Aaron Levine

Twenty months ago Aaron Levie, all of 26 years old, did something arguably foolish, undeniably gutsy and entirely counter to the prevailing mood that startups should be “lean” in the Internet age. Forty-five minutes into a routine meeting with his board at Box, Levie blithely announced: “I want to make a small adjustment. We need to raise an extra $50 million.” An awkward pause followed. Box had previously raised $106 million, already a heady sum for a company with just $25 million in sales and no profits. Levie’s early investor and biggest booster, Josh Stein of venture firm Draper Fisher Jurvetson, piped up: “I’m sorry, but you said $15 million, right?”

Nope. Five-oh. A month earlier Levie, with the board’s acquiescence, shot down a $600 million offer from virtual-computing giant Citrix. That would have given the guys in the room 3 to 50 times what they’d put into Box just a few years prior. Now Levie was asking them to dilute their stake by some 15%. He hadn’t even told his cofounder about it.

They should have seen it coming. Levie is on a mission, and it’s an expensive one: to be the Oracle of the next generation of enterprise applications. Box is an online storage and collaboration service that finished 2012 with about $70 million in revenue, up 160% from 2011. Levie figures he can double that this year, but that’s not interesting to him.

Levie wants to create a transformative technology company for the mobile era, one that will become the glue connecting any big company’s myriad data and documents across all of its disparate software applications and makes them accessible securely on a tablet or phone. At that July 2011 board meeting Box already offered a better mobile experience than anything Oracle, SAP or Microsoft offered. But it had only five people selling to big companies, which put it at a crushing disadvantage to the giants.

A two-hour cross-examination later the board gave Levie the go-ahead to raise more cash to beef up the sales force, and he had no shortage of interest: His $50 million ask turned into an $81 million round, and he’s since raised another $150 million, at a valuation of $1.2 billion. Box has amassed more venture funding, $312 million in total, than any enterprise software firm in the current startup boom.

Even he can’t keep track of it all. “Sorry, which round am I talking about?” he asks, nervously cracking his knuckles. Levie is perpetually fidgeting with something–his iPhone, frizzy curls, jean cuffs, sneaker laces–in between sips of endless cups of black coffee. He generally rises at 10:20 a.m. and tends to fast through the workday, taking his sole meal at dinner, after a half-hour power nap in his office lair, an 8-by-10 room with nothing but a scribble-filled whiteboard, purple couch, two orange earplugs and an inhaler. He rarely drinks alcohol, even though he regularly schmoozes at wine-soaked business suppers, because after midnight is when he powers through e-mails before collapsing at 3 a.m.

His board has been accommodating to his ambition, in part because of this work ethic and in part because he’s taking the dilution along with them, betting together that they can make more owning less of something bigger. While his frenemy in the consumer online storage world, 29-year-old Drew Houston of Dropbox, has raised $250 million and kept an estimated 15% stake worth $600 million, Levie is down to only 8% or so of Box, giving him $96 million for his personal fortune. “My what?” he says, taking a mock puff of the inhaler. Levie’s biggest extravagance: a BMW 3 Series he leased five years ago. “I’m living the life I dreamed of as a 12-year-old. I don’t have hobbies. I want to build a big company, and this is it.”

He’s chosen a formidable industry. Four companies founded decades ago–Microsoft, IBM, Oracle and SAP–still control half of the $270 billion business software market, according to Gartner. All the others get scraps. The status quo consists of expensive licensing deals, even more pricey setup costs followed by ongoing maintenance and consulting fees just to keep the software up to date. Yet the products they’re selling are largely archaic. Most are stuck on servers talking to PCs and don’t run on mobile devices, even though 47% of American workers are using their smartphones for work and 16% are also using tablets, per Forrester Research.

The new wave of more-convenient-to-own cloud-based business software, which began last decade with Salesforce, Netsuite and Workday, has swelled to dozens of startups now hitting the enterprise market with flexible pricing, mobile access and tools that make doing business as easy as using Facebook. B2B software has also been a much healthier investment play. The IPOs of Workday and Splunk went off brilliantly while consumer Web firms Zynga and Groupon disappointed.

Levie built Box for this new world. A file stored in Box (this could be as simple as a Word document or as complex as a 3-D rendering of a new building) appears and can be shared (and in some cases edited) on any device with a browser. Box has apps on all the major mobile operating systems. His vision of IT’s future cobbles together software from the new generation of players with Box in the middle of it all acting as a data traffic cop so that any piece of information from one offering can effortlessly be pulled from another application. In his world the expensive storage hardware and collaboration software “suites” from Microsoft, Hewlett-Packard, IBM, EMC and NetApp go away.

Enterprise Software's Next Generation Of Leaders

Box’s not-so-secret weapon is its freemium business model. With Box you get 5 gigabytes of online storage and basic features for nothing. If you want enhancements, better security and IT-department-level controls, Box is $15 a month per person. Only 3% of the company’s 15 million users now pay the fee, but expansion of existing accounts is generating 40% annual revenue growth.

With Dylan Smith

Box is already looking like the big-vision pitch Levie made to his investors back at that fateful board meeting. The company is signing up four times as many annual deals worth over $50,000 compared with what it did just a year ago, from companies like Gap, Electronic Arts and Discovery. And while its human sales force has surged to a couple hundred, more than two-thirds of Box’s deals originate when someone in an IT organization notices Box adoption and wants to wrap security and administrative controls around it.

The industry giants have noticed, too, and are quickly co-opting Levie’s freemium, mobile-first approach. Salesforce launched its Facebook-for-business product, Chatter, with a freemium model in 2010. Microsoft this June acquired Yammer, a freemium social-tool-for-business outfit, for $1.2 billion, citing the firm’s business model as a reason for the purchase. Meanwhile, Oracle, Microsoft, SAP, Netsuite and Salesforce have lined up to partner with Box so that their salespeople have an answer to the inevitable customer question about getting data to the plethora of mobile devices that clutter a company’s system.

All that action is what, literally, keeps Levie up at night. Says the now 28-year-old: “I have more gray hair than President Obama.”

Some of that gray in his wavy tuft comes from a shockingly preternatural entrepreneurial career. Levie grew up on Mercer Island, Wash., a leafy suburb of Seattle where technology wealth from Microsoft and Amazon seemed to flow through the air. At 8 years old he was distributing flyers offering himself for weed-pulling, dog walking and anything else a neighbor might pay for. He turned 10 the year Netscape was founded and spent his tweens browsing online, typically until 2 a.m., and cooking up one new business idea a week, which he’d pitch to his father, Ben, a chemical engineer, and his mother, Karyn, a speech-language pathologist. “Honestly, it was tiresome,” admits Mom. “He even told me I should start a company with some tool that other speech pathologists need. I mean, I kind of stopped listening after a certain point.”

His high school classmates were more enraptured. While he obsessed over the business models underpinning this new thing called the Internet, his buddy Jeff Queisser, who lived four houses down, would haul over his 20-pound Dell tower and CRT monitor for all-night coding sleepovers. Some 15 startups ensued. There was an Internet kiosk for hotels and malls, a Web portal for real estate listings and “Zizap,” which Levie describes as a “really slow pay-to-play search engine.” They all failed, though Levie considers that word too binary: “Failure? I wouldn’t put it that way. They didn’t take off, sure, but I got something out of every one.”


Besides lessons, he built a team: His Box cofounder and key hires all hail from Mercer Island High School: Queisser heads up technical operations, Dylan Smith is chief financial officer, Sam Ghods oversees technology and Ashley Mayer is head of p.r. “We weren’t all buddies in high school,” says Smith. “It was more that Aaron sought us out at some point and then united us in one of his many causes.”

Levie squeezed his way with a low-B average into the University of Southern California as a business major. He exchanged startup ideas via e-mail with Smith, who was starting premed at Duke University. One was a sort of social network for college kids but limited to simply listing each student’s interests. Levie also launched a site called socalendar.com, a directory of events in the L.A. area. It flopped.

But the idea that got them both excited popped up in a sophomore marketing class. Levie chose to research the online storage industry and instantly saw an attractive arbitrage opportunity. He could charge $2.99 a month for 1 GB of storage that cost him only a dollar.

In 2005 he persuaded Smith to launch an online storage company that summer out of Smith’s parents’ attic on Mercer Island. They rented servers with Smith’s $15,000 in online poker winnings to start it, then dropped off business prospectuses at the homes of Seattle’s tech luminaries like Paul Allen and cold-called two dozen VCs. Not one bit. Then Mark Cuban changed everything. Levie had sent the dot-com billionaire and blogger a story pitch. Cuban’s response: I want to invest. Six weeks later they had his check for $350,000 for 30% of the company. Levie and Smith decided to drop out of their respective colleges and head to Silicon Valley, driving Mrs. Levie’s Nissan Quest to an uncle’s backyard cottage in Berkeley.

Customers were signing up briskly, but Levie felt there was still too much friction in the act of pulling out a credit card to open a Box account. Some quick math showed they could give away the first gigabyte and make up the expense if only 3% of accounts upgraded to the $2.99-per-GB price. In early 2006 Box moved to the “freemium” model, and overnight they hit 50 times the number of daily sign-ups. Great penetration–but also a frightful cash burn. Cuban wasn’t happy with the equation, which mandated that investors subsidize the freeloaders in the hopes of making it up later.

That October the venture capital firm Draper Fisher Jurvetson came through with $1.5 million, some of which went to buy out Cuban entirely. While Cuban has built a $2.3 ?billion fortune through some brilliantly timed moves, this one proved a disaster, as his stake today, even without investing another penny, would be worth $60 million.

Early on, though, it appeared Cuban would be proved right. Box came up shy of $500,000 in revenue in 2006, and while consumers were begging for new features, they weren’t willing to pay for them. Rivals were dropping prices, and rumors began to swirl that Google and Apple would soon offer cloud storage for free.

Box was still a tiny operation. Its two cofounders and some of their high school crew slept on mattresses lining the floor of a garage next to their one-room Palo Alto office. Levie jumped on his share of support calls, which proved the ultimate market-research exercise. Many of their customers were “rogue” office workers, storing and collaborating on files in the cloud without their IT manager’s approval. Levie would ask them what new features they wanted Box to add. Many said they would gladly pay 100 times what Box was charging if it had security features and a dashboard that showed employee usage. Box, the office workers told Levie, was simpler to use than a similar Microsoft product called SharePoint. When Levie found out that SharePoint made Microsoft $2 billion a year, he realized he’d been targeting the wrong customers.

In one of the great “pivots” in recent Silicon Valley history, Box ditched the consumer play and became an enterprise software company in the middle of 2007. Again, he faced a dwindling pile of cash, and Draper Fisher wanted to see another investor buy-in before recommitting. Levie went to 20 venture capital firms, and none would touch Box because Levie’s track record and knowledge of this new market were negligible, and the hoodie look that worked for Mark Zuckerberg fell flat. (His revised uniform: dark blazer, jeans, dress shirt and neon Pumas.)

Levie finally found a believer in then 29-year-old Mamoon Hamid at U.S. Venture Partners. His $6 million infusion in January 2008 kept Box afloat for another year while the founders retuned their features for the corporate buyer, including the ability for administrators to delete accounts, track who accessed which file and when, and control which groups can have access to files and folders. Levie turned himself into a student of enterprise software. He devoured industry classics like Thomas J. Watson Jr.’s Father, Son & Co. (Bantam, 1990), about the early years of IBM, and Matthew Symonds’ Softwar (Simon & Schuster, 2004), an authorized Larry Ellison hagiography. “I immersed myself in it,” says Levie. Literally: He lined the walls of his dingy apartment with 4-foot-high posters of the logos of Oracle, Sun Microsystems, Salesforce and Siebel Systems. (While faded, they’re still there. His girlfriend, currently clerking for a federal judge in Arizona, “isn’t here often enough to care,” he says.)

A second epiphany came in April 2010 when Levie was sitting in his bedroom watching the live webcast of Steve Jobs unveiling the first iPad. “My imagination ran wild,” recalls Levie. “The thing looked like a piece of paper, and that’s exactly what most businesses are still running their businesses on.” He instantly e-mailed Box’s engineers, ordering them to develop an app for the device by the time it debuted in stores–and they did.

Around that same time Procter & Gamble started sniffing around. Executives at the consumer products giant were starting to use iPads and wanted access to their files. And while it took 18 months of courting and customizing to close the deal, having a product that worked smoothly for 18,000 of its employees opened doors for Box at other giant companies.

Levie spent 2011 continuing his self-education. He e-mailed his favorite pioneers in his industry with a simple, if ballsy, request: “Spend one hour with me.” Tom Siebel, who founded Siebel Systems (acquired by Oracle for $5.85 billion in 2005), told Levie he once traveled to four states in a single day to meet with customers. Craig Conway, who ran PeopleSoft when it sold to Oracle for $10.3 billion, glanced at Levie’s calendar, saw roughly one customer meeting and echoed that advice. Levie, focused on what was going on inside Box, had lost the perspective, gleaned from IT support calls, that had saved the company. He now meets eight customers a week, peppering each with questions about what’s working and what isn’t.

Box’s Los Altos headquarters feel more like Facebook’s fun zone than Oracle’s stiff towers. There’s a bright yellow slide, a room with ping-pong tables, unicorn figurines and lots of scooters. “I’m not a scooter person, but this stuff matters for our culture,” he says. Staff doubled this year to nearly 700, with key hires from Oracle, Google and Salesforce.

But for all the giddiness, danger lurks. Not a month goes by without some mortal threat against Box. Virtualization giant VMWare announced plans to offer file-synchronizing last summer. Salesforce, an investor in Box, is launching a rival storage feature called Chatterbox. Dropbox has talked of going more seriously after business accounts.

Then there’s Microsoft, which has Box firmly in its sights. Levie got lucky by originally competing with the Redmond giant’s SharePoint software. While Microsoft bundles it with other offerings and has sometimes threatened price hikes on existing products if customers signal they want to switch, SharePoint is notoriously expensive. For every $1 customers spend on the software itself, they’re spending on average $8.70 for outside firms (developers and IT consultants) to get it to run. While it does considerably more than Box, such as linking into inventory systems, it’s hard to use and doesn’t work on mobile devices running Google’s Android system or Apple’s iOS.

That will change this spring when SharePoint will debut apps on Google and Apple phones. “This is a big turning point in the industry,” says Jared Spataro, SharePoint’s senior marketing director. “Box, along with other smaller companies, got there before Microsoft. But we always see customers wanting fewer vendors, not more.”

Levie’s defenses, built in collaboration with his latest consigliere, Ben Horowitz, founding partner of the Valley’s hottest VC shop, Andreessen Horowitz, which invested in Box’s $48 million round in February 2011, look like this: Build a sales team that can look and act like Oracle’s while preserving Box’s innovative, fast-moving culture, and make Box a viable platform on which other software firms can connect and sell their file-related technologies. The only way Levie will become the next Larry Ellison is to insert Box at the nexus of a company’s most important data. “I have to do everything, all at once, as quickly as possible,” says Levie, gleeful about the fact that he has bitten off more than he can chew. “If I had a clue how this industry worked, I would not attempt to do what we’ve done. I was blissfully ignorant.”


Victoria Barret, Forbes Staff
I write about the people pioneering the technology industry.

--------------
http://www.forbes.com/sites/victoriabarret/2013/02/13/box-aaron-levie-mobile-enterprise-software/print/