Poor Aaron Levie.
That was my first thought when I started seeing signs over the last few weeks of the softening enterprise tech market on Wall Street after it seemingly peaked in March. Now we have reports in the WSJ that Box will likely delay its long-anticipated IPO until at least June. The Journal further reports that the company is exploring selling itself rather than listing, attempts that Fortune suggests are at the behest of its bankers, but not authorized by management. Either way, sadly, the smell coming off this deal is growing more suspect by the second.
IPO-timing is two parts art for every one part science, and many even go as far as to say that it’s an impossible or unnecessary exercise all together. But for a company like Box, whose financials and overall business model were met with broad skepticism upon filing its March 24th S-1, going out amid negative market sentiment is something you can’t afford to risk.
It’s one thing to sell a high-burn, high-growth narrative when an entire category is going up and to the right, but it’s another thing entirely to do so when category stalwart Salesforce is losing 7 percent of its market cap in a single day with no bad news in sight. In many ways, this is a replay of the issue that cost Levie Mark Cuban’s support as an early investor – not everyone believes that you can spend your way to a healthy business.
Box has waited a long time for this moment and has been the victim of bad timing at multiple points throughout its journey. First and foremost was when Levie and co-founder Dylan Smith deciding to start the company in 2005 during their time at USC. At that time, early-stage valuations were still deeply depressed following the dot-com crash, meaning that they were diluted big time just to get things off the ground. The company was then forced to raise growth financing in 2008, 2009, and 2010, during the infamous “RIP: Good Times” era in Silicon Valley. The result is that Levie owns just 4 percent of Box at this point. The company would have been better off starting out in 2007 alongside Dropbox, or perhaps even a few years later, given its enterprise focus.
Now, after a year in which enterprise technology saw more Wall Street love than at any point in history, Box’s IPO is calendared just a few months after this “correction.” The laws of gravity, after all, apply not only to physical objects, but to business sectors as well. Levie, it seems, missed his chance to catch the market on its way up.
A number of well-reasoned recent reports have predicted a drop in early stage SaaS valuations by as much as 50 percent. But it’s not just unproven companies that will be affected by this math. The valuations of upcoming IPOs within the sector will likely see a similar impact.
There’s an argument to be made that a company’s immediate post-IPO performance has little to do with its long-term success. A quick look at Facebook’s performance as a public company provides a clear example that this is true, at least some of the time. But with Box’s near-term cash needs, its management’s already diluted state, and the all around uncertainty around the company’s business, the need to maximize the successful IPO buzz is stronger than most. Hence the decision to delay.
There’s no guarantee that the IPO markets will be any more welcoming come summer, but it’s unclear whether Box can afford to wait much longer. Sure the company raised $100 million in new equity in December, but the company also lost $168.5 million in the 12 months ending January 2014. There’s also the perception issue. With every delay, whatever confidence the market does hold in Box slips away a little bit more.
And so that’s why I feel bad for Aaron Levie. He’s one of the prototypical enterprise founders of this era and has no doubt worked as hard as anyone in the game just to get Box to this point – a point that’s in the top 0.01 percent of startup success. But the capital markets are an unforgiving mistress, and Levie just can’t seem to catch a break.