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Tech Startup Box Must Cut Losses to Survive Deep Pocketed Competition

Tech Startup Box Must Cut Losses to Survive Deep Pocketed Competition

By Quentin Hardy, The New York Times | Updated: 20 April 2015 16:26 IST

About 10 years ago, Aaron Levie dropped out of college to start a Silicon Valley company called Box. Before long, he was one of those young technology wizards of whom great things were expected.

Levie faced hurdles and some fitful progress, but ultimately reached the point many entrepreneurs only dream of: Box conducted an initial public offering in January that raised more than $500 million. It employs 1,200 people and is considered on the cutting edge of a new generation of companies that provide services to big business customers over cloud-computing systems.

Now comes the hard part - survival. Box today is worth $2.1 billion, but losses are continuing to add up while revenue is not growing enough to suit Wall Street's tastes. The company's shares are down 25 percent since it went public. And rival services from tech heavyweights like Amazon and Microsoft threaten Box's business.

Levie and his company are nearing a make-or-break point others in this generation of young companies are also likely to soon face: Find a way to cut those losses and stay ahead of deep-pocketed competition or disappear.

At a company conference this week, Box, which has so far focused on Internet data storage and collaboration technology, will explain how it plans to help other businesses build their own cloud services. The goal is to create a so-called ecosystem that ensures continued growth just as Microsoft did with PCs and Apple did with the iPhone.

If the plan does not work, it is doubtful that Box will survive as an independent company, and Levie, for all those high hopes, will become a footnote, someone with a great idea who could not quite turn it into a lasting business.

"The writing is on the wall," said Norman Young, an analyst at Morningstar. "They know they need to innovate. What separates the winners is supplying a valuable and necessary service."

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Levie, 30, is voluble and as bouncy as an undergraduate, a mood reinforced by his typical costume of suit jacket, jeans and orange-laced track shoes - though his hair is starting to show more than a little early gray. He prefers to put a positive spin on his company's predicament. His life, he said in an interview, "is an entrepreneur's dream. You just try not to think about the times that you are the world's pinata."

The technology that made Box notable, the pairing of cloud computing and mobile devices, has moved from a wacky idea when Levie started Box to today's mainstream of corporate computing. Upstarts like Uber rely on the cloud and mobile; long-timers like IBM are remaking themselves for the new kinds of corporate computing, and older Internet giants have every intention of dominating the field.

Levie realized his company had to do more because it was not much more than a "glorified storage tool" that could be easily replicated, Young of Morningstar said. He added, "The wrinkle is, how long can he hold out and become the next big thing, or does he get purchased by a bigger company?"

For Box to compete, it has to get other people to build great things on what it has built in the same way Apple and Google got app-makers to create things that made their mobile software indispensable.

Box currently has ways to store and share most of what makes a business, be it marketing brochures, X-rays, financial records or video. It can be the center of a new industry, Levie says, by helping other companies and third-party consultants create applications that can quickly draw off Box's cloud-based collaboration technology.

A bank, say, might use Box for a new loan-making app, or a filmmaker could securely distribute his latest work to willing buyers. An educational publisher might release content to 10 million students at once, through Box.

"Our brand can be the proxy for all kinds of cloud developers, the 'Intel Inside' of the cloud era," Levie said. He added, "It's going to come down to who can integrate a lot of different experiences for people."

General Electric has made Box a standard for collaboration technology inside and outside the company, a product of years of sales calls by Levie. A few months ago Jeffrey Immelt, GE's chief executive, had Levie address top executives about his experience building Box, new, more effective ways companies could collaborate, and how Box reacted quickly to change.

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His youthful manner, which practically screams "Silicon Valley," was a selling point.

"Frankly, I would have been disappointed if he hadn't worn the sneakers," said a person at the meeting, who asked not to be named discussing an off-the-record event.

Box has 45,000 paying business customers, including about half of the Fortune 500. Levie said wooing those clients - who need lots of security, features and tutorials about how the new world works - is why Box had spent so much money. Its roster of big corporate customers, he says, will attract developers.

So far that investment has not shown up as profit. When Box's financial details were revealed in filings before its public offering, Om Malik, a well-known tech blogger who had been enthusiastic about the company, deemed it a "house of horrors."

In its last fiscal year, Box lost $167 million on revenue of $216 million. That was a 74 percent revenue gain from the year before, with a 5 percent bigger net loss. This year, revenue is expected to grow by about 30 percent, a marked slowdown that Levie hopes the new developer strategy may also turn around. As of its latest earnings report, in March, Box had $330 million in cash.

These kind of losses, not just among Box but at many other young tech companies, scare some of tech's old guard.

"We're different. We lived through a massive downturn in 2000-2001 and can't live with this kind of cash burn rate," said Brad Garlinghouse, the former chief executive of Hightail, another online storage service. He left Hightail in September and is now chief operating officer at Ripple Labs, an Internet payments system. "Aaron is smart and pragmatic, but he and a lot of these young guys haven't been through bad times."

Levie started Box with three friends he has known since middle school, in the town of Mercer Island, Washington. He first had the idea while completing a business class project at the University of Southern California, eventually dropped out of college, and convinced the others to join him.

After all those years and nine funding rounds, Levie holds just 3.8 percent of Box, or about $80 million. "I'd love to own more, but I wouldn't trade the growth we've had for more equity," he said.

On weekends, he swaps the dress jacket for pink shorts and a white V-neck T-shirt, and he has kept the same apartment near Box headquarters and driven the same older BMW for years.

"There have been sacrifices on the personal side," Levie added. "I'd like to spend more time with my girlfriend. There's always stress, but when you see how it could have an impact you've dreamed of, it's worth it."

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