You Only Have to Be Right Once (7 page)

“He's the only tech entrepreneur who's had the patience to achieve what he has with the record business,” said Sean Parker, now a Spotify board member, who helped open the door to U.S. deals, including one with Facebook. “He has this Zen-like patience and an ability not to crack under pressure or get frustrated. Over and over again he puts himself in a situation where a normal person would have thrown in the towel.” As I talked with Ek in his office, he sat straight and motionless like a Swedish Buddha; the only thing moving was his mouth; he wasn't even blinking his icy blue eyes.

Such calm helps him manage the chaos: In 2011 Ek was on the road 100 days—mostly a triangle between Europe, New York, and California, a schedule that cost him his girlfriend of two years. When he's in Stockholm, Ek wakes around 8:30 a.m., answers e-mail for an hour, then takes the five-minute walk to Spotify. He spends about 25 percent of his time recruiting; otherwise he's at his open desk or walking the floor. “Ek's one of the few people,” said Parker, “who can handle the technology side, the strategic side, and the deal side of the business.”

Ek works in the office until 8:00 p.m., eats dinner out and then returns home to unwind, either by playing guitar for a few hours or juggling a rotating trio of books (when we spoke, the Steve Jobs biography, a primer on typography, and a guide to bonzai trees). Then he hops back on e-mail, before typically turning in around 2:00 a.m. Lorentzon wants Ek to find a balance: more exercise, less junk food, more sleep, less work. The last goal will be tough to achieve for the foreseeable future.

• • •

EK BOUNDED UP ONTO
the sleek white stage in Greenwich Village's Stephan Weiss Studio right after Thanksgiving in 2011, as dozens of typing journalists and rows of live TV cameras stood ready. Though thrilled that the new platform was set for launch, he couldn't wait for his first press conference to end. When Ek operated just in Europe, he could lie low. But with Spotify's entrance to America—home to the cults of Bezos, Gates, Zuckerberg, and Jobs—Ek had to switch from programmer to preacher. For Spotify to scale, he needed to hype his platform, generate buzz, and get labels, artists, and developers excited to partner up.

He didn't need to win over investors. Ek's roster had surged over the past few years. Spotify went from some smallish Swedish funding to a heavyweight round from social media elite (Li Ka-shing, Sean Parker, and Founders Fund), who collectively put in more than $50 million at a roughly $250 million valuation. A few months before the press conference, DST, Accel, and Kleiner Perkins reportedly invested close to $100 million at a $1 billion valuation. “Daniel was an entrepreneur that we had to, and wanted to, work with,” said Accel's Jim Breyer. “The combination of a passion for music as well as his idea of making music as frictionless as possible for discovery and sharing is where we hit it off.” Ek still held about 15 percent of the company. Thanks to all that seed money, Lorentzon owned some 20 percent. With a valuation, by the summer of 2014, swelling toward the $4 billion range, both seem poised for billion-dollar scores.

Facebook deserves a lot of credit, as well. The social media giant is embedded into Ek's platform, and vice versa. Those billions of shared songs don't happen by accident. “I don't think there's a Facebook app so well-resourced,” said Ek. “We wanted it perfect.” Added Zuckerberg: “He clearly is very forward-thinking on where he wants to go. He's very clear on the things he wants for the product and what he doesn't want.”

The real threat to Ek, ultimately, isn't his product—it's the industry Spotify purports to save. Spotify will only be as successful as its music library. While almost every band has capitulated to the stream (the Beatles, one of Ek's favorites, still haven't played ball), others, like the Black Keys and Radiohead, have complained about the cut given to artists, despite $1 billion-plus paid in royalties to date. Scooter Braun, agent to Justin Bieber, understands the thinking but told me: “They should then tell radio not to play records for free and call YouTube and say don't allow my music to stream on videos for free.”

Similarly, Ek remains vulnerable to record labels, which control all that music. Wisely, Ek brought the big players into the tent—as part of the original licensing deals, Spotify granted equity stakes to the four largest music labels (Warner, Universal, EMI, and Sony) and Merlin. Industry sources put their collective cut at nearly 20 percent. But those stakes, while significant, aren't enough to automatically quell an insurrection. Ultimately Ek needs to change the power dynamic, and create the world's dominant music source, a hit maker so big no label or artist can afford to opt out.

That's why he opened up Spotify to developers: He's hoping they'll turn it into a universal music platform, while allowing him to focus his full-time team, now 1,200 strong, solely on growth. “Google has 30,000 employees,” Ek said. “A part of me wonders, What if they were all focused on really solving search?” He took out his iPhone. Using its Siri voice software, he asked it when tomorrow's first appointment begins. After a few seconds the computerized voice replied, 11:00 a.m. “Imagine if this was three times as fast or truly understood my intent,” said Ek. “It's probably the biggest threat to Google; it's a whole new way of interacting.”

Did he plan on building a voice-activated Spotify interface? He flashed a mischievous smile. “Play me some Coldplay,” he told the phone. Its small speakers ring out with the opening piano chords of the band's hit “The Scientist.” “We hacked into it a few weeks ago,” Ek said, with a satisfied nod. “I'm not an inventor. I just want to make things better.”

Aaron Levie, Box:
The Man Who Would Be Gates

It's a measure of a phenomenon when an entrepreneur in his twenties raises more venture money than almost anyone in history ($414 million), yet gets privately critiqued for the “small” fortune he's left for himself ($100 million). Aaron Levie, founder of Box, clearly has a bigger prize in mind than just making himself rich—he's determined, with a stunning amount of moxie, to take on and defeat the biggest giants in tech history: IBM, Oracle, and Microsoft. If Drew Houston's Dropbox wants to be your personal digital attic, Levie's Box wants to be your office's digital file cabinets. Bill Gates and Larry Ellison, take note: As
Victoria Barret
discovered in 2013, the man fixated on some of your most lucrative business has proven himself an adept battle commander, down to his neon Pumas, with a giant IPO in his immediate field of vision.

 

W
hen Aaron Levie was twenty-six, back in 2011, he did something arguably foolish, undeniably gutsy, and entirely counter to the prevailing mood that startups should be “lean” in the Internet age. Forty-five minutes into a routine meeting with his board at his simply named company, Box, Levie blithely announced: “I want to make a small adjustment. We need to raise an extra $50 million.” An awkward pause followed. Box had previously raised $106 million, already a heady sum for a company with just $21 million in sales and no profits. Levie's early investor and biggest booster, Josh Stein of venture firm Draper Fisher Jurvetson, piped up: “I'm sorry, but you said $15 million, right?”

Nope. Five-oh.

A month earlier Levie, with the board's acquiescence, shot down a $600 million offer from virtual-computing giant Citrix. That would have given the guys in the room three to fifty times what they'd put into Box just a few years earlier. Now Levie was asking them to dilute their stake by some 15 percent. He hadn't even told his cofounder about it.

They should have seen it coming. Levie is on a mission, and it's an expensive one: to be the Oracle of the next generation of enterprise applications. Box is an online storage and collaboration service that finished 2013 with $124 million in revenue, double what it did in 2012, and five times bigger than in 2011. Levie figures he can keep growing quickly, but that's not interesting to him.

Instead, he wants to create a transformative technology company for the mobile era, one that will become the glue connecting any big company's myriad data and documents across all of its disparate software applications and makes them accessible securely on a tablet or phone. At that July 2011 board meeting Box already offered a better mobile experience than anything from Oracle, SAP, or Microsoft. But it had only five people selling to big companies, which put it at a crushing disadvantage to the giants.

A two-hour cross-examination later the board gave Levie the go-ahead to raise more cash to beef up the sales force, and he had no shortage of interest: His $50 million ask turned into an $81 million round, and then he raised another $150 million, at a valuation of $1.2 billion, and then yet another $100 million around Christmas 2013, which made the company worth almost $2 billion. All necessary, given the $169 million sales-obsessed Box lost in 2013, according to pre-IPO documents filed in early 2014.

Even Levie can't keep track of it all. “Sorry, which round am I talking about?” he asked, nervously cracking his knuckles. Levie is perpetually fidgeting with something—his iPhone, frizzy curls, jean cuffs, sneaker laces—in between sips of endless cups of black coffee. He generally rises at 10:20 a.m. and tends to fast through the workday, taking his sole meal at dinner, after a half-hour power nap in his office lair, an 8-by-10 room with nothing but a scribble-filled whiteboard, purple couch, two orange earplugs, and an inhaler. He rarely drinks alcohol, even though he regularly schmoozes at wine-soaked business suppers, because after midnight is when he powers through e-mails before collapsing at 3:00 a.m.

His board has been accommodating to his ambition, in part because of this work ethic and in part because he's taking the dilution along with them, betting together that they can make more owning less of something bigger. While his frenemy in the consumer online storage world, Drew Houston of Dropbox, has kept an estimated 15 percent stake, Levie is down to only 5.7 percent or so of Box, giving him a “mere” $100 million or so, pre-IPO, for his personal fortune. “My what?” he says, taking a mock puff of the inhaler. Levie's biggest extravagance: a BMW 3 Series he leased five years ago. “I'm living the life I dreamed of as a twelve-year-old. I don't have hobbies. I want to build a big company, and this is it.”

• • •

HE'S CHOSEN A FORMIDABLE
industry. Four companies founded decades ago—Microsoft, IBM, Oracle, and SAP—still control half of the software market, according to Gartner, which will soon eclipse $300 billion. All the others get scraps. The status quo consists of expensive licensing deals and even pricier setup costs followed by ongoing maintenance and consulting fees just to keep the software up to date. Yet the products they're selling are largely archaic. Most are stuck on servers talking to PCs and don't run on mobile devices, even though roughly half of American workers are using their smartphones for work and a surging number are also using tablets, per Forrester Research.

The new wave of more-convenient-to-own, cloud-based business software, which began last decade with Salesforce, Netsuite, and Workday, has swelled to dozens of startups now hitting the enterprise market with flexible pricing, mobile access, and tools that make doing business as easy as using Facebook. B2B software has also been a much healthier investment play. The IPOs of Workday and Splunk went off brilliantly while consumer Web firms Zynga and Groupon disappointed.

Levie built Box for this new world. A file stored in Box (this could be as simple as a Word document or as complex as a 3-D rendering of a new building) appears and can be shared (and in some cases edited) on any device with a browser. Box has apps on all the major mobile operating systems. His vision of IT's future cobbles together software from the new generation of players, with Box in the middle of it all acting as a data traffic cop, so that any piece of information from one offering can effortlessly be pulled from another application. In his world the expensive storage hardware and collaboration software “suites” from Microsoft, Hewlett-Packard, IBM, EMC, and NetApp go away.

Box's not-so-secret weapon is its freemium business model. With Box you get 5 gigabytes of online storage and basic features for nothing. If you want enhancements, better security, and IT-department-level controls, Box is as cheap as five dollars a month per person. Only 7 percent of the company's twenty million–plus users now pay the fee, but expansion of existing accounts is generating 40 percent annual revenue growth.

Box is already looking like the big-vision pitch Levie made to his investors back at that fateful board meeting. The company signed up four times as many annual deals worth over $50,000 in 2012 than it did in 2011, from companies like Gap, Electronic Arts, and Discovery, and by 2014 was cutting deals with the likes of General Electric. But while its human sales force has surged to a couple hundred, more than two-thirds of Box's deals originate when someone in an IT organization notices Box adoption and wants to wrap security and administrative controls around it.

The industry giants have noticed, too, and are quickly co-opting Levie's freemium, mobile-first approach. Salesforce launched its Facebook-for-business product, Chatter, with a freemium model in 2010. In 2012, Microsoft acquired Yammer, a freemium social-tool-for-business outfit, for $1.2 billion, citing the firm's business model as a reason for the purchase. And Google has made Google Docs a legitimate solution for business, as well. Meanwhile, Oracle, Microsoft, SAP, Netsuite, and Salesforce have lined up to partner with Box so that their salespeople have an answer to the inevitable customer question about getting data to the plethora of mobile devices that clutter a company's system.

All that action is what, literally, keeps Levie up at night. Says the now twenty-eight-year-old: “I have more gray hair than President Obama.”

• • •

SOME OF THAT GRAY
in his wavy tuft comes from a shockingly preternatural entrepreneurial career. Levie grew up on Mercer Island, Washington, a leafy suburb of Seattle where technology wealth from Microsoft and Amazon seemed to flow through the air. At eight years old he was distributing flyers offering himself for weed-pulling, dog walking, and anything else a neighbor might pay for. He turned ten the year Netscape was founded and spent his tweens browsing online, typically until 2:00 a.m., cooking up one new business idea a week, which he'd pitch to his father, Ben, a chemical engineer, and his mother, Karyn, a speech-language pathologist. “Honestly, it was tiresome,” admitted Mom. “He even told me I should start a company with some tool that other speech pathologists need. I mean, I kind of stopped listening after a certain point.”

His high school classmates were more enraptured. While he obsessed over the business models underpinning this new thing called the Internet, his buddy Jeff Queisser, who lived four houses down, would haul over his twenty-pound Dell tower and CRT monitor for all-night coding sleepovers. Some fifteen startups ensued. There was an Internet kiosk for hotels and malls, a Web portal for real estate listings, and “Zizap,” which Levie described as a “really slow, pay-to-play search engine.” They all failed, though Levie considers that word too binary: “Failure? I wouldn't put it that way. They didn't take off, sure, but I got something out of every one.”

Besides lessons, he built a team
.
His Box cofounder and key hires all hail from Mercer Island High School: Queisser heads up technical operations, Dylan Smith is chief financial officer, Sam Ghods oversees technology, and Ashley Mayer is head of PR. “We weren't all buddies in high school,” said Smith. “It was more that Aaron sought us out at some point and then united us in one of his many causes.”

Levie squeezed his way with a low-B average into the University of Southern California as a business major. He exchanged startup ideas via e-mail with Smith, who was starting premed at Duke University. One was a sort of social network for college kids but limited to simply listing each student's interests. Levie also launched a site called socalendar.com, a directory of events in the L.A. area. It flopped.

But the idea that got them both excited popped up in a sophomore marketing class. Levie chose to research the online storage industry and instantly saw an attractive arbitrage opportunity. He could charge $2.99 a month for 1 gigabyte of storage that cost him only a dollar.

In 2005 he persuaded Smith to launch an online storage company that summer out of Smith's parents' attic on Mercer Island. They rented servers with Smith's $15,000 in online poker winnings to start it, then dropped off business prospectuses at the homes of Seattle's tech luminaries like Paul Allen and cold-called two dozen VCs. Not one bit. Then Mark Cuban changed everything. Levie had sent the dot-com billionaire and blogger a story pitch. Cuban's response: I want to invest. Six weeks later they had his check for $350,000 for 30 percent of the company. Levie and Smith decided to drop out of their respective colleges and head to Silicon Valley, driving Mrs. Levie's Nissan Quest to an uncle's backyard cottage in Berkeley.

Customers were signing up briskly, but Levie felt there was still too much friction in the act of pulling out a credit card to open a Box account. Some quick math showed they could give away the first gigabyte and make up the expense if only 3 percent of accounts upgraded to the $2.99-per-GB price, given that those paying customers were likely to eventually want loads of storage. In early 2006 Box moved to the “freemium” model, and overnight they hit fifty times the number of daily sign-ups. Great penetration—but also a frightful cash burn. Cuban wasn't happy with the equation, which mandated that investors subsidize the freeloaders in the hopes of making it up later.

That October the venture capital firm Draper Fisher Jurvetson came through with $1.5 million, some of which went to buy out Cuban entirely. While Cuban has built a multibillion fortune through some brilliantly timed moves, this one proved a disaster, as his stake today, even without investing another penny, would be worth upwards of $100 million.

Early on, though, it appeared Cuban would be proved right. Box came up shy of $500,000 in revenue in 2006, and while consumers were begging for new features, they weren't willing to pay for them. Rivals were dropping prices, and rumors began to swirl that Google and Apple would soon offer cloud storage for free.

Box was still a tiny operation. Its two cofounders and some of their high school crew slept on mattresses lining the floor of a garage next to their one-room Palo Alto office. Levie jumped on his share of support calls, which proved the ultimate market-research exercise. Many of their customers were “rogue” office workers, storing and collaborating on files in the cloud without their IT managers' approval. Levie would ask them what new features they wanted Box to add. Many said they would gladly pay one hundred times what Box was charging if it had security features and a dashboard that showed employee usage. Box, the office workers told Levie, was simpler to use than a similar Microsoft product called SharePoint. When Levie found out that SharePoint made Microsoft $2 billion a year, he realized he'd been targeting the wrong customers.

In one of the great “pivots” in recent Silicon Valley history, Box ditched the consumer play and became an enterprise software company in the middle of 2007. Again, he faced a dwindling pile of cash, and Draper Fisher wanted to see another investor buy-in before recommitting. Levie went to twenty venture capital firms, and none would touch Box because Levie's track record and knowledge of this new market were negligible, and the hoodie look that worked for Mark Zuckerberg fell flat. (His revised uniform: dark blazer, jeans, dress shirt, and neon Pumas.)