The IPO delay — which Box CEO Aaron Levie told us has been an “extremely unusual process” — raised a lot of eyebrows because companies usually don’t hold out for that long after filing an S-1.
In particular, many outsiders pointed to Box’s massive losses, where sales and marketing costs alone exceeded its total revenue.
Normally, this would make a lot of investors nervous. But Chamath Palihapitiya, the founder of the VC firm Social+Capital, who’s also one of the early investors of Box, says he’s not concerned at all. He says Box’s high spending is, in fact, “good burn.”
“Box found out that enterprise sales is expensive to get off the ground, and it takes a long time as typical sales cycles are 12, 18-plus months,” Palihapitiya told Business Insider. “But they also figured out that when you do finally close these deals, you’re closing huge 10,000-plus seat licenses and they’re multi-million dollar, multi-year contracts.”
Palihapitiya has a point. Subscription services like Box spend a lot up front to acquire customers, and the process could take years when they’re dealing with big companies like General Electric. But once they close the deal, it turns into a recurring source of revenue, meaning those deals become 100% gross margin businesses year after year.
Palihapitiya says the fact that Box, as a private company, has already built a strong enterprise sales channel is what makes it different from other enterprise startups. A lot of enterprise startups only have small and medium-sized businesses and mid-market customers when they go public, which causes them to spend another few years of massive losses trying to build a sales channel for big enterprises.
He says Workday is the only other enterprise software company to have successfully built an enterprise sales channel as well as Box before going public — and that’s something Wall Street appreciates in the long term.
“When they’re public, Box could be in a very unique set of only a handful companies that have all three channels (SMB, mid-market, big enterprise) cranking,” Palihapitiya says. “They understand the nuances that really matter and they will get rewarded by Wall Street for that.”
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