Eleven years ago, a college student named Aaron Levie had a startup idea.
That idea became Box, now a publicly traded company that Levie, 31, and his three cofounders still run today. Box sells a cloud storage solution with a suite of tools for enterprise companies, and has a market cap of $1.5 billion.
But when it first launched, Box was a cloud storage solution for consumers, like its competitor Dropbox.
Now there are a lot of cloud storage options for consumers, like Apple’s iCloud and Google Drive, which has pushed competitors like Dropbox into the same enterprise space as Box where the “race to zero” — the cheapening of storage offerings until it’s finally free for consumers — doesn’t matter as much.
Fortunately for Box, it made the decision way back in 2007 to go all enterprise. And it all came about after Levie wrote a memo to his team that resembled Tom Cruise’s mission statement moment in “Jerry Maguire” (see the scene in the clip below).
Levie’s memo wasn’t 25 pages, like in the movie. Instead, it outlined three paths to his investors and cofounders at the startup, which at the time only employed about 20 people.
Post memo, Box decided to go all in on enterprise. Last year, nearly nine years after the fateful decision, Box generated about $300 million and it now counts clients like GE and Procter & Gamble.
We met with Levie in Box’s Redwood City headquarters in early April, where he discussed the memo, why so few companies are going public, and what cool startups he’s seeing as an angel investor.
Here’s the Q&A with Levie, which has been lightly edited for clarity.
Alyson Shontell: How’s everything been going since the IPO?
Aaron Levie: We are very happy being public. For the past two or three years, we’ve run the company like a public company, with quarterly “earnings calls” internally. So we were prepared.
Now, when you add in the factor of the liquidity crisis in the private market, by comparison it’s great to be public because that’s behind us. We don’t have to raise more capital so we’re not reliant on outside funding at this point.
The other thing about our kind of enterprise business is, when you’re public it can help your customers. Large enterprises can look at our financials and understand what’s going on with the business. They get way more transparency which ends up being very strategic.
Shontell: Are IPOs still the main goal for most Silicon Valley entrepreneurs? Would they rather get acquired? Mark Cuban recently told CNBC, “20 years ago, it was a goal of every entrepreneur to take their company public…That’s gone. The number of public companies has been cut in half.”
Levie: When you go public, we in the valley consider that an exit because it means your investors can sell your shares, but it’s the last thing from feeling like an exit. We have to plan for the next 10, 20, 30, 50 years of our strategy.
If you get acquired, it’s a fundamentally different path. I think in general when you’re public, you do increase the amount of work that goes into things like investor relations and communicating your strategy publicly and the operating rhythm around the quarterly earnings results.
So for us, we’re happy to be public, but having been a company that was private for so long, we also reaped the benefits of being private, which meant you could make decisions without having to explain it to as many people, and you didn’t have the quarterly rhythm as much.
Shontell: You’re invested in a bunch of startups — how do those founders feel about going public? Is that the long term vision?
Levie: I think that if you’re going to go public you have to think about your business as a multi-decade business. It’s not a near-term way to cash out.
For companies that have have multi-decade long strategies and are part of markets that will continue to grow in perpetuity, then it makes sense to potentially go the IPO path. If you’re in a startup [where] you’d be better off getting leverage from some larger company — because you need a larger sales force or a larger distribution channel and your products make sense for it — then getting acquired actually makes sense.
But, I have different advice for entrepreneurs depending on their situation.
Shontell: Years ago, you made the decision to shift Box away from the consumer business to focus on enterprises. Now your competitors are starting to eye the enterprise space. What made you decide that back then?
Levie: We made that decision when we were 20 people [in 2007]. When you’re in the moment, it feels dramatic. I wrote a Jerry Maguire-like memo, which had all of our options in front of us. One option was to stay the course, to be a little bit consumer and a little bit enterprise. The second path was to go full consumer. And the third option was to go enterprise.
I wrote a Jerry Maguire-like memo, which had all of our options in front of us. One option was to stay the course, to be a little bit consumer and a little bit enterprise. The second path was to go full consumer. And the third option was to go enterprise.
Option one was too much of a compromise and had the worst of both worlds.
Option two, we just assumed over the long run we were going to be competing with Google, Apple, Microsoft, Yahoo — really anyone who could give away free storage and file sharing, then make money selling devices or advertising. We didn’t think we’d have any ancillary business that would subsidise the storage part.
The third option was to go enterprise.
We didn’t flip the whole company overnight. We pursued an incremental strategy where our fifth employee started doing deep research on what it would look like if we became an enterprise software company.
He interviewed a bunch of customers. We hired a consultant to help us with enterprise sales strategy. So, we took bite-sized approaches to the pivot; it took between 3 and 6 months to tilt the direction of the company before we said, “OK, we have to be an enterprise software company. This is the only future that makes sense.”
8.5 years later, that’s what we do. We’re 100% focused on the enterprise.
Shontell: What sparked the Jerry Maguire memo?
Levie: We were a handful of people working 14 hours a day, and we were all living the product and the strategy. But it became really obvious that what we were doing was only going to be successful temporarily, initially.
We were not best in class on the enterprise side, and we were not best in class on the consumer side. We saw competitive threats emerging in the consumer space. One of our cofounders and one of our investors were really pushing me to move in the enterprise direction. When wrapped all together, I realised we were at a juncture.
Most companies early on have to make one of these [pivot] decisions. For us, it came about 2 years into the company.
Shontell: Who did the memo go out to?
Levie: At most it would have been seen by 4 or 5 people. It was very non-Jerry Maguire in its drama.
Shontell: Let’s zip ahead to Box today. Why are you burning so much cash on sales and marketing?
Levie: We’re burning far less than before in some key areas. For instance, last quarter we were cashflow positive from operations. So even from a sales and marketing standpoint, we were cashflow positive.
We have one giant bucket that we call “sales and marketing,” but it’s actually more on the sales side than on advertising. We don’t spend much on pure advertising. Instead, we have people around the world whose jobs are to try and align our strategy with a prospective customer’s IT strategy.
We spent a lot of money building out that team, plus on all of the time and effort that goes into trying to sell to customers. The benefit is that, when it works, you get very large customers like GE who have a couple hundred thousand employees using your product.
We made a bet about 5 years ago that there’d be a once-in-a-lifetime shift from traditional, on-premise technology environments at companies to [storing data in] the cloud. And if we were not the company that got the majority of that migration, somebody else would be.
So we decided to bet big and try to become the leading player in enterprise in this segment. That’s why we built up the sales team, that’s why we started marketing to enterprise and IT.
Fast forward, last year we did about $300 million in revenue. So I think it shows the success of that strategy, and the scale that that was able to create.
Shontell: Is the “race to zero” cost for consumers in data storage still a thing?
Levie: It is. We fundamentally believe that in the future, consumers will not pay for storage. You will never have to think about the amount of storage on your phone, for example. Think about your email. When was the last time you thought about how much email storage you had?
You stopped thinking about that nine years ago when Gmail gave you a free gigabyte.
Whether it’s email, music, personal photos, whatever — we think storage space is going to be essentially unlimited and free in the future. A company like Google, Apple, or Microsoft will just decide, “We’ll give you free unlimited storage because it’s getting cheaper every year to do so, and we’ll make up for [the financial loss] with some other product or service that we want to sell.” That’s what’s happening on the consumer side.
On the enterprise side it’s incredibly different because we don’t charge for storage. We charge for the capabilities on top of the storage, like the ability to manage your own encryption keys or to have hundreds of millions of files that you can organise and manage in one place.
Shontell: Are you still an active angel investor in startups?
Levie: More or less.
Shontell: What have you seen that could be the next big thing?
Levie: I was probably more active a couple of years ago, so the things that were most exciting then were startups like Stripe and Gusto (formally ZenPayroll). There’s also a genomics and personal health startup called Colour [Genomics].
When we were starting Box in 2005 and we were sophomores in college, we would do brainstorming sessions [with friends] for what to build. Often they’d say, “OK, the startup is going to be software that’s going to help you do something, like a search engine or a social network or a communication app.”
What’s exciting is that now, 10 years later, when you do a brainstorming session a founder might say, “What about healthcare? What about transportation? What about logistics?”
I think because of the iPhone and the fact that we now have a ubiquitous internet, our creativity in the startup space is ten times different. Every single industry, every single market, is going to be technology driven in some way. There’s [an] infinite opportunity for startups because now you can go and solve problems that previously looked like they had nothing to do with technology.
Now you could actually go disrupt or positively enable an existing industry.
I try to look for things that are going to be a little more than just an app, and are actually going after a real market or industry that wasn’t previously software enabled.