Companies that sell software as a service enjoy some of the raciest valuations among the technology sector’s growth stocks. Forget profits measured on a conventional basis: even Salesforce.com, the sector leader that is now more than 15 years old and worth nearly $40bn, is still in the red.
Investors are quite happy to see sales and marketing costs eat up half or more of revenues as long as they believe that, one day, profits will flow. The rest of this new industry owes Salesforce.com boss Marc Benioff a vote of thanks for the years he spent persuading Wall Street to forget the losses and instead learn to love the long-term customer relationships he was buying. But what happens when the music stops?
A reminder of the predicament that lies ahead for many of the so-called SaaS (software as a service) companies comes with the planned initial public offering next week for Box.