Box Moves Toward IPO Destiny

(San Jose Mercury News/MCT) -

It’s the quintessential Silicon Valley tale: Two kids start a company in a dorm room. The company grows, adds millions of users, and within a few years is worth more than $1 billion.

Only Aaron Levie and Dylan Smith aren’t helping people swap MP3s or status updates; they’re selling data-storage software to the Fortune 500. And though they’re both just 28, they’re widely expected to soon launch one of the tech industry’s most anticipated stock offerings.

“There aren’t a lot of people Aaron’s age who are actually passionate about the enterprise – even though that’s where the money is,” said analyst R. “Ray” Wang of Constellation Research. By some estimates, the cloud storage market, in which Los Altos, Calif.-based Box competes, is worth more than $7 billion a year, and Wang is among those who predict strong demand when the company finally kicks off an IPO.

Like any good chief executive, Levie won’t cop to a timetable for an initial public offering, but he’s well aware of the fact that Wall Street’s appetite for enterprise software is razor-keen. While consumer companies such as Twitter get the buzz, stock investors have shelled out hundreds of millions of dollars recently to buy stakes in the likes of Marketo and FireEye, which help businesses analyze and safeguard their data remotely.

So how did a college sophomore become deeply interested in   enterprise software?

In an interview after the annual BoxWorks conference, which drew thousands of people and celebrity speakers last month to a San Francisco hotel ballroom, Levie recalled how he’d gone to the University of Southern California with dreams of breaking into film. Instead, he found himself in a business class, where he and his fellow students were told to analyze a market.

“I don’t think anybody in that class could spell ‘online storage,’ ” he quipped about that day in 2004. But he chose the industry because he thought it vaguely interesting. Then, after some research: Lights, camera, action!

“I realized what an opportunity this actually was,” he said.

Most people and businesses at the time were backing up data on external hard drives and DVDs, which could quickly become obsolete. And while a few companies in the late 1990s had tried selling remote storage via the internet, connection speeds and data costs had driven them out of business.

Levie became convinced the time was right for “a universal, lifetime backup and sharing service.” He rang up Smith, his boyhood friend from Seattle, who was studying business at Duke University. With $20,000 Smith had won in contests, the pair launched their startup.

Box’s second infusion of cash arrived even more audaciously, via a cold call to billionaire tech entrepreneur Mark Cuban, who wrote a six-figure check. Within a few months, Levie and Smith had left college – much to their parents’ chagrin – and moved to Silicon Valley.

Thanks to the company’s “freemium” pricing model, which gives users 10 gigabytes of gratis storage (roughly enough to hold 10,000 emails or 2,000 music files), “tens of thousands of people sign up for the service every day,” Levie said. Once enough users establish a beachhead within a company, Box sales representatives swoop in to sell the bosses on such features as secure file sharing and collaboration. Levie said revenues will top $100 million this year; the company boasts more than 900 employees worldwide.

By all accounts, Levie and Smith could have cashed out already: They rebuffed a reported $600 million offer from Citrix two years back. But Smith, the startup’s chief financial officer, told this newspaper that the co-founders and their investors have bigger goals. Or, as Levie puts it, “We’ve been given a shot to build a company that can hopefully define a whole new category of technology.”

To that end, he calls an IPO “the natural step on the path,” although, rather remarkably, he said the company hasn’t yet filed confidential paperwork with federal securities regulators to begin the process.