Why Is Box Taking So Long To Pull The IPO Trigger?

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On March 24th, Box filed for its long-awaited IPO and went into the dreaded quiet period. It’s been over six months now since Box filed its S-1 form, signaling it would look for $250 million in its public offering. Prior to the announcement, Box was one of the hottest startups in technology, but after months of delay, with its IPO still sitting on the table, it is fair to wonder what the company is waiting for, and why it hasn’t pulled the trigger.

While mired in its standard quiet period, Box has been unable to defend itself, as the Silicon Valley skeptics have come out of the woodwork.

It didn’t help that the numbers in Box’s S-1 filing showed lots of growth, but also tectonic losses. Box’s full fiscal 2013 earned revenue of $124 million, a large number to be sure. But the company had GAAP losses that were greater: $168 million in the fiscal period. In its recently updated S-1, Box managed to get its fiscal first quarter GAAP operating margin under -100 percent, but its loss still grew 13 percent in the period to $38.5 million. On the plus side, the company’s revenue grew at a much larger 93.6 percent to $45.3 million in its fiscal first quarter.

Greater losses, but on even greater revenue. Box showed that on a year-over-year basis, it could grow its top line, but unfortunately didn’t prove that it could do so while reducing its red ink.


It’s clear Box has been burning through cash at an alarming rate, the very practice Silicon Valley venture capitalist Bill Gurley warned about in an interview last week. But it takes cash to achieve scale and CEO Aaron Levie has always believed in the power of scale. In fact, much of that money was going toward building a traditional enterprise-class, worldwide sales and marketing organization, something that is not cheap to construct. It was also going toward building a customer base and a platform.

Levie tells a story early on that when the company was generating some revenue, he decided to switch to a freemium business model. His early financial backers, including Mark Cuban, questioned the wisdom of giving the product away when some were already paying for it. Levie believed that in order to take the company in the direction that he desired, he needed the power of scale, and so he went the freemium route to grow his user base more quickly.

That bought him a couple of things.

First and foremost, it bought him enterprises he so desperately wanted as customers. Levie bet that enterprises had both the money and willingness to pay for software, and that he could generate more revenue faster with enterprise licenses than he could with regular consumers. This was an idea that Dropbox is only now beginning to understand.

Freemium was also a hidden tunnel into large enterprise companies that would never have paid attention to the then-small startup. It’s a well understood sales technique today, but back in 2007 or 2008, it was a fairly radical notion to bypass IT and go straight for users by luring them with a free product.

Once Box achieved a certain level of scale, Levie built a development platform on top of Box, another stroke of incredible vision at the time. As Rory O’Driscoll from Scale Venture Partners said at Box’s 2014 BoxWorks event, today this is something every startup wants because it expands the breadth and quality of the base offering, but it’s much easier said than done. “Third parties only engage when you achieve critical mass. You have to do something else and become a platform. You aren’t born fully formed as a platform,” he said. Levie understood this.


If Box has managed to grow its user base, develop large enterprise customers like Proctor & Gamble, GE and Schneider Electric, all while nurturing a platform that they say has more than 40,000 developers, why the hell hasn’t it hit go on its IPO? Could it be because the market isn’t sold on Box’s ability to generate sustainable profits, or even cash flow positive? Recent comments from prominent venture capitalists suggest that’s the case: The market views companies that are burning such huge amounts of cash through tinted glasses — not rose, mind you, but a less presentable color.

Box to this point has been a good bet on revenue growth. Unfortunately as they consider an IPO, that approach is now far less in vogue.

Instead of forcing its IPO out — and this presumes that it would have been possible at all — Box raised $150 million this July in private capital. Using back-of-the-envelope calculations, that probably pushed Box’s on-hand cash in the neighborhood of $200 million. Box appears to have bought itself some time with this raise and it can wait until it thinks the market is right. In other words, if the market isn’t ready for Box’s coming out party, Box has the cash on hand to be patient until it is.

To be specific, Box burned through $29.58 million in cash in its most recent fiscal quarter. At that rate of burn, it still has quarters and quarters of runway, provided that it doesn’t increase its burn rate (something it would be foolish to do under these conditions). Presuming that its business model will allow the company to reduce its losses while growing its revenues, at a lower deficit Box could go public whenever it’s good and ready. And it may have the reserves to get there.

When asked about the delay, a Box spokesperson indicated they had nothing new to add beyond their official statement. “Our plan continues to be to go public when it makes the most sense for Box and the market. As always, investing in our customers, technology, and future growth remains our top priority.”

The market might not be ready for Box and Box may not be ready to go under current market conditions, but it appears to have enough funding to take its time and go whenever it considers the conditions are right. But waiting is still fraught with peril and the longer Box waits, the more people will wonder.

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