Once again, similar theme. It is guys like these that are eroding IBM’s and Oracle's share. Aivars Lode avantce
Rich, but Not Silicon Valley Rich for Founders of Box
Venture-capital infusions shrank Box founders’ stakes, ignited strife
By Monica Langley
Aaron Levie and Dylan Smith are worth more than $100 million combined after turning the cloud software firm they started in a Berkeley, Calif., garage into Box Inc., with 1,200 employees and expected revenue of $285 million this year.
They rang the New York Stock Exchange’s opening bell in January to mark Box’s debut as a public company, a rite of success that few Silicon Valley startups live long enough to see.
But getting there took 10 years. Stress made the 30-year-old Mr. Levie’s wild hair gray at the temples, while cash infusions from outsiders drastically shrank each man’s stake in Box and ignited strife about when to go public so early investors could cash out.
Since soaring 66% in the first day of trading, Box’s share price has fallen about 20%, and just one of the eight securities firms following the stock recommends it.
As a startup, “Box had come out like a rocket ship, a darling of Silicon Valley,” says John Donahoe, eBay Inc. chief executive and mentor to Mr. Levie, the chairman and CEO of Box. “Then Box hit some bumps…and learned the real world won’t hesitate to knock you down.”
Box shows the price that technology companies often pay as they vie to become the next big thing. So much venture-capital money is sloshing around that firms can wait longer to go public than during the last tech boom. Each funding round helps companies grow but erodes their founders’ ownership and power.
Along the way, some of Box’s early investors wanted Messrs. Levie and Smith, best friends since they played trumpet together in the sixth grade in Seattle, to sell the company or take it public sooner than they wanted. January’s initial public offering made them rich—but not Silicon Valley rich.
In an example of the hard compromises, Mr. Levie went looking for $150 million last summer while Box was still a private company. Plans for the IPO were frozen because of turmoil in the market.
Hedge fund Coatue Management LLC and private-equity firm TPG Capitalplayed hardball. They demanded a 10% discount on the purchase price of Box shares to lock in a profit if the company went public within a year.
The young CEO pulled curls of his hair with both hands and went for a walk with Mr. Smith, Box’s finance chief, who said the proposed terms were “tough” but racing into an IPO was “risky,” the two men recall. Mr. Levie replied with two four-letter expletives but agreed to take the deal.
‘Lead Magician’
Mr. Levie now says the past year was the hardest of his life as the grind of trying to go public distracted him from Box’s day-to-day business. More than 45,000 paying customers use its online software to save files in a digital file cabinet. Companies can let employees access, collaborate and share those files from any device.
“You can’t control what the skeptics say, and you certainly can’t control the market,” says Mr. Levie, whose Twitter profile calls him “Lead Magician (and CEO).” “You have to focus on your long-term mission and move forward despite the distractions.”
The IPO gave one of Box’s first outside investors, venture-capital firm Draper Fisher Jurvetson, a 5,100% paper profit on its original investment of $1.5 million in 2006. “Dilution hurts,” says Mr. Smith, 29. “It’s happened a lot along the way.”
Josh Stein, a partner at Draper Fisher Jurvetson who led the firm’s investment in Box, says: “From the garage in Berkeley to the IPO, it’s been a crazy ride, but Box is really just getting started.”
Messrs. Levie and Smith were among the first entrepreneurs to target the cloud-based storage business. Mr. Levie got the idea after his 11 previous website ideas went nowhere. In 2005, the two men took Mr. Smith’s online poker winnings of $20,000 and got to work in the garage of a house owned by Mr. Levie’s uncle.
“Back then, investors had a hard time investing in a company where the founders acted 40, were 19 and looked 12,” Mr. Levie recalls. “They thought we’d run off to Disneyland with the funding money.”
Mr. Levie emailed billionaire investor Mark Cuban , owner of the Dallas Mavericks basketball team, in a long shot hope for an investment to start turning Box into a business. Mr. Cuban put in $250,000 and got a nearly one-third stake in the fledgling firm. Box later bought back his stake.
Early investors included U.S. Venture Partners, Scale Venture Partners and Andreessen Horowitz. Their home run investments include Tesla Motors Inc.,GoPro Inc., Facebook Inc. and Twitter Inc.
Messrs. Levie and Smith also felt more pressure to grow up. Mr. Levie quit performing magic tricks and ditched his skinny jeans for J.Crew black suits, though he kept wearing neon tennis shoes. Mr. Smith, who appeared on the reality television show “Millionaire Matchmaker” in 2010, gave up playing professional Wiffle ball, got married and bought a house. Both men stopped hurtling down the bright yellow, two-story plastic-tube slide in the lobby of Box’s headquarters.
In May 2011, Citrix Systems Inc. offered to acquire Box for about $600 million, nearly triple the online storage company’s value in February.
Draper Fisher Jurvetson, of Menlo Park, Calif., pressured Messrs. Levie and Smith to think long and hard about selling. The venture-capital firm stood to get $9 for every Box share it bought for 29 cents.
“Take the deal now or commit to building a company that will go public,” said Mr. Stein, a Box director since 2006, at a board meeting.
Mr. Levie, whose iPhone holds a screen shot of Oracle Corp. founder Larry Ellison, stayed mostly silent. He didn’t want to sell Box but knew he had to seriously consider Citrix’s takeover offer and wanted to see if other people in the room felt the same way.
Dan Levin, Box’s president and chief operating officer, finally turned to Mr. Levie and said: “You’re the CEO. Just make a decision.”
Mr. Levie said his gut feeling was that Box could do better as a stand-alone company. He turned down the Citrix deal. Investors who leaned toward a sale say they supported the CEO’s decision once he made it.
In July 2012, General Atlantic LLC, based in Greenwich, Conn., pumped $150 million into Box, increasing its implied valuation to more than $1 billion. The company’s customer list soon grew to include drug maker Eli Lilly & Co., the U.S. unit of Toyota Motor Corp. and the World Bank. (The Wall Street Journal, owned by News Corp, also is a client of Box.)
It didn’t bother Box’s investors that the privately held company was awash in red ink. Revenue was doubling every year, suggesting that the young tech company could go toe to toe with much larger cloud-computing rivals such as Microsoft Corp. and International Business Machines Corp.
In March 2014, Box filed a prospectus to sell stock through an initial public offering. The filing showed the company spent $1.38 on sales and marketing in its previous fiscal year for every $1 of revenue.
Change in sentiment
Om Malik, a partner at venture-capital firm True Ventures, which doesn’t own any Box shares, called the company a “house of horrors.” The comment swept through Silicon Valley.
Box was blindsided again the next month. The IPO market for up-and-coming tech companies suddenly turned dour. At a Box board meeting, Morgan Stanley investment banker Colin Stewart warned of a “big reset” for companies with fast growth but big losses, saying the change was based on “no news but a change in sentiment.”
Mr. Smith told board members: “Our peers have lost 50% of their value in a few days.” There were steep declines in the share prices of FireEye Inc., WorkdayInc. and NetSuite Inc., all publicly traded.
Even though Mr. Stewart said barreling ahead with an IPO would be dicey, some early Box investors wanted to try. “Timing markets is impossible,” said Steve Krausz, general partner of U.S. Venture Partners and a Box director.
“There’s no sense waiting around,” agreed Mr. Levin, 51, a former Intuit Inc.executive hired by Messrs. Levie and Smith because of his age and previous experience at several startups. “Let’s get back to running the business.”
Mr. Smith resisted. “Let’s pro-con this thing out,” he told the rest of Box’s board. “For Aaron and me, this is our baby.”
The board, packed with representatives of early Box investors, decided to go along with Messrs. Levie and Smith but urged the CEO to watch his spending and hire “dozens fewer” salespeople.
Mr. Levie shot back: “We will save our way into the land of irrelevance.”
IPO delays are common, but Box’s attracted a swarm of outside attention. Box was trying to land General Electric Co. as its biggest customer ever, and the company demanded to review Box’s detailed balance sheet before signing a contract.
“Box had a strong product, but we did our due diligence that the company could endure, whether through an IPO or investors,” says Jamie Miller, chief information officer at GE.
Box opened its books to GE, and the two companies reached agreement in May 2014. Financial terms weren’t disclosed, but 300,000 employees at GE now use Box. It has more than 34 million registered users overall, including more than half of all Fortune 500 companies.
Feeling frazzled
The IPO’s limbo frazzled Mr. Levie. He often drank two cups of coffee at a time, clutching one in each hand. He lost his car keys and quit driving, ran between employees’ desks at Box’s headquarters and largely subsisted on once-a-day pho at a Vietnamese restaurant nearby.
Last July’s deal with Coatue and TPG gave Box more breathing room and valued the company at $2.4 billion, its highest level ever. But some earlier investors complained about the 10% discount given to the two firms.
Rory O’Driscoll, a Scale Venture Partners managing director and Box board member, says he went along with the deal to “pursue the IPO on our timeline.”
At an office party, Box’s founders made fun of the IPO process by showing a clip from the movie “Tommy Boy” in which Chris Farley and David Spade light a toy car on fire in a sales pitch gone horribly wrong.
The company also unveiled industry-specific software for retail, entertainment, and health care. At a conference, actor Jared Letodemonstrated how he uses Box for music projects.
In December, Box filed an updated prospectus that showed an acceleration in revenue growth and improved operating margins, signaling that the IPO was back in motion.
After another filing in early January, Mr. Levie tweeted: “Well that certainly took a while.”
He and Mr. Smith then began rehearsing for a video planned for release before a “roadshow” with institutional investors. As Mr. Levie started, he noticed that he had forgotten to wash off pen marks scrawled all over one hand. Mr. Smith lamented while speaking numbers at the camera: “I look like a hostage.”
During the roadshow, some investors spent more time lecturing Box executives about the company’s weaknesses than listening to the executives’ strategic plans, says Mr. Levin.
The gloom faded when Box shares jumped from their offering price of $14 on Jan. 22 to $23.23 at the end of their first day of trading. Apple Inc. Chief Executive Tim Cook tweeted congratulations to Mr. Levie and “the Box team on their IPO and for creating a great company!”
“I was worth $100 million for a second,” Mr. Levie says. “I did the math.” Messrs. Levie and Smith flew back to California and played beer pong at Box’s headquarters with other employees deep into the night.
Box shares sank 13% in one day in March after Box jolted investors with news that its pace of sales growth has slowed. Losses aren’t likely to narrow soon. Venture-capital firms and other shareholders who owned stock before the IPO can start selling in July.
Yet Mr. Levie says there isn’t “a single decision in the entire financing process I would have made differently.” And it is much easier to run a banged-up public company than it was to constantly maneuver Box toward an IPO.
Since the stock’s debut, he has flown 22,000 miles to meet with 226 current or prospective customers. “It’s fun again,” he says. “Finally.”
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