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For the past few years we've had it had beaten into us that a start-up is an organization searching for a scalable (and implicitly, profitable) business model.

For the past few years we've had it had beaten into us that a start-up is an organization searching for a scalable (and implicitly, profitable) business model. Some businesses are always going to need a ton of capital up front: space travel, medical, semiconductors, etc. Also, social networks for obvious reasons, twitter doesn't counter this argument. There isn't a huge amount of utility gained by you when the company your friend works for is using Box. I see Box need would need some capital, but I can't remotely put it in the capital intensive category. Which leaves me thinking that Box simply hasn't yet found a scalable and profitable business model, it's a large company to still be in the search stage. I get the argument that Enterprise sales is a long process and there's a race against the likes of Dropbox. Let's say the sales cycle is 2 years. If I have 500 sales people in year 4 and 800 in year 6, I expect those original 500 to be earning twice their wages, at a minimum, at year 6. If they're not doing that after 2 years, why do I keep recruiting at such a rate? I also expect some proportional contribution from sales after 3-4 months, up to 2 years. Let's call that roughly 600 people-worth of sales, that's a minimum of 1,200 salaries of income. Looking at their numbers they'd have to have gone from (normalise this to their actual numbers) 500 to 1,700 sales people in 2 years (or 250 to 850, etc). In that actually the case?

stanleydrew 13y ago
They don't have a scalable business model when measured annually, that is clear. But enterprise customer LTV accrues over years, not months. It might take $5 to generate $1 of income this year, but then only take $0.25 to maintain that $1 of income for the next 10 years. I don't know for sure, but I'd say there are probably enough smart people who understand the dynamics of enterprise software involved with Box for this to make sense.
jackgavigan 13y ago
Note that sales and marketing accounts for 66.6% (yes really) of total operating expenses and "Sales and marketing expense [includes] datacenter and customer support costs related to providing our cloud-based services to our free users." (p55). Their Net Loss, as a % of revenues, is decreasing year-on-year: 13 months to 31 January 2012: -227% 12 months to 31 January 2013: -191% 12 months to 31 January 2014: -135% You can project that curve forward and predict that they'll be cash-flow positive by the end of 2015. I think that, if you were to ask Levie off the record (i.e. with the restrictions imposed by the SEC), he'd say that they've found a repeatable and scalable business model and that the company could become profitable in the not-too-distant future. They could slow their expenses' growth rate further by ceasing to offer free storage to new users. If they really started running out of money, they could cut expenses significantly (and increase revenue a bit) by saying to existing users "No more free storage! Pay us $x/GB from next month or you'd better download your files because we'll delete 'em!" I doubt they'll do that, though. I expect they'll simply keep selling and marketing and growing bigger and bigger, in the same way that Amazon studiously avoid profitability in order to keep growing and expanding. Interesting, by the way, that Andreessen Horowitz don't show up in the list of >5% shareholders.
- davidjgraph 13y ago
  This might be dense, but why would you measure net loss as a % of revenues? That calculation uses revenues twice, each $ of revenue reduces loss by a $. Surely, it should be expenses as a % of revenue? Edit : Sorry, I'm not asking what it is, I'm wondering why a trend in that particular metric points towards profitability, one day.
  - deleted 13y ago
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  - jackgavigan 13y ago
    It was easier. The end result (in terms of projecting forward) is the same however you do it. PS: It's not dense, by the way - fair question. > Edit : Sorry, I'm not asking what it is, I'm wondering why a trend in that particular metric points towards profitability, one day. For the purposes of a "finger in the air" projection of when they'll hit profitability, it doesn't matter whether you use "Net Loss as a % of Revenues" or "Expenses as a % of Revenues" because, as you pointed out, Net Loss = [Expenses - Revenues]. The numbers are different (by 100 percentage points) but the general shape of the curve is the same. If you extrapolate the curve out, you get to break-even in 2015. It's completely unscientific. I'm basically pulling numbers out of my ass. I have an MBA, you see. ;-)
vagarwa 13y ago
Not having a 'scalable' business model (or having to prove that the model is indeed scalable) hasn't deterred other companies from going public and having an awesome final exist (from Investors' perspective). Example: Successfactors. Here is the excerpt of their S-1 from IPO and their last 10-K as an independent company: http://mark.ly/KgA6PO/ http://mark.ly/KgA6PO/ The point being that as long as Box's bankers can convince the investment managers that there is an eventual buyer, box will have a decently oversubscribed order book at IPO. Of-course roadshow can't and won't mention this.
guiambros 13y ago
> Which leaves me thinking that Box simply hasn't yet found a scalable and profitable business model, it's a large company to still be in the search stage. Quite the opposite. They do have a scalable and profitable business today. The biggest component of their operating cost is Sales & Marketing. The Sales organization was the main cause for the costs increase in 2014, but it won't continue to grow linearly with revenue for much longer. Maybe a couple of years more, as they ramp up sales teams outside the US, and then it'll flatten out. On the other hand, the cost of Marketing is not really marketing. It's infrastructure + customer support for the free users. For now it's an investment, and they are hoping to monetize by converting into paying customers, or some indirect way in the future (e.g., advertising). Let's do a quick thought experiment. Turn it off its free users, and focus only on the 34K paying companies. Plus, to keep existing paying customers you don't need an army of 600+ salesmen, so you could get rid of them too. What is left is a company that is extremely profitable and cashflow positive, with a nice and sustainable business. Naturally pre-IPO companies are better-off by focusing on exponential growth, instead of profitability. The enterprise cloud storage market is a gold rush. Dropbox, Box, Amazon, Google, Microsoft and EMC all fighting for the same corporate dollars, so there's no time to waste. The next couple of years are pretty clear for Box and Dropbox. I think the interesting challenge will be in 2-3 years, with the upcoming commoditization of this market. When everyone has a Storage-as-a-Service product, and their apps and web interfaces became good enough, how to you convince IT folks to justify tens of thousands of dollars per year?
- elefont2 13y ago
  Okay, let's do that thought experiment. Set Sales and marketing expense (Currently $171 million) to zero. So, they would be making $2.3 million a year in profit. But you can't have your cake and eat it too. Without sales/marketing, you can't expect any growth. And expectation of future exponential growth is the trigger for these very high tech company valuations. Without that growth, I would value it like a blue chip company. The average P/E ratio of the S&P 500 is about 20 times earnings. That would put the valuation of the company at about $50 million - a far cry from what they want to value it at. Or, if you do it by sales, the average P/S ratio of the S&P 500 is about 1.7 times sales. Which puts their valuation at about $210 million - still a far cry from what they want to value it at. So, while they have a scalable and profitable business today, they don't have one which comes anywhere close to justifying their valuation outside the silicon valley bubble. Ergo, they better still be in the search stage.

stanleydrew 13y ago

They don't have a scalable business model when measured annually, that is clear. But enterprise customer LTV accrues over years, not months. It might take $5 to generate $1 of income this year, but then only take $0.25 to maintain that $1 of income for the next 10 years. I don't know for sure, but I'd say there are probably enough smart people who understand the dynamics of enterprise software involved with Box for this to make sense.

jackgavigan 13y ago

Note that sales and marketing accounts for 66.6% (yes really) of total operating expenses and "Sales and marketing expense [includes] datacenter and customer support costs related to providing our cloud-based services to our free users." (p55). Their Net Loss, as a % of revenues, is decreasing year-on-year: 13 months to 31 January 2012: -227% 12 months to 31 January 2013: -191% 12 months to 31 January 2014: -135% You can project that curve forward and predict that they'll be cash-flow positive by the end of 2015. I think that, if you were to ask Levie off the record (i.e. with the restrictions imposed by the SEC), he'd say that they've found a repeatable and scalable business model and that the company could become profitable in the not-too-distant future. They could slow their expenses' growth rate further by ceasing to offer free storage to new users. If they really started running out of money, they could cut expenses significantly (and increase revenue a bit) by saying to existing users "No more free storage! Pay us $x/GB from next month or you'd better download your files because we'll delete 'em!" I doubt they'll do that, though. I expect they'll simply keep selling and marketing and growing bigger and bigger, in the same way that Amazon studiously avoid profitability in order to keep growing and expanding. Interesting, by the way, that Andreessen Horowitz don't show up in the list of >5% shareholders.

davidjgraph 13y ago
This might be dense, but why would you measure net loss as a % of revenues? That calculation uses revenues twice, each $ of revenue reduces loss by a $. Surely, it should be expenses as a % of revenue? Edit : Sorry, I'm not asking what it is, I'm wondering why a trend in that particular metric points towards profitability, one day.
- deleted 13y ago
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- jackgavigan 13y ago
  It was easier. The end result (in terms of projecting forward) is the same however you do it. PS: It's not dense, by the way - fair question. > Edit : Sorry, I'm not asking what it is, I'm wondering why a trend in that particular metric points towards profitability, one day. For the purposes of a "finger in the air" projection of when they'll hit profitability, it doesn't matter whether you use "Net Loss as a % of Revenues" or "Expenses as a % of Revenues" because, as you pointed out, Net Loss = [Expenses - Revenues]. The numbers are different (by 100 percentage points) but the general shape of the curve is the same. If you extrapolate the curve out, you get to break-even in 2015. It's completely unscientific. I'm basically pulling numbers out of my ass. I have an MBA, you see. ;-)

vagarwa 13y ago

Not having a 'scalable' business model (or having to prove that the model is indeed scalable) hasn't deterred other companies from going public and having an awesome final exist (from Investors' perspective). Example: Successfactors. Here is the excerpt of their S-1 from IPO and their last 10-K as an independent company: http://mark.ly/KgA6PO/ http://mark.ly/KgA6PO/ The point being that as long as Box's bankers can convince the investment managers that there is an eventual buyer, box will have a decently oversubscribed order book at IPO. Of-course roadshow can't and won't mention this.

guiambros 13y ago

> Which leaves me thinking that Box simply hasn't yet found a scalable and profitable business model, it's a large company to still be in the search stage. Quite the opposite. They do have a scalable and profitable business today. The biggest component of their operating cost is Sales & Marketing. The Sales organization was the main cause for the costs increase in 2014, but it won't continue to grow linearly with revenue for much longer. Maybe a couple of years more, as they ramp up sales teams outside the US, and then it'll flatten out. On the other hand, the cost of Marketing is not really marketing. It's infrastructure + customer support for the free users. For now it's an investment, and they are hoping to monetize by converting into paying customers, or some indirect way in the future (e.g., advertising). Let's do a quick thought experiment. Turn it off its free users, and focus only on the 34K paying companies. Plus, to keep existing paying customers you don't need an army of 600+ salesmen, so you could get rid of them too. What is left is a company that is extremely profitable and cashflow positive, with a nice and sustainable business. Naturally pre-IPO companies are better-off by focusing on exponential growth, instead of profitability. The enterprise cloud storage market is a gold rush. Dropbox, Box, Amazon, Google, Microsoft and EMC all fighting for the same corporate dollars, so there's no time to waste. The next couple of years are pretty clear for Box and Dropbox. I think the interesting challenge will be in 2-3 years, with the upcoming commoditization of this market. When everyone has a Storage-as-a-Service product, and their apps and web interfaces became good enough, how to you convince IT folks to justify tens of thousands of dollars per year?

elefont2 13y ago
Okay, let's do that thought experiment. Set Sales and marketing expense (Currently $171 million) to zero. So, they would be making $2.3 million a year in profit. But you can't have your cake and eat it too. Without sales/marketing, you can't expect any growth. And expectation of future exponential growth is the trigger for these very high tech company valuations. Without that growth, I would value it like a blue chip company. The average P/E ratio of the S&P 500 is about 20 times earnings. That would put the valuation of the company at about $50 million - a far cry from what they want to value it at. Or, if you do it by sales, the average P/S ratio of the S&P 500 is about 1.7 times sales. Which puts their valuation at about $210 million - still a far cry from what they want to value it at. So, while they have a scalable and profitable business today, they don't have one which comes anywhere close to justifying their valuation outside the silicon valley bubble. Ergo, they better still be in the search stage.