Box can’t IPO, so now what?

Danny Crichton has opened a can of worms by pointing out that Box and Square are a/ highly valued companies that b/ are finding the spring of 2014 a very difficult time to move toward their planned IPOs, because c/ the market has soured on cloud computing companies that are burning through hundreds of millions.

Square has apparently lost more than $100 million in 2013, and Box — the real subject of this post — lost almost $160 million last year.

Fred Wilson dismisses Crichton’s argument that the two companies have ‘commodity’ products that have failed to capture the ‘last mover’ advantage (a term of Peter Thiel’s, meaning the competitor in a market that gains enough of an advantage so that others are squeezed out). But he does agree with Crighton’s observation that the two companies are caught in a valuation trap:

A second iron law of startups might be that the higher the valuation of a startup, the fewer options it has for financing and exits…… once a company has raised mezzanine capital and is valued in the billions, its options are essentially to go public or find a very interested buyer with deep pockets. There are few other options on this side of the startup pipeline.

As Wilson points out,

So the moral of this story is that you can push valuations when you have investors knocking down your door, but unless you are cash flow positive and expect to remain so for the foreseeable future, you do that at your own risk. You will need to find someone to top that price down the road and that person may not be there.

Backing up a few steps, my view is that this discussion is about the changing stock market, and less about what Box and Square were doing in 2013.

In particular, it seems that investors are looking at software-as-a-service solutions with jaundiced eyes, based on recent flare-ups about Twitter, Amazon and other companies already in the market.

And taking a hard look at the file sync-and-share space, it’s true that Box has a long list of competitors, some that are start-ups — like Dropbox, Hightail, and Egnyte — and many of which are part of very well capitalized giants, like Google Drive, Microsoft OneDrive, Apple iCloud, Citrix FileShare, and EMC Syncplicity, as well as well-established enterprise secure file management companies — like Intralinks — who are rapidly building out functionality to compete head-to-head in this space. These are companies that have wagered on the central role of file sync-and-share in the new computing architecture emerging in today’s ‘mobile first, cloud first’ world.

But anyone who looks deeply in the market does not see commoditization, but competition. A great deal of competition.

And those of us in the business of reading the tea leaves would say this is a market ripe for consolidation. Hundreds of millions — and soon billions? — of users in the personal side of things, hundreds of millions on the enterprise side, and who is in the best position to dominate?

My belief is simple. File sync-and-share is a patch to a basic flaw in the operating systems that dominate the world: iOS, OS X, Windows, and Android. Those operating systems are stuck in the past, and lack the notion of a distributed virtual file system. However, those operating systems — the platforms on which so much of our world runs — can be updated to implement a more modern notion of file system. And once they do, Apple, Google, and Microsoft will suck 90% of the value out of this marketplace.

To take that step, those companies may decide to acquire start-ups like Box and Dropbox, or simply knock off what they have done. But once Apple, Microsoft, and Google implement file sync-and-share functionality for free, out of the box (pun intended), I bet that the ecosystem would rapidly shift to those solutions. Value-added players — with enterprise oriented security capabilities, for example — would still play a role in the enterprise side of things, but the majority of these players would be high and dry, unless acquired by one of the majors.

So, the big question isn’t the short term blockage to a Box IPO, but how long before Microsoft, Apple, and Google build file sync and share in the OS.