Box’s IPO was never a normal deal. When Wall Street cooled to
tech IPOs last year, especially involving firms that are
subscription-based with high customer acquisition costs, the Box
offering became the canary in the Wall Street coal mine.The general consensus was that if Box succeeded, other firms could follow, allowing Silicon Valley and its attached investor class to breathe easy — but the same consensus held that if its IPO went poorly, other companies’ offerings would remain on hold.
Box sold 12.5 million shares in its offering at $14 each over night to raise $175 million at a $1.67 billion valuation. The $14 price point was a bit over its initially proposed $11 to $13 range. When sales opened this morning, Box surged to over $20 a share and is currently trading at $23.67 at the time of writing.
As people gush over the opening numbers though, lest we forget, it probably means that Box low-balled for a reason. Pricing an IPO is something akin to arcane magic, and companies want to see their shares rise on their first day of trading, but there is a fine line between pop and leaving money on the table. As Box CEO Aaron Levie tweeted, it’s not an easy balance:
TechCrunch spoke briefly with Levie, and CFO Dylan Smith, who also happen to be the company co-founders and friends since childhood. We asked the pair if their investment patterns would change now that Box was public. Smith noted that the company’s financial profile was improving, and that the market it is selling into is large. That translates into: Not really.
We asked the duo a related question about their perspective was on working towards profitability. “It’s a large market,” they repeated. Both executives, speaking only for themselves, indicated that they do not have short-term plans to sell any of their shares.
It’s hot-take season on Box, and so TechCrunch chatted up a bevy of external analysts, venture capitalists, and even a few CEO’s that compete with the firm to get their view on the impact of today’s activities.
The Analysts
Larry Hawes, who is principal at Dow Brook Advisory Services, said Box seemed wary of overpricing, and chose to remain somewhat conservative, but Wall Street has clearly grown more comfortable with Box in the months since its initial S-1 filing.“Initial demand has been good, as the price has popped about 65% so far this morning. It seems that investors are now more comfortable with Box’s net losses, which have improved as sales and marketing expenses have been brought down. Latest analysis indicates that Box is spending $0.97 to earn $1.00 revenue; previous customer acquisition costs were well north of $1.00,” he said.
He added, “All in all, this is a good start for Box as a public company. Yes, the IPO will raise working capital and money for additional acquisitions. More importantly, its success, so far, validates investor confidence in the company’s market and strategy, as well as in the SaaS business model in general.”
Analyst Alan Pelz-Sharpe from 451 Research, who has been following Box for years, says he was in Silicon Valley last week and the Box IPO was the cause célèbre. Pelz-Sharpe says you can’t underestimate the importance of this IPO to Silicon Valley and the startup community in general.
“Everyone in the Valley wanted Box to succeed as it validates many others not just in File Sync and Share, but in new approaches to enterprise business applications and functions in general. It also validates (for now at least) the necessity of spending heavily early on to build a subscription base of scale that over time will continue to deliver cash and bring profitability,” he said.
However, as one Silicon Valley insider, who chose not to be identified told TechCrunch, you can’t ignore what he called, “Box’s underwhelming metrics.” He’s referring to the high sales and marketing costs on the Box S-1 form, which companies file prior to the IPO.
He said in spite of this, there is room for Box to succeed in the long term. “There is a lot of pent up demand for IPOs with a huge room to grow. Box is in a market that dispurts many 10s of billions of dollars of enterprise spend — file storage, enterprise collaboration and inter-organizational file sharing. You can think of this market with potential greater than even Microsoft office,” he said.
He warned that Box has to keep the growth and innovation going, while reigning in spending and that could be a challenge moving forward.
“Wall Street places a huge premium on growth headroom and this can give Box a good multiple for a long time, provided Box grows significantly faster than the market, continues to improve on sales and marketing efficiency and shows a lot of platform product innovation which they are well positioned for.”
The Venture Capitalists
Today was an unequivocally good day for Silicon Valley’s money slingers. By not stumbling, Box probably saved more than a few similar companies’ valuations and proved that the IPO window is wide open, which provides venture capitalists with a strong path to liquidity.Christoper Calder, of EPIC Ventures, told TechCrunch that he doesn’t think that Box is overvalued at its current figures, but that a year ago, when the company first wanted to go public, its current valuation might “have been a bit pricey.” Box, of course, saw its revenue rise, and its losses slow in the period between its initial filing, and today.
How did Box perhaps get ahead of its skis, in terms of its valuation? “Investors in the private market are trading [short-term] IRR [Internal Rate of Return] for multiples right now,” according to Calder. Investors are “paying up at valuations that [a] company will have to grow into.” That can lead to overpaying for a company’s shares in the short term, but “it doesn’t really matter,” he continued, “assuming the company keeps growing.”
Jason Lemkin of Storm Ventures told TechCrunch that the “tactical reality” of Box’s IPO was that it was “well priced” at around five times 2015 revenues, along with “very high growth.” Lemkin also noted that Box’s first trades, coming in around $20, vindicated the private investors who last put money into the company. That capital was invested at $20 per share.
That Box had a first day pop did not shock Kleiner Perkin’s Matt Murphy, who told TechCrunch that a rise was “consistent” with other recent IPO results from companies like HortonWorks. However, that it was as much as 70 percent did surprise the venture capitalist. Murphy, who sits on the board of Egnyte, a competitor to Box — more on them shortly — said that he understands the “enthusiasm” around the IPO, given that the market “category is bigger than most people understand and is expanding rapidly at the high end.”
Ravi Belani, who is managing partner at enterprise incubator, Alchemist Accelerator said there was lots of love from startup founders toward Box, and Box’s IPO success is going to be good for the community in general.
“What’s salient and significant is that it shows a maturity amongst late stage investors and public markets towards assessing SaaS economics. And it sends a strong signal that founders can focus on the long term — toward building businesses built on customer engagement that over the long term build huge value vs short term pop type businesses,” he said.
The CEOs
The CEOs waiting in the wings for their own turn at the IPO dance should also feel free to break out the bubbly.Vineet Jain, the CEO of Egnyte, and Ajay Patel, the CEO of HighQ are having a good day. Both of their firms share product surface area with Box, so if investors had told Box to go to hell, it would have been something of a downer.
In the case of Jain, the executive told TechCrunch that Box’s first day pop “brings real validation to our space as well as the adjacent markets in tech.” Jain agrees that Box’s success is going to release a logjam: “[The] successful Box IPO will now spark a bull run of IPOs for tech in 2015,” he said.
Impishly, Jain took a minor swipe at Box’s still-yawning financial losses, telling TechCrunch that his firm has “the confidence that tight execution and keeping costs under control is the path to success.” Shade comes in various flavors, but always contains the same bite.
In the case of HighQ, the smallest of the three firms by revenue, Patel said that the IPO’s success was predicated on intelligent pricing. By his math, the company was pitched at 6 times forward revenues. Taking less capital in the offering by allowing for a larger, more exuberant share price pop means that “the software industry owes a debt of gratitude to Aaron Levie and his bankers for pricing their IPO at the right level,” according to the executive.
Echoing Calder’s point about growth, Patel told TechCrunch that there is “no reason” why Box’s “impressive growth cannot continue.” That’s due, in his perspective, to the fact that “the market appetite for [Box’s] solution is real and applicable to almost every organization in the world.”
What will Box’s biggest future challenge be? “Profitability,” according to Patel, who described Box’s current losses to TechCrunch as “staggering.” In his estimation, Box can reach profitability in 3 to 5 years.
Dropbox, another company in the enterprise collaboration and file storage space declined to comment, saying only that they were happy for them and it validates the market.
Huddle CEO, Alastair Mitchell, said that anticipation around the Box IPO has been building at a feverish clip.
He added, “While Box is still evolving from its roots as a
storage platform, its IPO is an important step for the market, as it’s
driving a broader conversation about the business value of
collaboration. At this point, if you haven’t already achieved enough
scale as a collaboration vendor, you face being left behind, and I think
we’ll see a lot of maturity in this space in the coming year.”
The Conclusion
Market consensus appears to be that Box priced intelligently, and then saw its IPO perform even better than expected. For the decade-old technology firm, it has been the IPO day that they were too cautious to discuss in voices louder than a whisper. They have to pleased beyond words as the gains have held steady throughout the day so far.Looking ahead, if Box were to give up its early gains, or other recently public companies like NewRelic and Hubspot retreated, the iron could cool incredibly quickly in IPO-land. For now, however, it’s go time. Get ready for the S-1 onslaught.