My friend the Vulture is a venture capitalist in Silicon Valley. He recently wrote a piece for us and I've been hoping he would do another one. I asked him what he thought of the Box IPO, which is taking place today. Shares last night priced at $14 per share, which will imply a valuation of $1.7 billion for Box — which last July raised a private round at $2.4 billion. Meaning: Box is limping into the public markets. But maybe, at this price, Box is a steal? Vulture doesn't think so. In fact he was brutal — especially about the VCs who are foisting this lump of coal onto the public while also setting up a sweetheart deal for themselves.
I really, really wish that I had something positive to say about the venture industry. Really. It sucks to have to scribe these pieces that are more negative than the democratic stance on the Keystone Pipeline. But, if the shoe fits, wear it.
This week, Box is preparing for its long-awaited public offering. Hats off to Aaron Levie and team for getting to the milestone that every entrepreneur wishes to achieve. It's the road to eternal happiness and a pocket full of money for founders and early investors. But has anyone explained to Aaron and team that being a public company is significantly different than being a private company that burns 100 percent of its revenue on sales and marketing?
You read that right! According to the S-1 filing and the red herring, the company charted a course to $153.8 million in the first nine months of the current fiscal year, which ends January 31, 2015. That is great year-over-year growth of 80 percent for the same operating period.
But — and it's a BIG BUT — the company spent 100 percent of revenue on sales and marketing. That means, they will burn $153.8 million in sales and marketing expense during the same period.
Add another 25 percent for research and development and 25 percent for operations and you have a -50 percent operating margin. So Box actually burned $230.7 million in the same operating period.
Simple math, people: $153.8 million in revenue minus $230.7 million in expense equals a $76.9 million loss.
Back in July 2014 Box raised $150 million in new funding. More than half of that $150 million will leave the building after nine months of operations.
Now they're doing an IPO, because — no shit! — they need more cash!
They aren't going to raise another dime from private investors at the valuation of $2.4 billion, which was the valuation of their last round.
If their revenue is $240 million for the year and their expense is $360 million, losing $120 million – who would invest at that valuation?
Enter the greater fool of investing: The Public Market. Mom and pop, get your orders in with Morgan Stanley, J.P. Morgan or Credit Suisse for those Box shares. It's a great deal!
At whom should we point the finger? Aaron Levie? Hell no. We should be looking at the board of directors and investor syndicate that will benefit from the IPO with their low-priced preferred shares.
Get this – when you buy a share of box in the public market, your share gives you one vote. But, if you held a share of Box as a private company (like the private investors and VCs) your shares will each get you 10 votes.
A single DFJ share gets 10 votes and mom and pop's share gets one. What a fucking joke!
If you're a VC and want to exert that much control over one of the companies in your portfolio, here's a recipe.
1.) Don't go public
2.) Nut up and tell the team that the burn is out of control and they need to reduce it.
3.) Tell your LPs that you fucked up by taking HUGE write-ups and now you need to come back to earth and help Aaron and team build a real company.
Box is a great service. But it doesn't have the fundamentals of a public company and the road to profitability in 2017 is full of IEDs. The investors hope that by floating an IPO with 12.5 million shares that have almost no voting power that they can flip another card on someone else's money.
This week's IPO is a Box of rocks. Don't do it, mom and pop!