THE BOX IPO ANALYSIS: This Company Is Burning Twice As Much Cash As Any Comparable Company

When enterprise-focused online storage company Box filed for its IPO, the number one thing that jumped out at people was the size of its losses.

On revenue of $124 million, the company lost $168 million. Mark Cuban, an early investor who bailed on Box, tweeted that he would "combust" if he was responsible for losses like that.

Since launching, Box has raised over $400 million funding, and it's burned through ~$300 million of that funding. In the last year, Box burned through $168 million.

Perhaps worse than the lack of profitability, or the burn rate, was the fact that Box spent $171 million on sales and marketing. A lot of people unfamiliar with enterprise businesses looked at that and thought, "WOW! That's a really big spend!"

It calls into question the entire business model of Box. Is it doomed to burn cash on sales in order grow revenues forever? Or is this totally normal? Is everyone who is freaking out wrong? Is this how enterprise companies operate - spending money up front to get recurring revenue in the future?

Tomasz Tunguz, a VC at Redpoint, did a comprehensive analysis of Box, comparing it to 40 Software as a Service (SaaS) companies. His analysis is not good for Box. Here's 7 key metrics for Box, versus the market at large:

1. "Box's profitability in year 9 of its life is -136%. No other comparable company comes close in terms of net income % in their ninth year. Second place goes to Rally with -53%."
2. "Box's burn rate is twice as large as the next comparable firm, and nearly 10x the average."
3. "Box spends about 137% of their revenue on sales and marketing. This sales and marketing expense figure is 3x the average of 42% of revenue found across all other publicly traded SaaS companies at this point in their lifecycle."
4. "Box spends nearly 3.7x as much on sales and marketing as research and development. The average public SaaS business spends 2.5x at year nine in its life."
5. "Box's average customer value (ACV) is $3,653, much lower than the median of 59,600."
6. "Box's sales average quarterly efficiency over the last year is 0.4 compared to 0.97 for other SaaS publics."
7. "Box is among the fastest growing SaaS companies at this point in its life. Box's revenue grew 110% in the last twelve months, about 2x the average rate of 53% of a SaaS company in its ninth year."

So, Box is growing its revenue like crazy, but just about everything else is much worse than others in the industry.

Since Box filed for its IPO, it's in a quiet period and can't talk right now. But, in a perhaps ingenious bit of timing, Re/Code just ran an interview with Box CEO Aaron Levie that was done before it filed its IPO.

In the interview, Levie explained his company's crazy burn rate by saying, "I would be the first to say we've been aggressive, but there is simply not another logical way to attack the market. If you assume this market is going to be worth tens of billions, if it's that big there can only be two, maybe three leaders. So we're incentivized to grow as fast as possible."

It sounds like Levie has no plans to cut back on the company's burn rate. He said his biggest problem is that, "I can't grow a sales force that's big enough in time for when I need it." He's going to continue staffing up, which costs money. Though, he also says he plans on relying on third party sellers, which can cost less.

Anyone considering an investment in the Box IPO has to have faith that at some point Box will be able to reign in spending, while still boosting revenue. That seems like a big ask for an investor right now. Of course, it all comes down to price. At a certain price, the burn rate isn't a big problem. For an investor, it's figuring out the right price.

Read the full Tunguz report here >

For another analysis, click here>

And for the good Re/Code story on Box click here >