Box snags $150 million in last chance saloon funding round

SUMMARY:

Box manages to scrape $150 million but can it extinguish its cash burn rate? It doesn’t look likely any time soon unless it takes hard decisions on marketing spend.

Aaron-Jumping_BoxWorksBox has scraped together a fresh funding round of $150 million. While most commenters are viewing this as a pre-IPO round forced upon the company by unfavorable market headwinds, I see this as a last throw of the dice for a company that’s selling features and not solutions in a market it cannot win.

Here’s the problem: Box sells cloud storage, a market that has long been overpriced in the enterprise space and ripe for disruption. But it is only relatively recently the company has truly woken up to the rigor of enterprise requirements. These go an order of magnitude beyond those for the consumer and SMB markets where it has enjoyed considerable success but where it was becoming increasingly difficult to sustain high growth.

Despite the obvious allure of selling a large number of seats to a single customer, you simply cannot rock up at a large enterprise and shop an easy on ramp that is limited to ‘enter a username and password’ product and expect IT to sit silently by. That is especially true in storage which is often seen as the equivalent of the bank vault for company secrets and proprietary information.

At the same time, Box is faced with incredibly stiff competition. In the consumer and SMB markets, Google can always outgun Box for several reasons:

  • Google offers a suite of business applications where storage is one of the components.
  • Google can apply predatory pricing any time it likes.
  • Storage is one of those markets which appears to be a race to the bottom as hardware prices continue to fall and where functional value is limited. Vendors like Google have become masters at managing those parameters.

But even the mighty Google fights shy of going all in on large scale enterprise where its list of customers grows at glacial speed. It knows only too well how tough that market is when faced with the likes of IBM, EMC and now Microsoft.

Box has not been standing still. It has tried to position itself in the collaboration space. At its most raw, this means your cloud storage is shareable. Whoopy-do. That ain’t collaboration. That’s a feature.

PasswordFor its part, Box touts Gartner leadership in a Magic Quadrant and GE as a marquee customer in the enterprise space as validation for its enterprise chops. Sorry – but those don’t count. Being a leader in a Gartner MQ is only one data point in an often complex buying process that can fail at any point along the buying continuum. And while I have a huge amount of respect for GE’s market savvy, note what Box says in the PR blurbs:

We’ve been working with GE leadership for nearly two years to bring Box to their organization

Two years? What’s that about? Here’s your answer:

…the scale of GE’s environment and the scope of their IT ambitions will inevitably help shape and evolve Box’s own development.

In short – we ain’t enterprise class but GE will help us get there. Ergo GE inked the deal for cents on the dollar.

The Box value proposition should be so self evident that enterprise almost fall over themselves to be part of the Box family but the PR can only muster some of the ‘usual (early adopter) suspects’ in its supporting PR like eBay and P&G. Even then it is far from clear whether Box is an enterprise wide solution or something that’s gotten in under the radar in non core groups.

Finally, if Box is serious about the enterprise then why do we not see headline customers as part of the line up in the forthcoming Boxworks customer gig? It is relatively easy to tout Silicon Valley newbies and the odd outlier but I see no tangible evidence that Box is able to showcase the companies it really needs, that will convince skeptical but valuable enterprise buyers.



Where does this leave Box?

Its most recent results imply the company has finally seen the writing on the wall and curtailed a good chunk of expenses along with throttling back hires. That helped it narrow losses in the latest quarter leaving Box with a cash burn rate of approximately $10 million per month. Combine its reported cash balance of $79 million with the $150 million it has just raised and all is far from lost.

But with a paid for to free customer ratio of around 1:12.5, Box has hard decisions to take about the extent to which it can continue to support a model where it currently costs $1.05 for every $1 it takes in revenue. That’s in marketing spend alone.

Right now, that $150 million looks more a leap of faith than a solid endorsement but then we don’t know the terms under which the deal was agreed. Some pundits believe those terms will have been onerous. If so then that’s hardly a ringing endorsement.

Most pundits are now flagging a Box IPO ahead of Labor Day. I have no clue whether that is a reality or simply the collective wisdom of otherwise idle gossip.

What I do know is that while Box may be a pioneer in disrupting otherwise moribund markets, its current business model is unsustainable. And for all the talk about growth, it may yet be the poster child for Silicon Valley vendors with aspirations to enterprise greatness that found out features don’t trump solutions. At least not in the enterprise.

Disclosure: Box is a partner at time of writing

    Comments are closed.

    1. says:

      Dissenting note …
      Personally, I would give Box better chances of survival than Den has, even though I’ll agree that the obstacles are formidable, particularly given the aggressive push that Microsoft is making into this market.
      The two factors I would give greater weight to are
      1) I think Den overestimates the extent to which Box relies on consumer subscriptions and understates its efforts to add enterprise-friendly features. For more on this see:
      http://diginomica.com/2013/09/17/boxworks-rethinking-documents-reinventing-enterprise/
      2) The financial metrics for a subscription business are different than traditional software businesses and Box has done a lot in its most recent quarter to rein in spending without any noticeable impact (so far) on its topline growth rate. So even though it still has an eyewatering cash burn rate, it looks much more like a sustainable business based on its Q1 numbers. For more on this, see myth 5 of:
      http://diginomica.com/2014/05/12/busting-misleading-myths-cloud/
      Having said that, Den highlights the key issue for Box: is it a feature or a solution? It has to answer that question in a way that will satisfy enterprise buyers before it can assure its survival.

    2. says:

      philww Fair points Phil and there is a short term solution – turn off the free accounts. But I remain concerned that at its upcoming show, not one of its brand leading customers will be on stage…unless you count Netflix. Why not showcase those so as to ram the point home. Plus – their mobility approach isn’t really enterprise class as far as I can tell. 
      But for me, the most telling thing is where they talk about two years of what – dev? For GE? Shows a real lack of understanding around the enterprise space IMO.

    3. apguha says:

      Respectfully disagree, Den.
      There is much more to the Box Story than Cloud Storage. As a Global SI serving F500 customers, our enthusiasm is based on solutions we have developed on Box Platform and the legacy ECM migrations underway.

      We would be happy to brief you and your team or meet us at BoxWorks, we will introduce you to marquee enterprise customers who will be attending.

      Twitter:  @apguha

    4. says:

      apguha I’m sure…but – your customers are dependent upon a company with an eye watering cash burn rate and which can’t field its marquee customers at its annual customer conference?
      It’s increasingly looking like potential acquirers are waiting to see if Levie’s team can get them across the IPO line or whether they simply sit it out until investors get fed up of a return that may never come. That of course, is if Microsoft or Google don’t crush them first. 
      Trust me, I wish the team well and we like their chutzpah but there comes a point when the bills have to be paid and poking fun at PowerPoint on Twitter (as example) doesn’t look like a great strategy to me.

    5. Adam Thier says:

      A shared drive is not a business model.

    6. Vijay Vijayasankar says:

      It’s a business surviving on founder’s charisma . They should have hired real enterprise people sooner – the ones with Rolodexes
      I don’t worry about feature incompleteness . Customers buy on vision and their ability to influence product direction.
      I think Box just needed more adult supervision – not sure if it helps anymore to hire . Getting funding isn’t difficult . If you suffer dilution – there is always some one to give the $$

    7. Diginomica says:

      @vijay – harsh but probably true

    8. Vijay Vijayasankar says:

      Agreed Adam .

    9. Adam Thier says:

      Vijay, the only real thing wrong with BOX is….we didn’t think of it first……

    10. Vijay Vijayasankar says:

      Apple didnt think of the concept first either – but when they followed, they compensated handily with design, engineering and marketing. Box doesnt seem to be able to do that