Box is the unicorn that Mark Cuban let get away

By Michael Carney , written on January 31, 2014

From The News Desk

Reports yesterday indicate that Box has finally filed paperwork for its long anticipated 2014 IPO. As is customary with marquee exits, that news leads to a question of who stands to see the biggest return. But uniquely, Box’s earliest investor won’t be cashing in once the company enters the public markets.

Billionaire angel investor, Dallas Mavericks owner, and television Shark Mark Cuban wrote the first check into when it as little more than an idea in founder Aaron Levie’s USC dorm room. As the famous story goes, Levie sent an unsolicited email to Cuban asking him to write about Box on his blog. The result was a $350,000 investment as the first outside capital into the company.

There are limited details available regarding the terms of this round, but it’s not unreasonable to guess that Cuban invested at a valuation of between $1 million to $2 million given the stage and the era – Seed valuations in 2005 were far from today’s heady levels. Box closed its latest funding, a $100 million Series F round in December, at a reported $2 billion valuation.

Given this range, if the company were to price its IPO between $3 billion to $5 billion, its valuation would have increased between 1,500-times to 5,000-times since the time of Cuban's investment. There’s no telling the dilution that he would have encountered in subsequent rounds – he likely would have had the option to invest further – but his stake would have no doubt been worth hundreds of millions. Just 5 percent of Box at the high end of that IPO valuation range would be worth a cool $250 million. It may not be life altering to a man reportedly worth $2.5 billion, but even Cuban could use some extra cash for all those hefty NBA fines and backing those often questionable Shark Tank companies.

Sadly, Cuban will be watching the Box IPO from the sidelines on that fateful day like so many others.

The year after he invested, Cuban and Levie disagreed about the ideal course for Box. Concerned about the threat of Google’s rumored GDrive competitor, Levie wanted Box to pursue a freemium land-grab strategy. He felt that it would be the quickest way to claim additional market share, even though it would definitely require raising tons more venture capital. Cuban preferred a more conservative approach of monetizing every user. Unable to agree, the man who many consider to be a ruthless investor politely bowed out, selling his shares at cost to Draper Fisher Jurvetson in Box’s 2006 Series A round.

Levie described Cuban’s thinking during a Soapbox podcast lecture, saying, “He liked this neat and tidy linear, understandable business model. So what ended up happening is he basically said, 'If you guys are going to do freemium then I don’t want to invest in the company anymore'... He wanted to go a different path and we decided we had to go for scale and do it our way."

In hindsight, of course, it looks like a boneheaded move. But at the time, it was a remarkably level-headed thing to do. As Box’s largest outside shareholder, Cuban could presumably have made things much more difficult for Levie, including both blocking subsequent fundraisings or demanding a premium on his share buyout. He did neither. Instead, he stepped aside and let the company move forward with investors who believed in its vision – DFJ managing director Josh Stein and later US Ventures Partners’ Mamoon Hamid who funded the company through 2010.

Of course, Cuban also could have just let his money ride and trusted the founder to know his business best. After all, most VCs don't try to run strategy for their companies.

But no matter what Levie benefitted from the whole thing. It was Cuban’s cash, and likely in part his credibility, that allowed the Box team to move to Palo Alto and ultimately attract the DFJ round. Levie has spoken in the past about his experience with Cuban. Asked whether working with the billionaire investor was a mistake, he told Entrepreneur magazine:

No, not at all. He might say otherwise, but we had a great experience. The interesting thing about extremely experienced and entrepreneurial investors... is they'll often have pretty strong opinions about what you should be working on. And rightly so, because they have a lot of experience.

Levie also credits Cuban with giving him the best advice he’s ever received. What was it? Ironically, it was to trust your gut and not hedge when you know you’ve got a winner. Ultimately, it was that thinking that helped Levie hold his ground when it came to the freemium business model when Cuban wanted to play it safe. It’s a great example of a founder following his instinct, where others may have caved to the pressure.

That was the second time that Cuban’s go big or go home advice helped put Box on the path to success. Early on, Levie had set out to build both cloud and peer-to-peer (P2P) versions of Box’s storage platform. He believed that the cloud was the future, but was hedging due to the popularity of P2P platforms like Kazaa and Skype. Cuban schooled Levie that by dividing his focus, he was ensuring that neither strategy would receive the attention and resources necessary to succeed. Fortunately, Levie took the advice and went all in on the cloud, setting the stage for the forthcoming IPO.

For early stage investors, far more bets go to zero than generate a return. By that math, Cuban was ahead of the curve by simply getting even money back for a company that he didn’t think was headed the right direction. But startup unicorns are a once-in-a-career opportunity for most investors. Everyone’s got a list of great deals they’ve passed on, but Cuban had one in his grasp and the decided to let it free. It’s a decision that surely haunts him to this day.

Levie reportedly still keeps a photo of Cuban hanging on the wall in Box’s Palo Alto office. No word on whether Cuban does the same.

[Image via Shark Tank]