Box CEO Aaron Levie has seen a lot of change in enterprise technology since he co-founded Box on Mercer Island 13 years ago, and thinks bigger changes are yet to come.
Levie and Box rose to prominence by capitalizing on the shift to enterprise software delivered as a service over the internet, as opposed to something you install on your own servers. The ripples of that shift continue to play out more than a decade later as older tech companies become desperate for the growth enjoyed by SaaS companies and new startups take aim at companies like Box that are now big established players.
In a recent interview with GeekWire, Levie talked about the recent consolidation across cloud infrastructure and SaaS companies, and why for all the hype, artificial intelligence will likely change this world even more than SaaS did. A lightly edited transcript of that conversation, in which I resisted the temptation to paraphrase “best-of-breed” several times, follows below.
GeekWire: One thing that’s been on our minds has been a lot of the consolidation that’s been going on in enterprise and cloud and across both SaaS and infrastructure. How do you look for acquisition opportunities and how do you see that playing out over the next year or so?
Aaron Levie: It’s both fascinating and exciting to watch all the moves happening just in the past six weeks of enterprise technology with Qualtrics being — I think it’s the largest private acquisition ever in enterprise software — and Red Hat, which is one of the largest transactions of all time in enterprise technology.
You have this amazing market right now where you have large incumbents that have an unbelievable amount of capital and scale, and then you have these incredibly disruptive companies that are also reaching a point of maturity and scale. Incumbents are looking to be able to build out a modern portfolio of services and technology and offerings for their customers.
I think we’re in for another couple of years of having this type of dynamic, because startups on the disruptive side of the industry are only getting bigger and they’re only getting more mature and working in larger and larger enterprises. And that’s when you kind of add to customer lens to this, which is I think we’re seeing that enterprises for the first time ever are starting to build out their IT stack with best-of-breed technologies (companies that specialize in a particular type of product or service) as opposed to the more kind of traditional approach of buying from one monolithic vendor for a significant chunk of enterprise technology and the business.
And so you have because of that (environment), you’re starting to have enterprises now using five, 10 or 20 different technologies from different players. That is causing customers to want more of the sort of innovation from those best-of-breed players, which then in turn causes incumbents to want to buy the best-of-breed players also. So you have this really interesting virtuous cycle where the market is causing this new dynamic to emerge.
Where would you put … you talked about disruptors and incumbents and where’s Box in that framing?
I think we’re an incumbent, but we’re probably still more on the disruptive side. We do our own form of consolidation, but it is with smaller companies, so it’s five or 10 persons startups that we think are doing something really interesting in our space. We did three acquisitions this year as a bar, as an example, but obviously, you know, nothing quite that big on the Qualtrics scale.
And then on the other end of it, it’s been reported over the years that you’ve seen interest from companies like Microsoft and others. (Have) you see more inbound interest over the last couple of months given what’s happening in this space?
So, obviously I can’t talk about anything on the M&A front. All I can share is that we’re seeing a lot of at-scale incumbents that are super attracted to the best of breed IT model and at-scale SaaS companies that have emerged.
With this whole best-of-breed thing, if there is consolidation, then you sort of go back to having one big vendor that gives you everything, right?
I think we’re nowhere near that sort of tipping point where the trend favors back to the incumbent only because you’ve got a dozen or so of these more mature SaaS products or cloud companies that have emerged service now, Workday, Salesforce, Slack, ZenDesk, and obviously Box. So you have this emergence of really an entire ecosystem of technology companies that are (generating) $500 million or a billion or 5 billion or 10 billion in revenue as independent entities.
And so I don’t think we’re anywhere near the point where you’d be at risk of us moving back to a monolithic model and even when you sort of zoom out even further and you and you don’t just look at it as the startups versus the incumbent. Even incumbents themselves are sort of recognizing that they have to play in these sort of best-of-breed categories, and so Oracle, SAP, Microsoft, IBM, the traditional monolithic providers are recognizing that they have to now be best-of-breed in their own kind of specific categories. So I think you’re going to start to see even more of that specialization emerge within the big incumbents.
As you know we’re very heavily focused on the Pacific Northwest, which is obviously a place you know and love. Have you considered (establishing) more of a presence here?
I love the Northwest, obviously I kinda grew up there and credit growing up in the Northwest in terms of driving my and my co-founders’ excitement around technology and our fascination with technology and entrepreneurship in general. We do have a bunch of people in the Seattle area, it’s mostly customer-facing teams as well as a couple of business development folks as well for our key partnerships up in the Northwest.
We’ve always considered a building out a larger engineering footprint in the Northwest, and that’s still on the table as we think about multiple office locations for engineering over time. Right now we are all centralized in Silicon Valley with a few remote folks, from an engineering and product standpoint, simply because of the velocity benefits that we get.
Having spent time in both the Bay Area in the Pacific Northwest how do you see the differences in terms of technology careers, organizations and entrepreneurial funding?
In one region you have two superpowers in technology, Microsoft and Amazon, and then a bunch of really great companies on the kind of mid-market side, numbered in the dozens probably. And then in Silicon Valley you have dozens of superpowers and then thousands of startups and hundreds of (institutional) investors or thousands of (angel) investors.
So you do have a much more liquid market down in Silicon Valley for talent, for capital, for ideas. And what we’ve seen is that any market where people move between organizations more frequently, where capital flows between vendors, with more venture capitalists and startups, you’re just going to see the flywheel effect emerge much faster because of just the nature of how quickly our economy is changing in technology.
However, there’s a lot of great benefits to what the Northwest offers if you’re building a company and in some cases it’s actually the opposite of some of the challenges or some of the benefits of the Silicon Valley. You are not competing as much with as many startups from a talent standpoint, you’re not competing with as many startups from a venture capitalist standpoint. So I do think you have similar levels of potential and upside in either the startup environment, we just see more start off down here for pretty obvious reasons.
You mentioned sort of the friction with employee movement and I’ve wondered how much the noncompete factor in Washington state plays into some of that environment. It sounds like you’ve at least considered that.
I don’t know in terms of on a daily basis how much that’s showing up as preventing the liquidity of the market. I mean, it absolutely must play a role, anytime you have one of those system-level constraints on talent movement, you will see massive downstream consequences. I just don’t know enough about how much that has been factored into the daily talent movement within the Northwest.
Anecdotally I would say that you rarely see startups that emerge that go after Amazon or go after Microsoft within the Northwest versus Silicon Valley. You very regularly see new startups emerge that are intended to disrupt the super powers down here, and I think that that’s a healthy sort of rejuvenation of ideas and innovation, it keeps incumbents on their toes.
What technologies that you think will change the way that your company operates or your products are developed over the next three to four years?
I think AI is the big one to watch. I don’t think we are in for a bigger technology shift than what AI will do.
I think that the idea of taking all of this information that we have in the world once it’s digitized and then also for the information that’s already digitized, being able to extract insights from it and automate processes because of it, to be able to augment our own ability to connect the dots between information, that will have a profound impact on every single business and every single part of the economy in the future. I think right now we as the tech industry are doing a lot of talking about it, but we still have decades of watching it ripple through how businesses operate and how markets operate. We’re still incredibly early in that journey.
This is fundamental business process transformation for most industries and that that means that you could take decades in some cases for it to fully play out. But I think that it is the single biggest technology change that we’re going to see over the next couple of decades.
Do you think Box needs to own its own AI, in terms of having to have that as kind of a core business or technology skillset within the company? Or is it like cloud computing where for some things you might want to own it and for some things it’s perfectly fine to let somebody else provide it.
We are building our own, we have a bunch of internal projects with our own machine learning (teams), I wouldn’t necessarily call it AI. For instance, we have a technology called Box Graph which basically maps all of the activity happening within your enterprise and then can deliver advanced features based on the patterns of work and behavior, how people are working in your organization. Some of those features are going to be used for productivity reasons, and some of those features are going to be for security reasons.
Then for things like the really, really hard aspects of Ai, computer vision, speech detection, we think that there will be sufficient innovation and open technologies that emerged from the Googles and IBMs of the world that we would much rather use as a tailwind for us as opposed to us competing with those technologies. We’re not going to get to the same scale as those organizations. For the stuff that requires hundreds of engineers and computer scientists and billions and billions of hours of data to be processed, we would much rather leverage existing algorithms and enable our customers to leverage the best technology that’s out there.