By Aaron Levie, contributor
FORTUNE — Having just closed a fourth round of funding, raising $48M from Andreessen Horowitz and other notable investors, I have the dubious distinction of having pitched Box more than a few dozen times on Sand Hill Road over the past five years. During this period, there have been radical shifts in the global economy, massive technology transitions, and the emergence of multi-billion dollar ecosystems that didn’t previously exist. I’ve also witnessed dramatic fluctuations in the interest in my own company, as well as the broader pulse of the Valley.
What I’ve learned throughout all these rounds is that the Valley has a reasonably efficient, if not always transparent, way of distributing capital to the right opportunities. It’s not entirely perfect: many investments have been lost to markets that were too nascent or too mature, or companies that couldn’t execute. However, investors seem to always be there when the time becomes right. It’s the impatience to always be building bleeding-edge technologies, and investing in or stimulating the development of new markets, that drives such rapid innovation. And I can say with absolute certainty that the Valley’s venture capital and startup community is more excited and more impatient than ever in its search for tomorrow’s next big thing.
Why now: A perfect storm of enabling factors
In 2006, my first year in the Valley, investors and entrepreneurs often joked that this would be “the year of mobile.” The irony was that this refrain had been around for a decade or so, but there were still few meaningful opportunities for mobile startups. Platforms were immature, devices were clunky, dealing with carriers and manufacturers was cost prohibitive, and consumers’ mobile activities revolved around phone calls, SMSing, and playing snake. And it wasn’t only the mobile market that wasn’t quite ripe when we set out to raise our Series B the following year. It was the same whether you were focused on selling to enterprises or were creating digital game studios. And as a startup going up against Microsoft (MSFT) with a freemium business model and a heavy emphasis on mobility, we elicited a lot of squeamish groans from investors in 2007. Besides, with the exeception of Salesforce (CRM), few software companies had proven that the cloud was even viable in the large corporations.
We were early in our market, and had we been much earlier, it’s doubtful we would have had an economically compelling proposition for customers or investors. Starting Box ten years ago would have been wildly impractical, given that the cost of our core underlying fabric, storage infrastructure, has dropped precipitously over the past decade. Today, we buy hard drives that store 3 terabytes of data for nearly the same cost as a disk that stored 90 gigabytes of data in 2000, a storage density (and cost) improvement of 33X in just a decade. This is allowing us to scale a web-delivered application for millions of users and tens of thousands of businesses with unprecedented efficiency, and helping thousands of other startups to store, archive, and manipulate massive amounts of data incredibly cheaply. (Believe me, I say a nightly prayer to Gordon Moore.)
But storage efficiency is only one of several factors driving the prosperity of startups that couldn’t have existed (or at least, succeed) five years ago. When pitching our latest round a few months ago, investors understood that the ubiquity of iPads, Android tablets and smartphones are catalysts for a new generation of tools, even in the enterprise. They were bullish on how the democratic and open nature of app marketplaces, as well as the richness of platforms, are providing a thriving ecosystem for mobile apps. And not only was there zero doubt that the cloud had tipped for big businesses, but it was acknowledged that startups finally have a unique advantage in building and selling these new services. Even our business model of providing a free service and then monetizing on upgrades began to look rational.
Compare this to 2006, when an early investor reacted to our freemium strategy with, “You’re crazy to give this away for free.” And he was right: subsidizing customers, with the expectation of future profits, was probably the #1 way businesses got burned in the first internet go-around. But the way consumers and businesses adopt and buy technology has changed radically in the past decade. “Freemium” has transformed marketing and delivery techniques for enterprise software startups like Yammer and public companies like LogMeIn. At Box, it has driven the adoption of our product in 73% of the Fortune 500, allowing us to go head-to-head with the industry behemoths tethered to legacy models. Other spaces have seen similar business model-driven disruption, like the one-click payment processing for apps on iTunes or the success of virtual currencies for gaming companies, allowing new entrants like QuickOffice or Zynga to monetize their offerings in unprecedented volume.
What next: A more responsible IPO frenzy
Of course, the impatience of the Silicon Valley investment community is most acute when it comes to successful liquidity events. Or at least that used to be the case. Historically, the most significiant returns by far have been produced by going public — the likes of Google (GOOG), eBay (EBAY), Amazon (AMZN) and others have generated billions for their initial financiers through IPOs. But the fervor around IPOing in the last bubble produced more lemons than sustainable, profitable companies. Something I also know about through first-hand experience.
My Silicon Valley story starts not in California, but in Seattle at the age of 13. I had just become the beneficiary of a few thousand dollars, and at the suggestion of my well-intentioned dad, we invested in a few high-flying, buzz-word compliant internet stocks that seemed like they could defy gravity. With my investments perfectly timed to the near-peak of the market, I anxiously watched my net worth drop from $3,500 to $2,500 to $1,000, and finally to a number so small that I was forced to close my trading account. I was 14 by then, and already wise to an important set of lessons: markets are volitile, and my dad doesn’t have a knack at betting on speculative technologies (we’re hoping this trait is not genetic).
Which brings me back to present day Silicon Valley. In general, private companies are spending far more time building significant, stable businesses before going out to the public markets. They can do this because the cries of Wall Street are being countered by remarkably prudent investors who are content with waiting for their portfolio companies to mature. In fact, as Sarah Lacy of Techcrunch recently pointed out, some late stage investors are turning the IPO model on its head, with private investors playing the role of larger investment banks and retail/public investors for the equivalent of IPO-scale rounds. At least for now, this new funding ‘paradigm’ seems to be satisfying the main reasons companies go public: to create liquidity and raise significant capital for operations. While this approach reduces the likelihood of stratospheric returns for public investors since a large portion of the capital gains are captured by the earlier private investors, it makes for a much safer bet.
It seems to be working in practice: as Ben Horowitz recently explained, the most recent class of tech IPOs are significantly more mature than their 1998 counterparts, bringing in an average of more than $300M in revenue versus $120M, respectively. The maturity of these businesses, the predictability of their cashflows, and their market penetration are at all-time highs, particularly relative to the dot-com bubble. This year will see IPOs from Linkedin, Pandora, Skype, HomeAway, and other market-leading players, all generating hundreds of millions in revenue and with powerful product traction; LinkedIn is connecting 100M members; Pandora has 80M listeners in the US; Skype is considered the largest long distance phone company in the world. And Rovio’s Angry Birds…well, let’s just wait to see the S-1 filing on that one.
One final observation
The risk of our chronic impatience, of course, is that everyone becomes inundated with more technology and new services than they can handle. It means that one day we’re talking about Foursquare, the next day Quora, and then Color after that. In referring to the challenges of standing out in today’s market, Om Malik poignantly stated that, “With over 650,000 apps across multiple mobile platforms and tens of thousands of web services, it is pretty clear that there are no second chances on today’s Internet.” Silicon Valley will have to balance its intense impatience for the next new thing, with the fact that it’s in our best interest to let the current new thing self-actualize. In the meantime, we’re certainly in the middle of an incredibly exciting period for startups, investors, and technology-consumers alike.
–Aaron Levie is the CEO and co-founder of Box.net.
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