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Box co-founder Dylan Smith
Box co-founder Dylan Smith at the EY Strategic Growth Forum.

It’s been a big year for Box.

The fast-growing cloud storage powerhouse went public in January after a few fits and starts, raising $158 million and positioning the Los Altos, California-based company for big things ahead. The stock has slumped in recent months below its IPO price, and Box now is valued at $1.7 billion.

But despite that decline, things are moving forward at a rapid clip at Box which sees a huge opportunity to help large enterprises make the leap to the cloud.

We caught up with Box co-founder Dylan Smith at the recent EY Strategic Growth Forum in Palm Desert, California — discussing how the company competes and partners with Microsoft; how things have changed since the IPO and whether the company will join the throngs of Silicon Valley powerhouses opening engineering centers in Seattle.

Box often gets tagged by Seattle tech leaders as “the one that got away,” since Smith and co-founder Aaron Levie hail from the Seattle suburb of Mercer Island. They moved the company to Silicon Valley shortly after it was founded, in part because of the access to capital, talent and an ecosystem that was more welcoming to younger entrepreneurs. (Previously on GeekWire: Why we had to leave Seattle to build

Dylan Smith, Aaron Levie and Dan Levin of Box
Dylan Smith, Aaron Levie and Dan Levin of Box

The 30-year-old Smith shared some of that history in a recent interview with GeekWire, and also retold the story of how he started Box with money he made playing online poker. He also discusses what it’s like running a business with a childhood buddy.

Here’s more from our interview with the Box co-founder and CFO:

GeekWire: Every large tech company in the world is opening engineering offices in Seattle, but we’ve not seen Box do so, even though you guys have roots in the Seattle area. I’m curious if that’s something you’re considering or if you’re looking into that?

Dylan Smith: It’s definitely something we are considering… It’s more from a recruiting standpoint, the benefit of just being able to draw from other pools of talent. And we’ve been pretty successful, thus far, in our ability to hit our hiring plans on engineering, and so there’s not been as much of a burning platform to do it. Especially because more and more, it’s not like you go hire people in Seattle and it’s 30 percent less you don’t have nearly as much equity or something like that…. There’s a great talent pool up there. And especially if they were like an acquisition or one of our senior leaders wanted to move there or something like that. That could probably be one of the forcing functions to actually do it, but we are still considering it.

GeekWire: I think for some of the companies setting up offices in Seattle is that the engineers don’t hop around to new jobs as much as in Silicon Valley. Any thoughts on that?

Dylan Smith: No, it will be interesting to see if that changes now that they are kind of replicating the Silicon Valley ecosystem up there versus the way that people have grown up of and you pick a company like Microsoft and you are there for many, many years… I haven’t seen the actual data, but you know I have heard that and I think there is probably a lot of truth to that.

GeekWire: It’s obviously been a big year with Box going public. How’s that transition been for the company? Has it changed much in terms of how you are operating? It’s changed your job I’m sure.

Dylan Smith: I’d say both from a company standpoint and the impact on me personally, we have been pleasantly surprised by the transition — so it hasn’t changed the way that we make decisions and focus short term. And even from my personal standpoint, I may spend more time now doing investor relations, but it’s still 30 percent of my time or something like that. So, it’s not something that is too disruptive to the operation. There’s some real cost and some things like (Sarbanes-Oxley) compliances is always fun. But, overall, it’s actually not been a big change from pre-public life, which is cool.

The Box IPO.
The Box IPO.

John Cook: Would you rather be a public company with a $1.5 billion valuation or a private company with a $10 billion valuation?

Dylan Smith: I think it depends on how real and how much your employees and potential employees believe the $10 billion valuation. I think you can clearly do a lot more from an acquisition standpoint, recruiting standpoint, etc. if you can throw around seven times the amount of equity value. But I think that was one of the challenges and I think what we’re seeing now, though, is a lot of skepticism around some of those valuations. So, in absolute terms I think it depends on the situation. I’d say that mathematically, a $10 billion valuation would be a better outcome if it’s believed — and if you can actually treat it like a $10 billion valuation.

John Cook: Isn’t that one of the challenges with these unicorn-style companies, is that it really isn’t proven out yet until you get into a public market place?

Dylan Smith: I think that has made it more of a challenge from a recruiting standpoint last year which was the combination of questions about Box’s business and were we going to go public and when — combined with, I think, people seeing all these unicorn companies on the rise. A lot of great companies. And now I think this year, the combination of having a stock price and a stock that is liquid and more stability around the company and still massive head room to grow combined with the lustre wearing off on some of these unicorn companies has actually made it better for recruiting this year versus last year, which is interesting.

John Cook: So some of the lustre’s coming off some of the unicorn companies?

Dylan Smith: I think so, I think some of them. I think there’s still companies like Uber and Airbnb that are absolutely just kind of transformative companies and are being and should be treated as such. I think the other 60 or however many companies that have billion dollar plus private valuations, people aren’t really giving them credit for that as much these days it seems, at least in the valley where we have hyperational engineers trying to figure out what this is really worth, etc.

John Cook: So what do you think is going to happen with that? How do you think that’s going to play out?

Dylan Smith: Some companies can force investors into sub optimal outcomes. I think most companies are either going to grow into the valuations, just it’ll take a number of years but it doesn’t fundamentally change the company. And then there’ll probably be some that end up just having the sort of ‘come to Jesus’ moment of: ‘We’re going to go public at a valuation of half of what we raised our last round at’ and rip off the band aid and then just continue building a great company after that one time reset.

I think that’s why it is going to cause some cultural thrashing and some attrition in these companies. But I think, if it’s a great company, even if you raise it two or three times what you ‘should have’ it doesn’t change the fact if it’s a great business, it’ll continue to be successful.

It all depends on the expectations that were set. Because if you’re a $10 billion company saying like ‘hey it was a great valuation, we’re giving a lot of equity to people as if we were worth less’ and setting realistic expectations, there may be no disruption whatsoever. But if you’re that $10 billion company you’re talking about how ‘hey a year from now we can be $30 billion’ and setting those expectations and then three years later you’re still at $5 billion, that is a different situation.

GeekWire: As these big companies get more into your sphere and more into your business, how are you trying to combat that? I’m thinking Amazon, Microsoft, Google now are kind of encroaching the cloud storage arena in a much bigger way and the worry is that it becomes more of a commodity business. And Amazon’s probably the master at making money in commodity businesses.

Dylan Smith: We really only compete — of that list on the enterprise side — with Microsoft, on the (small and medium-sized business) front we compete with Google. But it really hasn’t been a storage amount or price game with any of those guys. (Microsoft’s) OneDrive is literally free. Google Drive, literally free with Google apps, same thing with a lot of these companies is we don’t compete on price any way, already. And so that’s not really changing the landscape. And really the most relevant competitor that we see is Microsoft. Amazon, they are basically selling the nuts and bolts storage which can be competitive on the platform side of what we’re doing, but I don’t think we’ve ever seen them in an enterprise deal, and so it really doesn’t change the landscape.

I think that’s one of the misconceptions of the overall broader ‘enterprise files second share space’ versus really what our customers buy us for and what the landscape looks like in the enterprise and it’s pretty different. The former has dozens of companies and the latter is Microsoft and Box, essentially. So it doesn’t change much. It’s interesting — as much as the overall landscape is evolving — our competitive landscape has been pretty stable over the past at least couple of years since Microsoft became more relevant.

GeekWire: So do you view it as a commodity business?

Dylan Smith: No, we have 75 percent margins, we have 96 percent annual retention — so very much not commodity. We’re being purchased to solve some pretty sticky and critical business problems that aren’t kind of the cost-for-gigabyte-type of problem that I think the perception might be.

GeekWire: And then the differentiator with Dropbox is that they are more consumer-oriented versus enterprise oriented?

Dylan Smith: So its functionality, security, scalability all those such things.

GeekWire: And obviously Dropbox is going to now try to go heavier into the enterprise and so do you feel like you have that turf carved out pretty well?

Dylan Smith: I think there is the ability for them to move further up market over time. They have been saying that for many years and we haven’t seen them show up in the enterprise in any real way. But I do think that over time eventually, we will start to see them more in the mid-market and potentially eventually even in the enterprise. But we do have a pretty significant head start and it’s where we have been laser focused with all of our energy, whereas they are trying to do a lot of different things. So, I think we will see them as more competitive in the future. But it’s still really hard to tell exactly how motivated they are to go after that space. And what they are doing about it.

GeekWire: Your relationship with Microsoft has been interesting over the years. How has that changed and where does it stand now?

Dylan Smith: We have a great relationship with them. Even just launching with Windows 10 as a partner and building our app on that as one of the first companies to do so for a more unified experience. Any time they do any sort of major platform launch, we tend to be up there even on the core content side. They have made a lot of strides to be a lot more open and so building some of these integrations natively into their application,s as well as building on top of their APIs.

We actually work really well with the Microsoft products. It doesn’t change the fact that they are still our most formidable competitor.

But it is one where they are very motivated most motivated to sell Office 365 licences as it relates to our business. OneDrive is a free feature included as part of that suite. And, I think they recognize that in a lot of situations, when our joint customers or their customers or prospects have the desire to really go deeper and our viewing content as a strategic space, OneDrive is not going to get it done. And they want to make sure then that that customer experience and the work loads that are going to be put on Office 365 are still as compelling as possible. So from a strategic stand point they have kind of been forced to open up to companies like Box and Dropbox. And they have been great partners along those lines.

GeekWire: How do you think Satya Nadella is doing?

Dylan Smith: Really well. I have been really impressed — and your closer to it so I’d be curious to hear your review. But it seems like rallying the company around focusing on fewer things, really driving this vision and making Microsoft cool again. In a lot of ways, I think he has done a great job.

GeekWire: So, would you ever consider an acquisition by Microsoft?

Dylan Smith: I think there is a lot of interest from bunch of the different large software players, just given kind of the platform we have built and the customer base we have built. But we have made it pretty clear that we intend to build a very large independent company.

So on the partnership front, it is just continuing to get deeper and deeper technology integrations. Microsoft is a really interesting company, just in terms of the number the ways we partner. And the number of different assets they have and strategic initiatives they have that relate to content where Box fits in. And that’s whether it is on integrations with Outlook or on their iOS apps or in new operating systems or in any of those things there is a lot of ways to more tightly kind of align our product roadmaps and make it a better user experience, which are really the types of things we have been doing. And the announcement is pretty settled over the last few quarters at least we have seen come out. And we can expect more of those types of things in the future as well.

GeekWire: So are they your biggest partner and biggest competitor at this point? How do you define that?

Dylan Smith: So certainly our top two partners would be Microsoft and IBM. So arguably IBM is a more important partner but they are both incredibly impactful and important from an ecosystem stand point. I would say they are our biggest competitor as well. So it is an interesting dynamic.

GeekWire: So how do you navigate that from a management stand point?

Dylan Smith: It’s a big company and I think we see where we can add value, and then at the same time we are going to get into sales battles all of the time, in addition to being very supportive of what they’re doing from an ecosystem standpoint, making sure we work together with Office 365. I think the important point to note is that when a customer chooses to use Office 365 and Box together, Microsoft doesn’t lose.

There’s some day that they will still have access to the analytics on everything because of our partnerships that all else equal they would prefer it to be in OneDrive. But people aren’t paying for One Drive. You’re just paying for the suite. If a customer wants to go and spend some of their additional dollars on Box to have a better experience of a basic content management, from their point of view, it’s not optimal, but it’s really not a whole lot of skin off their backs.

Dylan Smith
Dylan Smith

And so it isn’t one of those things where we’re forced to make the sort of ‘Sophie’s choices’ around that. I wouldn’t say it’s particularly challenging — at least from my point of view from the technical standpoint, it’s more on the business development side, navigating all the different parts of Microsoft is where it gets a little more complicated.

GeekWire: Interesting. So are you 10 years in now?

Dylan Smith: Yep.

GeekWire: So now you have a whole new set of challenges as an entrepreneur versus when you started. So what’s the biggest challenge as an entrepreneur 10 years in versus the first couple of years where you were probably scrambling to build the product and raise the money and tell people what you do? In your mind, what’s the biggest challenge as an entrepreneur?

Dylan Smith: I think from a founder-entrepreneurship standpoint broadly, much more of the focus is on growing the company and evolving the culture in the right way. Especially in a public company, especially in my role, how do we implement a little bit more discipline, process in the right ways without slowing people down and making it feel like they can’t have an impact. And so I’d say just the communication to the company and how much time we spend thinking about how to keep everyone on the same page, the types of people we hire, how to grow the business are just much more complex and interesting challenges than they were when you’re 20 people: You just say something and everyone’s in the room, they hear it. There we go.

Now we’re on the same page on the strategy and now it’s just how do you cascade things especially as we’re growing the company.

Right now, we have 1300 people and three quarters of us are in the Bay Area. The next 1,300 of people we hire, it’s probably going to be inverted, nearly three quarters of people outside. And such it changes the way you build the company, the type of leaders you need to hire, the way that you communicate, the infrastructure in place. And so from an operational standpoint — as well as an entrepreneurship standpoint —that sort of scalability and the communication become a lot more important. Previously, it’s just how do we generate, how do grow the business, how do we raise the capital, how do we build the right product and launch it as quickly as possible, And now it’s just a lot more about sort of the operational components and scalability.

GeekWire: And do you like that aspect of it?

Dylan Smith: I do, I’m not an operational guy myself that builds, but I’ve hired the folks who are and love that stuff. So, for me, I like the investor relations side of things and still focus a lot on the business and the planning and a lot of the pieces that I’ve focused on from the early days. But yeah, I actually have in my case, it’s not right for everyone. You see a lot of people who just want to go back and they just want to code or whatever it is. But I’ve actually been pretty excited about the way my role’s evolved.

GeekWire: You were started as two young co-founders too. Sometimes a company can outgrow you and the role that you have. It’s interesting with Box, it seems like you’ve both been able to curve out roles for yourself even as the company’s gotten bigger and now gone public. How has that happened?

Dylan Smith: 100% of it goes down to the team. Just being self aware on what are blind spots and weaker spots are and being able to focus on our strengths and just build an awesome team around us. That’s where I think the trajectory of the company and the vision that Aaron, in particular, and that we’ve both been able to sell to employees on what we’re doing and how we’re changing the landscape has allowed us to over hire early on some really impressive executives. If anything, it’s not a silver bullet but the key to success is just hiring great people who have done that and allow us to focus on what we love doing and what we’re good at.

GeekWire: And then how has the relationship with Aaron changed over time from two college dropouts right?

Dylan Smith: I did end up getting my degree. We’re still best friends. I guess the relationship, as much that’s changed, a lot of the fundamental pieces haven’t changed. The friendship has never been at risk because of the business or vice versa, so it’s gone pretty well. There’s always the caution around starting businesses with family, friends. We’ve had a very positive experience, but it’s also just because we can be very open with each other and not be worried about offending each other and I think that’s helpful.

GeekWire: It is pretty unique though, especially in the Valley where you think of it more as cutthroat and hard charging and the epic battles that you hear between founders. Do you guys stand out there, do you think, in terms of culture and style of operations?

Dylan Smith: I think it’s just because at the end of the day, as much as we think differently, we’re very different and fortunately complementary skill sets. We’re fundamentally trying to build the same thing, and so in terms of our vision for Box we’re very aligned, whereas I think some of the challenges occur either when companies struggle and people have very different views about how to work out of it or maybe one founder, or small group of founders if they’re multiple, wants to go in this direction, others are like ‘hey why don’t we sell or go that direction with the product’ or something like that. And so there’s just some fundamental disconnects, I’ve seen challenges there but I don’t think we necessarily stand out. Every founding team is different but we’ve had a pretty good relationship along the way.

GeekWire: So you’ve been pretty much aligned throughout the process?

Dylan Smith: Yeah, on the things that really matter. We argue about things and components of the strategy and should we hire this person or not and should we do this or that. We argue constantly, and that’s just part of a healthy debate. We always emerge as friends on the same page and kind of get shit done and ultimately recognize ‘hey if we disagree this one’s your call, that one’s my call.’ It’s the disagree, but support sort of mentality I think we’ve both taken to heart.

GeekWire: That’s cool. And is it true that the company was started with your casino winnings?

Dylan Smith: Yeah, it was online poker. So some of the stuff that Aaron had done through Box but yeah, largely it was online poker winnings.

GeekWire: How much was that?

Dylan Smith: About $20,000 dollars.

Dylan Smith: And then Mark Cuban ended up doing…

GeekWire: And that was a cold call, just to see if he’d invest?

Dylan Smith: I didn’t even call, I just emailed.

GeekWire: Do your Northwest roots play any part in the type of company you’ve built?

Dylan Smith: It’s hard to say. The stereotypical West Coast style is not actually Northwest, but is West Coast in general tends to be more collaborative, more of a kind of pay it forward type of thing. Whereas I think a lot of the East Coast kind of brand businesses as well as I guess LA to a certain extent are more like dog-eat-dog, but that’s very stereotypical. But no I don’t know that anything specifically from Seattle was like ‘well we run this business like a Seattle company’. I don’t know if there’s anything like that.

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