SaaStr founder and CEO Jason Lemkin chats with Box CEO and Co-Founder Aaron Levie to talk about what’s new at Box, SaaS fatigue, hiring a new COO, operating margins and efficiency, the future of AI, and what to expect for 2024. 

Let’s jump into Aaron’s advice, hot takes, and of course, What’s New. 


On How to Go Long in SaaS

There are a variety of factors involved in keeping the energy up to continue building a business in SaaS. Aaron has been at it with Box for almost 20 years. How does he do it? 

“I’ve never been able to come up with something more exciting than software,” he says.

He believes Enterprise software is the most exciting thing. The consumer side is ten times more stressful because you don’t have recurring revenue, and a single change in the platform can alter the entire dynamics of your business model.  You’re dealing with the whim and mercy of the fickle consumer market. But Box has lucked out with 95% recurring revenue. They get to talk to brand-new businesses in completely different industries all the time. 

Sometimes, it’s a media company making movies with your software, and other times, it’s a defense company saving the world with your software. Aaron’s advice is to have to have a deep passion for continuously trying to solve new problems for people. That’s the part that will change forever and make this industry interesting. Otherwise, you’re doing the same thing every day. 

Since tech employees have the lowest satisfaction on record, How do you energize the team in this era? 

Aaron begins by saying he doesn’t want to diminish the psychological impact of layoffs. They’re real problems that have a massive impact on people and families. So, let’s compartmentalize that component and talk about low employee satisfaction independent of that. 

“I don’t think you could have a better job on the planet than the software industry,” he shares. “We get to go to our computers, work with other people, design new ideas, and talk to people everywhere.”

This isn’t particularly hard work compared to 90% of the jobs Aaron sees. In most jobs we interact with on the consumer side, the energy level after day 3,000 of doing what you’re doing is incredibly inspiring compared to how easy tech jobs are and what we get to do every day. 

On Hiring a New COO

This is Box’s third COO in 14-15 years. Their co-founder, Dylan Smith, handles many functions of the business, like finance. He keeps the business humming and is a thought partner on all things business strategy. His work frees Aaron to focus on what he loves: product and engineering. The other part of the business Aaron needs help with is the GTM operation — customer success, marketing, all of the international global operations, sales, and consulting. That’s what the COO is for. 

This is the third COO, and the pattern of hiring is finding someone who can help take Box to the next stage of growth, where their experience is relevant in driving that growth. The original COO took Box to $500M in revenue and did a fantastic job. The second one took them from $500M to a billion. And now, they have someone who has seen multi-billion dollar software scale, like Google Cloud, and they’re in charge of taking Box from $1B to $2B and beyond. 

How Box reached an impressive 25% operating margin:

“The part where SaaS misunderstood itself was slightly losing sight of the core fundamentals of how the market works and what it pays for,” says Levie. 

At the terminal point of your business, its purpose is to produce a certain amount of cash that goes back to investors. Why would you give a dollar to something? Because you want cash back at some point.  You have to show the market what that cash return is that your business can produce. On the one hand, there’s a clear and good argument that the goal is to get the revenue to the largest number humanly possible. 

When everything is going well, you should have an 80% gross margin, efficiency in sales and marketing, and produce 30-40% operating margins. But, not all businesses look the same, which can sometimes make investors wary of when they get to see returns and actual cash flow. 

That’s the transition we’ve gone through in the last couple of years. If you’re growing 100% a year but losing even 50-100%, then you haven’t proven you have a fundamentally viable franchise. At some point, your market has certain headwinds that cause it to slow down, or you’re spending too much to acquire customers in a market environment. This is a nod that it’s worth getting more efficient during those moments. 

Eventually, you have to transition to a more sustainable, long-term model of growth. 

On Efficiency in 2024:

“It would be healthy if they didn’t reflate too much and looked more like when you and I were doing this, trying to get a 6-8x multiple, which was fantastic,” Aaron says. 

The only problem with the market at the moment is when something is growing 50-100%, people get overly excited and jack it up to a 15-20x multiple. 

Sometimes, that makes sense if you’re an outlier. But, ultimately, you don’t want to do that across categories indiscriminately. You want it to be healthy at a 6x or 8x multiple. That tends to be a safe range if you assume the company gets a 20/30/40% operating margin and grows at a 10-20% revenue rate. 

We want to be more grounded in reality, have a profitable business, make intentional decisions about what we invest in, and think about efficiency. This transition period is hard to appreciate for some, but it’s more fun because the puzzle is more intellectually interesting than when money was unlimited, and you could spray it everywhere. 

What’s New at Box:

“I hate to be the cliche, but I’d say that for our business specifically, it’s the promise of what AI can do with unstructured data.” 

It’s very early, but it’s real and changing things. Currently, Box needs the cost to go down for vendors and quality and accuracy to go up. But you can see a trajectory where that’s happening. Box has hundreds of petabytes of unstructured data, and being able to close your eyes and hand that over to a super-intelligent computer, you have 100x more leverage on what you can do with your information. 

That’s a gold mine of opportunity, and they’ve just now opened their beta to customers for it. 

Box’s Pricing Model to Maintain Efficient Growth:

Box came up with a clever model. The normal choice is to tell a customer to pay for this AI thing, and it’s separate. Then, only a certain percentage of customers are using it. There’s a lot of friction and testing. The alternative is to embed AI into everything, but then costs explode, and you might have power users being subsidized by non-power users. 

So, Box’s model is to have a certain amount of allocation for each user to use AI. For instance, if Sally and Bob both use AI and then Sally decides to power some crazy workflow, the customer has to pay for the volume after the allotment. You want employees to experiment and not have friction and also understand that they have to pay for that. 

As far as budgets, this is the one part SaaS hasn’t figured out yet — where this new money is coming from. There isn’t really an AI budget, yet many companies have discretionary dollars to use that range from 1-10% of an IT person’s budget. There’s also a risk in the industry of overloading the customer with a thousand pitches. The customer is exhausted. 

This is part of Box’s theory on their pricing model — to create an instant win for the customer by saying Box has AI in it already. If they started Box from scratch, AI wouldn’t be an add-on capability. It would be part of the founding story. They want to embody that strategy in their pricing model. 

Additionally – Box has been building a product for three years called Box Hubs. Traditionally, you have content organized in folders. Hubs creates presentation layers, and you can say you want content from x different folders presented to specific audiences. 

Now, all of a sudden, LLMs exploded and it was the perfect scenario for this product where the customer is telling them what their most authoritative set of content is. When you bring in that LLM, you can do questions and answers. If you go through the sales portal and ask for the pricing of a product. It’ll give you an answer instead of being given a file that might have the answer. 

The future of Box and SaaS in 2024:

As always, Box is focused on being as interoperable as possible. They believe in a world where customers will have hundreds of software vendors that do different things, and they can manage all of that content on Box. You’ll see more features that support that ecosystem. It’s also a huge new era of partnering within the AI space. 

As far as what to expect in 2024, it has to be way better than 12 months ago. “I don’t see a crazy new tailwind in the economy, but it’s clear that the change in headwinds is in a positive direction,” Aaron says. 

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