One of the more common arguments about Box’s delayed IPO is that Wall Street just doesn’t understand how cloud companies work.
For example, cloud software, often called software-as-a-service (SaaS), tends to spend huge amounts on sales and marketing early on to acquire customers, all under the premise that those contracts will recur over a long period of time.
Plus, standard accounting rules don’t reflect the total value of recurring contracts, while still recognising the full sales and marketing costs up front. That creates an imbalance between the total cost and the full value of the sales it actually generates.
NetSuite CEO Zach Nelson, however, believes this misunderstanding no longer exists. Nelson, who took his business management software company public in 2007, says investors now “understand the SaaS model really well.”
Instead, he thinks Box’s case has more to do with investors trying to gauge the true market potential Box is going after.
“Investors have to get into a deep analysis of what market Box is going after. How big are those markets and how big can they become?” Nelson told Business Insider. “I think that’s what’s really straining their investment decisions today — not, ‘Is the SaaS model for real?'”
Nelson says he’s not familiar with Box’s numbers, so it’s hard to comment on its IPO, but ultimately, “It has to come down to the company’s performance.”
“Box is in a very different market than perhaps Salesforce and NetSuite in terms of the size of the market and the number of users,” he continued. “Box has done really well given the market they’re attacking, but they will have to explain their metrics in great detail so investors have a good idea of where they are today and how they plan to grow in the future.”
The file storage and work collaboration space Box is in has become one of the most competitive fields in tech lately. Big companies, like Microsoft and Google, and upstarts like Dropbox, are all vying for market share. So instead of just focusing on file storage, Box has been trying to differentiate itself as a comprehensive platform business.
“In our business, our incumbents are IBM, EMC, Microsoft, and so the scale of the competition is far greater…it’s our job to continue to add more and more value on top of our platform,” Box CEO Aaron Levie told us in an interview in November.
Nelson agrees Box is turning into a giant platform business. He says Box has done a good job making companies pay for its service, while building apps on top of it as a platform. “Good applications do become platforms and do become more than what you call a commoditized functionality…I think that’s certainly the case with Box,” he says.
In its latest S1, Box said it has over 44,000 paying organisations, with more than 1,300 apps built on top of it. That translates to an annualized run rate of $US225 million, Box claims.
Box launched its roadshow earlier this month and is expected to go public by the end of this week.