Greenhaven Road 3Q18 Commentary: Good And Bad Business Problems?

So to summarize, my past experiences gave me an admiration for the complexity facing large enterprises, a recognition that – particularly in a regulated industry – purchase decisions are often driven by compliance, and an appreciation for how integrations between vendors for critical systems can effectively lock in a customer. Recently, these experiences, coupled with two other themes that have been running through my research process, laid the foundation for a new investment.

The first theme, discussed above, is companies that are “undermonetizing” can be attractive investments. The second theme percolating is also an obvious one: data is today’s gold, and it is unlikely that companies will, on average, spend less on accessing, sharing, and protecting it. There is real career risk in skimping on data, and data management and cybersecurity have significant tailwinds for the next decade or longer.

None of these experiences or themes are blindingly brilliant, but collectively they are the underpinnings for our investment in Box, Inc. (BOX).

Box started 13 years ago out of a USC dorm room as an online file storage company, effectively offering a cloud-based hard drive to store computer files. Today, there are multiple companies that will allow a user to store a virtually unlimited number of files for a nominal amount of money, or even for free. Online file storage is a “bad” business as there is little value add and it is effectively a commodity. The founders of Box realized that commodity storage could be a race to the bottom, so relatively early on, they began to focus on the enterprise customers (larger companies), and particularly companies in regulated industries. For large companies in regulated industries such as health care or defense, storing information is easy: compliance is the tricky part. Large companies need to control who can access files, and with whom the files can be shared both externally and internally. There needs to be a log of all activity surrounding the file. Who opened it, when and where did they log in from, etc.? There are file retention policies to be enforced. While Google Drive may work for a small business, the compliance needs of an enterprise quickly strain the functionality of Google. Do you want your health records stored on a free Dropbox account your doctor got by sharing the email address of 5 friends? If you run a defense contractor with 150,000 employees, do you want them using a hodge-podge of Dropbox, Google Drive, and OneDrive? Large companies need more robust data storage solutions. They need the ability to share content internally and externally but also to have controls and records of how that sharing occurred. They need the ability to lock files. To gain a sense of the robustness of the Box offering, it is worth perusing this feature comparison datasheet (linked here).

Over the last decade, Box has built a customer base of over 87,000 companies with over 10M users that store their data on Box servers, including 69% of the Fortune 500. Box has integrated with 1,400+ applications so far, including Google Suite, DocuSign, and Slack. The products and integrations allow files stored with Box to be “the source of truth,” which means that while other applications can access files stored on Box, all of the changes are made and kept on the Box version where the security and sharing protocols can be applied. These integrations make it less likely a customer will leave Box, and diminish the chances that a direct or adjacent competitor could create a copycat product.

The robustness of Box’s current product suite and the lack of credible alternatives has led to very low churn rates: retention is 95%. Because of the addition of new products and the sales of additional seats, we can expect the core base of customers (before any new customer adds) to spend more this year than they did last year. In fact, Box’s net dollar retention is running at approximately 108%, so even if no new customers were added, and with some attrition, we would still expect revenue to increase at least 8% before factoring in sales to new customers.

Box has a very sticky product, and a large customer base. There is the potential to further monetize the customer base by selling a lot more product and services to the existing base to take advantage of being the holders of critical data. Box is sprinting at this opportunity. The company is spending over $100M a year on R&D. While meeting the compliance use cases of large enterprises is complex, it does not require this level of R&D spending. Box is aggressively building a robust pipeline of new products for release over the next two years, designed to improve how people work with and share information, the security of information, as well as applying automation and machine learning. Here are a couple of links to provide a sense of the future products and how they take advantage of Box’s unique position and how far Box will be from a simple file storage company.

Box Shield (video linked here) Box Skills (overview video linked here).

Box recently added a new board member, Kimberly Hammonds, and in the press release she said,

“Box’s leadership and vision for cloud content management puts the company in a unique position to power digital transformation and improve the business of every enterprise across the globe. Content and information are at the heart of how we work, and are only becoming more critical as powerful new technologies like AI, machine learning, and automation open up all new opportunities to innovate. Box is just scratching the surface as a transformative partner for their customers and I’m excited to be a part of this next phase of their business.”

I feel the same way.

I have not seen Box written up in any of the traditional venues like SumZero but it was presented by venture capitalist CEO Chamath Palihapitiya at the Ira Sohn conference. He argues that Box is a way for individuals and companies to benefit from the improvements in AI (Artificial Intelligence). Over time, Box customers (who are generally larger and have more types of data spread across more users than customers of other solutions) inevitably will want to apply artificial intelligence to their data. In fact, they will likely want to apply AI solutions from multiple vendors. Box is application agnostic and will be able to integrate with all of the major AI players including Google, IBM, and Amazon. Thus, by storing files on Box, companies will have both the security they need and also the flexibility to work with multiple vendors to access and mine their files in different ways. Typically when I hear a buzz word like AI, a combination of words like vaporware, hype, and short come to mind. In the case of Box, at this point only the expense of creating this functionality has been realized as these integrations have been built and are being tested but have yet to launch. The ability to apply the best AI offerings to data stored on box represents a free call option that could be another barrier to exit that generates revenue and is buzzworthy enough to generate multiple expansion.

Box is missing one characteristic that I value: high insider ownership. Box was started by four college-aged friends with limited personal resources. Their first round of funding came from Mark Cuban. Eventually, as the company pursued developing for and selling into the enterprise market, they raised hundreds of millions of dollars in several rounds of financing. As a net result, the co-founder CEO owns approximately $70M in stock and the co-founder CFO just north of $20M. So while collectively they hold less than 5% of the company, they do have “skin in the game” and are not simply hired hands.

Box operates in a massive market that they refer to as “Cloud Content Management” and size at $45B per year. I think no matter how we define it, it is likely growing and worth multiples of Box’s current revenue. Last year, Box generated operating cash flow while spending roughly two-thirds of revenue on sales and marketing and product development (54% and 20%, respectively). Over time, a company’s value should approximate the rates of return that they can get when they reinvest capital. As discussed before, with a customer base of 87,000 companies, it is easy to see a very high ROI on new product development. I am typically skeptical of sales and marketing spend as it can be a sugar high to drive short-term growth. However, with customer retention rates running in the above 90% and net dollar retention running well above $100, Box is actually probably not spending enough on sales and marketing. There is a slide on page 88 of their investor day deck (link) that shows revenue growth by cohort. It is beautiful. Several different years of customer cohorts have been compounding revenue growth well in excess of 20% per year. Now, marketing effectiveness may deteriorate over time, but the last two years have seen CAGR’s of 24% and 20%, and there is still a largely untapped international opportunity as the U.S. constitutes 76% of revenue.

All of the above paints the picture of a high-quality business with a bright future. Companies like this are rarely optically cheap. We are currently buying shares at just north of 4X next year’s sales, which one could argue is cheap relative to many SaaS peers, (Dropbox and DocuSign have valuations twice as rich) but certainly is not on an absolute basis. I think one of the greatest risk factors here is multiple compression, particularly if growth slows. However, given the product pipeline and sales pipeline, I don’t think the slowdown is imminent. In the long run, Box has the opportunity to continuously improve their business through a virtuous cycle of retaining customers and improving monetization. Product improvements lead to greater value add, which leads to greater utilization, greater lock in, lower churn, and higher revenue per user. Revenue growth and margin expansion are highly probable, with multiple expansion a possibility. No additional capital is required to grow. There is a long runway for growth, and multiple opportunities for additional products to be sold into a large and attractive customer base. Continued revenue growth of 20%+ for the foreseeable future, coupled with operating leverage and a very valuable customer base, create an interesting set-up.


We ended the quarter with limited short exposure. The fund remains short ETFs targeted at short-term traders, a bond fund where the underlying interest rates received relative to the risk assumed do not pass my common-sense test, and two indices as very modest hedges.

Annual Meeting/Annie Duke

In September, we held Greenhaven’s annual meeting in New York City. It is a special night for me, as I get the inperson opportunity to share context on the health and direction of the partnership, enjoy the company of our limited partners, and to say thank you. At the meeting, I spoke about three operating principals that have guided the firm over time. The first was to go slow and recognize that doing nothing is usually the right course of action. The second principal is to only pursue the “Hell Yeahs.” If something does not really excite me, we will leave it to others. The final operating principal is that design matters. How we organize, who we invest with, and how we spend our time are the most critical decisions. The primary filter for all design choices is, “can it help improve returns?” This may sound simple, but it is very different than how most large hedge funds operate.

Also at the meeting, we gave a small set of gifts to the limited partners in attendance that included the book Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts by Annie Duke. Annie Duke has an interesting background, awarded a National Science Foundation Fellowship to study Cognitive Psychology at the University of Pennsylvania. She was also one of the top poker players in the world for two decades, winning over $4M in poker tournaments and a lot more elsewhere. She was also part of a group of players who helped each other improve their decision making. The group was led by a player named Eric Seidel, who has over $38M in tournament winnings.

I think this book is well worth reading as it is a nice summary of probabilistic thinking and how to apply it. At the core, many of our investments are, in my estimation, asymmetric. There is a chance we may lose money, but there is a significant chance at a large profit, providing a positive expected value.

When I say design matters, and who I spend our time with is important, I mean it. Under the umbrella of the Partners Fund, I am going to convene Annie Duke and the portfolio managers of the funds the Partners Funds is invested in. As I wrote in the invitation to the managers,

“I think there is an opportunity to learn from her poker group – their norms, rules for engagement, etc. I think there are lessons that we may apply with each other…. At the end of the day, we are paid to make decisions, and avoiding a couple of bad ones and making a couple of better ones can have a large impact on our collective funds. Adding a couple of frameworks to the toolkit could have long-term benefits.”

The day with Annie Duke will be followed by a day of idea sharing among the managers. I don’t know exactly what will come of these gatherings, but in my experience, good content and good people are a promising formula. While I believe our best chance at generating returns are with an investment committee of one, I am also keenly aware that the best chance of success will not be acting entirely alone. Rather, our best chances for success will be from the combination of the right limited partners, the right managers in the Partners Fund, and the right outside resources. The Annie Duke day will be another stop on that journey.


We have a healthy economy and a portfolio of companies that have the opportunity for revenue growth, margin expansion, and multiple expansion over time. As volatility arises, I will attempt to take advantage of the opportunities it creates. We will continue to invest with a long-time horizon, and we will continue to invest like it is our own money – because it is. Thank you for the opportunity to grow your family capital alongside mine.


Scott Miller

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