What does the future hold for unicorns?
There are now 131 private tech companies valued at $1bn or more – a threshold that has earned them the “unicorn” label – according to research provider CB Insights. But if a 10-figure valuation was once rare enough to justify comparison with mythical one-horned creatures, it draws a blasé response in the current tech boom.
“Billion is the new hundred million,” says Aaron Levie, co-founder and chief executive of Box, a cloud software company and former unicorn. The name “only works if it implies some level of scarcity or rarity”, and it no longer does any more, he says.
Mr. Levie’s company now stands as a lesson in what may lie ahead for many of the unicorns. Earlier this year, Box became one of the few to have completed a Wall Street listing, prompted by a thirst for capital that could not be satisfied in the private markets.
But it has been a rough ride. The August stock market rout hit its already battered stock price, pushing the shares below their initial public offering price and leaving them at barely half the peak they hit early this year.
Like the chief executives of many public companies in a similar position before him, Mr. Levie claims this is the result of a misconception. “You’ve seen it with Netflix or Facebook or lots of companies that have been misunderstood on what the long-term vision is,” he says. “I think we’re maybe in one of those periods temporarily.”
Box delayed plans for a share sale last year, at a time when shares in cloud computing companies fell. The company was eventually valued in its IPO at less than it had been in its previous round of private capital-raising. That fate now awaits many unicorns, warns Silicon Valley venture capitalist Bill Gurley, as the slump in public share prices opens an even bigger gulf with overheated private valuations.
Fast-talking, irreverent and at times facetious, Mr. Levie says he has not given up the trappings of the start-up entrepreneur – the brightly colored canvas shoes he always wears, or the barbed tweets. (A typical recent example: “So Trump apparently won that debate. Scary times when reality television figures are indistinguishable from plausible presidents.”)
Along with school friend Dylan Smith, Mr. Levie dropped out of college to start the company. A decade on, at the age of 30, the touches of grey around the temples are spreading – something, he says, that is “correlated with doing lots of stressful things”. But he plays along with the suggestion that it might bring some useful gravitas: “People trust me way more now.”
During its troubled IPO, Box became a lightning rod for some of the biggest issues in the software world.
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is whether the largest tech companies such as Amazon and Google will march into the most promising cloud services, swallowing up or wiping out smaller start-ups. The market of companies such as Box is generally described as cloud storage – holding information for customers in centralized data repositories. To many, that sounds like a commodity-like service that will end up being dominated by companies with massive scale.
Mr. Levie says this is a misunderstanding of Box’s business and that it is selling a higher level of service based on securing and managing information, not just storing it: “Where our revenue comes from is businesses that care about security and data control and compliance and workflow, and what we give them is free storage as well.”
With the highly fragmented online data storage and management sector facing consolidation, Box is racing to prove that it can become one of the survivors. A partnership this year with IBM and the extension of an alliance with Microsoft have helped to advance its hopes of being seen as a key element of the cloud computing infrastructure, a place where large companies and governments store their data. But with expected revenues of only $290m this year, it still has a long way to go.
A second issue raised by Box concerns the stock market’s willingness to back the financial model of cloud software companies, which spend heavily to acquire customers in anticipation of subscription income stretching far into the future. Its losses were held up during its IPO as evidence of a lack of discipline, although Mr. Levie rejects the criticism.
“If you look in history, that would be how you would describe Amazon, how you would be describing Salesforce.com early on,” he says. “Companies that are building large, leading market positions decide to invest in growth and invest in dominating their market and that’s what we’ve been doing.”
Moderating its marketing spending ahead of its IPO helped to silence some of the criticism. But if Box bends to the market and spends less money now trying to win new clients, does that not mean it is crimping its growth in the longer term? Mr. Levie shows momentary frustration at the question: “So now you’re saying that you want me to spend more? You’ve got to decide. You’ve got to land on an answer here.”
This is the quandary for all so-called “software as a service” companies, caught between conflicting pressures to invest for growth and demonstrate near-term returns. Box is out to prove it can stop burning cash – it has set a target of early 2017 for turning cash flow positive – but it is also facing a sharp revenue decline, with growth slowing to 34 per cent this year from 74 per cent the year before.
The company proves that at least one thing has not changed about the software industry as it moves to the cloud. Selling to enterprise customers – big companies and governments – is still a lengthy and expensive process, even if the internet creates the potential for viral growth in consumer services. Legal, compliance and security concerns are among the issues that slow sales.
“I’ve always had this blind spot that I think everything is going to happen way faster,” says Mr. Levie. “Because once you see that this is so obviously the future, the most time you could think that it would take the world to change [is], like, three years.”
Instead, he says, it has turned out to be “more a decade [or] two-decade type of problem”.
Box is now facing the brutal reality of enterprise software, where a handful of large tech companies such as Oracle and IBM have maintained their dominance through generations of technology. As new waves of start-ups have emerged, most have been absorbed through acquisition or been marginalized.
“We’re certainly not selling,” says Mr. Levie, voicing the perennial optimism of the newcomer. The $750m that Box has raised over its lifetime certainly points to outsized ambition.
“We have spent hundreds of millions of dollars building out the core technology and the sales and marketing to win in this market,” he says. “And it’s going to be very expensive for anybody else to enter.”
By Richard Waters
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