Investors Bet Big on Box.net with $48M Round

2/24/11Follow @wroush

Box.net may just have shattered the notion that you can build a successful Web 2.0 company without much capital.

Aiming to redouble its already startling growth rate, the Palo Alto, CA-based online document sharing startup said today that it has collected a whopping $38 million in Series D funding from six top Silicon Valley venture firms. First-time investor Meritech Capital Partners led the round; it was joined by new investors Andreessen Horowitz and Emergence Capital Partners. Previous investors Draper Fisher Jurvetson, Scale Venture Partners, and US Venture Partners also chipped in.

In addition to the equity-based financing, Box.net said it has arranged for a $10 million secured capital line from Hercules Technology Growth Capital (Nasdaq: HTGC), a specialty venture-debt provider.

In its previous three rounds of venture fundraising, Box.net collected only $30 million in total. So this big new cash infusion—raised against a valuation that was “significantly higher” than the company’s Series C valuation one year ago, according to Aaron Levie, Box.net’s co-founder and CEO—is an important sign. It means the investors are even more confident than before in Box.net’s technology, which allows individuals and companies to share and annotate documents stored in secure online folders on cloud servers owned by Box.net. “We’re obviously very bullish about what we’re building, so we wanted to make sure that we had the financial capability to really see this mission through,” says Levie, 25.

What is that mission? Matt Holleran, a venture partner at Emergence Capital, says Box.net “has the chance to be the cloud content management service provider” for businesses. That’s an audacious goal, given that giants like Microsoft and EMC would also like to own the market for enterprise document sharing. Those companies have spent many years and hundreds of millions of dollars developing and marketing systems like SharePoint, Microsoft’s server-based document sharing system, and Documentum, EMC’s own platform for content management and collaboration.

But Box.net is a child of the Web and the Facebook era, rather than an earlier age of desktop and server-based enterprise applications built to work only inside corporate networks. That means it’s less intimidating to use—and it also means word about the service spreads more virally. “You don’t get to the 5 million users they have today and the 60,000 businesses without users actively introducing it to others in their workflow, and that is a fundamentally different model from SharePoint,” says Holleran. “Box.net has the opportunity to grow that market substantially and become the leader.”

Sustaining Box.net’s current growth rate—the company’s revenues grew by 340 percent in 2010—is going to take money and people. In 2010, Box.net doubled its head count from 70 to about 140, in part by hiring senior talent away from established tech strongholds like EMC, Google, Intuit, Oracle, and Salesforce.com. Now the company must double that count again over the next 12 to 18 months, according to Levie. Many of the new employees will fill sales, marketing, and support roles, though the company will also be looking for more engineers.

Another big chunk of the venture cash will go toward something more old-fashioned: servers and storage devices. That’s something you don’t hear much these days—the prevailing wisdom is that Web 2.0 startups can simply outsource their computational and storage needs to cloud services providers like Amazon, Google, or Rackspace. But Box.net, for better or worse, has largely outgrown that option.

The company relies on Amazon and other cloud providers for occasional “burst capacity, fault tolerance, and other secondary parts of our infrastructure,” Levie says. But it needs a level of control, reliability, and customization that it can’t get from outside cloud services, so it built two of its own data centers. “If you just think about our ability to audit our data center and our customers’ ability to audit us, those things are only possible if we store the information ourselves,” Levie points out.

Before Box.net can bring on millions more subscribers, it’s going to have to beef up those data centers. And the unfortunate catch in the company’s subscription-based revenue model—where customers pay from month to month, and only for what they use—is that the company can only amortize its infrastructure costs gradually over the life of each customer. Which means it has a lot of up-front capital costs, vaulting it well out of the ranks of the Web services startups that can get to the break-even point on a few million dollars.

Levie says he thinks there are a million businesses in the United States alone that could be using Box.net—so if the company wants to reach a decent fraction of them before the clock runs out on cloud technology and something even newer comes along, it needs to invest heavily now. “We see the opportunity in front of us as a one-time thing with this particular product,” Levie says. “We want to be able to deliver Box to as many businesses as we can in the world. That has some capital consequences.”

Box.net had specific reasons for wanting to add Emergence Capital, Andreessen Horowitz, and Meritech to its stable of investors, Levie says. Emergence Capital is becoming “the strong SaaS investor brand” in the Bay Area venture community, he says. (Holleran helped to build the AppExchange marketplace at Salesforce.com, and Emergence founder Jason Green, a new board observer at Box.net, has overseen investments in Yammer and SuccessFactors, among other companies.) Andreessen Horowitz partners Marc Andreessen and Ben Horowitz co-founded LoudCloud, which was perhaps the first cloud service provider company. And Meritech, says Levie, “is your quintessential late-stage investment firm, really helping companies go from tens of millions in revenue to hundreds of millions. Look at the experience they have had with Facebook, Salesforce.com, Netsuite, Netezza—those are all the kinds of companies we certainly look up to and want to be modeled after.”

The only difficulty with raising the big Series D round, says Levie, was that the new investors were so excited about Box.net that they wanted to buy major equity stakes. That meant Levie had to convince the earlier investors—Scale Venture Partners, US Venture Partners, and Draper Fisher Jurvetson—to accept fewer shares in this round than their pro-rata agreements entitled them to.

“That was a lot of work to do,” Levie says. “But at the same time, all of our investors have been really understanding and supportive and strategic around who else we wanted to bring to the table, and I think ultimately that will lead to a better outcome.”

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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