is still very nascent. So originally you could have probably said that YouTube, Twitter, and Facebook all compete with each other. You could have said that Facebook video competes with YouTube. But you can use all of those services complementarily. So you could be sharing your content on Box and being social on Yammer or Jive, and those services tend to complement each other very nicely.
BI: Looking 10 years down the road, do you see a shakeout as companies start to come out with these Microsoft-type bundles of services?
AL: A jack of all trades is a master of none. That's what happens with these products, the suite products. What you saw with the suite product from Microsoft, they're trying to bundle ERP, CRM, collaboration, e-mail, and communication all as one package. If you go to the average company in America, that's not what they've implemented. They've implemented Salesforce as their CRM, Google Apps for email—a large number of them, in the millions—they'll be thinking of Workday or NetSuite for their ERP. Each of those companies is or will become a multibillion-dollar company just focused on that best-of-breed aspect of what they're trying to solve. With the Web, you can connect these properties together, you can connect this information together, so you don't actually take a productivity hit by having different services. There might be a slight management complexity, but there's new technology that helps with that, like Octa and SnapLogic.
BI: But in 10 years—Wall Street rewards growth, eventually there's the temptation to move into adjacent markets.
AL: It will. It will. But let's take the Google example. Google wants to move into social. Do you really think they're going to be able to do that? My bet is no. I think that Facebook will block them out. Maybe if Google buys Twitter, that could work. But the way our brains work and the way companies can manage areas, the companies that tend to succeed do when they have that level of focus.
BI: Our first take was " Google Bing." If they get 30% share, they'll probably be happy.
AL: The dynamic with social is you tend not to have products with 30% market share. It's all or nothing. Email works because we have open standards that let you communicate across any email client. But with something like Google+, you really are going to have 5%, Robert Scoble and you and some other digerati, but unless you get over that curve to my mom, you're really going to have a hard time getting the full scale you need.
So that's why I wouldn't mind being Facebook in this situation.
BI: Speaking of Google, why do you think they haven't made a bigger play for the enterprise?
AL: It's something I've thought a lot about— Larry Page has really not set an aggressive agenda around the enterprise. Almost to the extent that you start to think maybe that was just Eric Schmidt's baby side project, it was not a core focus of the Google guys. I can't answer "why," but I can answer how they show up in the market, and when they show up making Google+ the number-one focus area and then they go and buy Motorola, these are not the actions of a company that's super-focused on the enterprise.
We don't necessarily have a problem with that—we want them to keep Microsoft honest with things like Gmail, and we want them to help accelerate the move to the cloud, we think they're an important force in that. But we actually think of them as a great partner. We have integration with Google Docs, we're big supporters of Android, we were in the Chromebook keynote they had at I/O. We think of them as a technology partner.
BI: In general it seems like enterprise-focused startups are underappreciated. You go to incubators and demo days, and there are 50 flavor-of-the-week consumer startups, and a lot of them get funding. Why is that?
AL: It's an interesting anthropology experiment. When you're 22 years old or 25 years old—the Y Combinator demographic—you have no context for the enterprise. If you're in your early 20s and you're hanging out with a bunch of other people in their early 20s, nobody has a sense of the kinds of problems that real "workers" run into every day. They're running into a completely different set of problems like "what's the party going on right now that I should be going to? What are my friends looking at on the Internet that I want to read? How do I share photos and videos?" That's their frame of reference for life.
When you either work in an organization or building up a company—now we're at 240 employees, so our frame of reference is, we have to make it really easy for 240 people to share information. We're building a product we want to run. That changes the excitement level you can have around building enterprise software because you can directly see how it can impact work and how it can change.
That's how we stumbled into this, I think you're right it's underappreciated. People aren't aware of how much innovation is happening and could be happening in the enterprise. This [move to the cloud] is the biggest change we'll see in the enterprise, ever.
BI: At least since the move from mainframe to client-server, right?
AL: That was a dramatic change, but I actually think the value you'll get from this technology will be substantially more because you can be more social, more mobile, more open. There are just a lot of aspects to this technology that are groundbreaking.
BI: How did you get that enterprise DNA? You started Box out of college—do you have somebody who secretly worked at IBM or SAP on staff?
AL: It's no secret. We do have some ex- EMC people here, we have ex-Oracle people here. Plus, have you seen my grey hair? I'm totally enterprise now.
We basically got to this juncture early on, we have both consumer and business users of our product and we need to decide what we're going to be when we grow up. A business-focused company? Or a consumer-focused company? The amount of effort we would have to put into either category would need to be disproportionate to the other for us to be successful. We decided when we looked at our userbase, we saw a more compelling opportunity and more compelling value proposition to go after the enterprise.
In the consumer market, we were making it easier to get to a file from a device, or another computer, or to be able to look up your photos. That was very interesting, but it wasn't 10x innovation. Within the enterprise, if you compare Box to something like IBM Filenet, or Microsoft SharePoint, you get almost a 10x improvement on productivity, speed, time to market for new products. So we saw an opportunity to create real innovation in that space and that's what got us excited.
Now we hear from customers, companies that use Box to sit in between dozens of partners and people outside their network that need to share information, we're getting new projects to market much faster. Audi uses us—we get cars to market faster. There's really exciting stuff that happens when you get used in the enterprise.
BI: I guess it's the question of a huge number of consumers x a tiny amount of revenue, versus a large number of businesses x a much larger amount of revenue.
AL: We think the market for enterprise collaboration will be much larger than the market for checking into locations on your phone.
BI: I saw you talk at an event with a group of other enterprise startups last week, and it came up toward the end of the conversation that big packaged-software companies like Oracle and Microsoft are doomed. Do you think that's true?
AL: We have insufficient data to know what happens with software companies that are on their next-generation paradigm. Let's look at Oracle. Larry Ellison has been driving that company for the last 30 years. It's been a machine and he's been this relentless, maniacal kind of person who can just execute on these big visions. We don't know what Oracle looks like 10 years from now, if you have some overall evolution of paradigm and leadership and process. Companies like IBM and HP have had to completely reinvent themselves to stay relevant. I think we now are at this inflection point where there's a gap in the market, we have this next generation of companies that's emerging—particularly cloud-based companies like Workday, we think like Box, like Yammer, like Jive, like Salesforce.com—it's usually in those marketplace transition points that new technology companies emerge. We think that will be an overwhelming force in the marketplace over the long period of time that will change in the structure of their leadership.
That doesn't mean Oracle goes away. That doesn't mean Microsoft goes away. What it means is that they might look different 10 years from now than it did 10 years ago where they were the de facto standards in the space. There's plenty of evidence to suggest that it's very hard to parlay success in one paradigm into success in another because most of the rules of the game have completely changed.
Like how we distribute our products is totally different from how Oracle and Microsoft distribute their products—we're direct to the customer, we're all over the Internet, you don't have to go through a whole network and channel of distribution. The way our applications are built—we release updates to our products every week. Microsoft takes 3 years to release a new product. So the whole DNA of our company is completely different. That will take some time to cycle it into Oracle and Microsoft. By then, companies like Salesforce, companies in our category and peer group, will have built those foundations.
BI: When you go into enterprises, do you find that those companies have pre-existing relationships that serve as a barrier to entry for you? Maybe a CIO would say "we love your product, but we already have a three-year agreement with Microsoft for SharePoint, so we're just going to go with that."
AL: The good thing is time is generally on our side. That [agreement] will expire and the customer will be ready to jump when it does. Companies that keep customers captive because of contracts aren't always the hardest to disrupt. Ultimately, it doesn't create a great customer-vendor relationship. There's a lot of fractures in the market where that exists.
I wouldn't mind being a Workday or a NetSuite going up against Oracle customers because Oracle has had now 20 years of these very difficult tenuous customer relationships. There are literally lawsuits from vendors to customers and customers to vendors in that industry. It's kind of a crazy industry because there's this asymmetry where you'll sell software to an enterprise, and they will pay you regardless of whether that's successful or not. That's entirely unlike SaaS where customers will only pay us if we're successful. That's the recurring nature of the model. So we think there's a completely different business model in this new world.
BI: You guys had a deal to bundle 50GB of storage for free with the HPTouchPad. What do you think about HP's big move? Did it catch you off guard?
AL: It was intense. We were very much caught off guard given that we were a partner of HP and still are. We like them as a partner, we think they're very strong at market execution. I am a little surprised they're willing to pull back on the device side of WebOS so soon. Particularly because you didn't see it through a full cycle of consumer adoption. But I'm positive Leo has a strategy from all of this. What they're going through is very interesting—it's sort of a cataclysmic change where they're driving that company to become more of a software powerhouse than a hardware powerhouse. That takes a lot of acquisitions, changing in DNA, changing in people in the organization, it'll be interesting to see how they execute.
BI: I thought they buried the biggest news—the acquisition of Autonomy.
AL: To be honest, that was more surprising than the WebOS shutdown. Particularly if the claim is that HP wants to go more cloud—that's not the most logical sequence to get there....I think they'll be able to make the acquisition work, I don't think it's going to be an unsuccessful acquisition, but I don't think it accelerates their story for cloud computing.
BI: Did the firesale on TouchPads benefit you guys?
AL: We saw a dramatic spike in WebOS activations.
BI: I saw that you posted on Steve Jobs recently. Anything you want to say on his retirement? [This interview was conducted the day after Jobs stepped down.]
AL: Steve Jobs is the most epic entrepreneur of all time. He served as a guiding light for any emerging businessperson who wanted to learn how things should get done. He'll be looked at as one of the best business leaders of all time, and certainly one of the best tech entrepreneurs.
BI: Will Apple be able to continue to churn out successful products without him at CEO? Has he been able to get his DNA into the company?
AL: The principles that Steve Jobs lives by, it's not like that can't be replicated. What Steve Jobs had was strong principles that anybody can replicate, but an amazing gut and intuition. Somebody like Jonathan Ive, a guy like him can probably maintain that kind of design principle for however long he's there. You can replicate a lot of the key individual things. It's really the way it all comes together as one symbiotic organism that Steve is uniquely capable of doing. If they can get a leader who says our Apple stores, our devices, our software, it all feels amazing, then we can continue that legacy. I think for the next 5 to 10 years Apple will just perform just fine. But what was the next device category that he would have created—it won't come to the market with as much credibility.
Just think about our company. Within minutes of watching the iPad keynote last January, we put a team on building an iPad app. The thing looked amazing, but for no other reason—this is how much credibility this guy had—for no other reason that Steve Jobs was behind it, we felt confident that we could build an app for this thing because he will make it go to market. You don't get that kind of confidence with a lot of people because he had a track record, if he says something is going to happen, he will make sure the marketplace buys it, adopts it, spreads it, and so on. If you only follow him every time he did something, maybe 20% of the time you'd go down the wrong path, but the vast majority of the time you'd be successful.
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