Zendesk vs. Box.com: Why Investors Are Split

// Ho Nam - Guest Contributor

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June 11, 2014
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Contrary to what some might think, the two companies are completely different. Both are growing, but Zendesk is on a credible path to profitability and growth.

Shortly after Box.com filed for its IPO last month, Zendesk filed to go public also. TechCrunch concluded that the “Zendesk IPO bears striking similarities to Box,” and I recall wanting to rebut that conclusion but never got around to it. However, the best rebuttal came last week when Zendesk not only became a public company, but its stock price shot up more 83% since its debut on Wall Street, while Box.com remains in limbo.

What happened? Aren’t these very similar companies? Both are fast growing, VC backed Software as a Service (SaaS) companies. However, these companies are very different and a recent change in investor sentiment helps explain why investors overwhelmingly favor one company more than the other.

Not long ago, investors valued growth over any other metric. On growth alone, Box.com looks fantastic–-one of the best SaaS companies of all time. However, investors are suddenly more interested in growth efficiency–-that is, a credible path to profitability and growth.

Zendesk is on a great (i.e. capital efficient) growth path and compares favorably against some of the best SaaS companies of all time when judged against a key industry metric called the Magic Number, which factors how much revenue growth is generated in a particular period per unit of sales and marketing spend in the prior period. In contrast, Box.com’s Magic Number ranks far below average.

The graph below shows the Magic Numbers of 16 top SaaS companies around the time their businesses reached $100 million in revenue. The blue bars represent the “annual Magic Number” (AMN), or the Magic Number for the year in which the company reached $100 million in revenue (left axis). The orange line represents the revenue in that year (right axis).

What stands out is that Box.com’s AMN 1 of 0.66 is 34% below the median of the 16 companies shown in the graph above, while Zendesk’s AMN of 1.49 is higher than most including Salesforce.com (CRM) in 2004. The bottom line is when comparing AMNs, Zendesk is 2.3 times better than Box.com. That, along with a subtle but important change in investor preferences helps explain the diverging paths of these two companies.

The original version of this post was published on Fortune.com on May 19, 2014.

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