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Box raises $150 million but can it overcome the Snowden effect?

Online storage provider Box last week raised another $150 million from two investment firms, pushing the total amount of its funding to $564 million as it prepares to go public.

While it can be seen as a good sign for the vendor that it can raise that much money in one round, you also have to wonder about the long-term viability of a company that has gone over $500 million in funding and has yet to break even.

The Los Altos, California-based company also got a vote of support from research firm Gartner, which named Box a leader in the enterprise file synchronization and sharing market along with Citrix, EMC and Accellion. It’s definitely a milestone for a company to rise to the top in a crowded market that initially purported to have more than 50 startups.

Box, however, remains unprofitable with a reported $168 million loss for the past year. It has an expensive business model, with a high burn rate as it tries to convert users who are lured into the service with free storage to paying customers.

Box also has to mature beyond basic  sync-and-share , which appears to be turning into a feature more than a full-blown product as companies integrate the technology into other cloud products. Box has opportunities in integrating their technology with other enterprise applications, such as

“The basic sync-and-share is a feature,” said Terri McClure, senior analyst at Enterprise Strategy Group. “[Box’s] advanced collaboration and data management is starting to become more compelling. They have a rich API set that allows integration into enterprise applications. They certainly are one of the market leaders in terms of functionality. Dropbox has an API strategy but it’s not as far along.”

McClure said that although Box faces the tough and expensive challenge of converting free users into paying customers, the company is making strong gains in that area. Seven percent of its 25 million users are now paying customers, translating to 1.75 million users. It also has 34,000 companies paying for accounts.

“It’s likely that a good number of those 1.75 million users are corporate users,” McClure said. “When (you are) seeing losses of $168 million against revenue of $124 million, it is easy to point fingers and call it questionable. But can this model work? Yes, over time and with the right investments.”

She said Box needs to build some on-premise functionality into its product to move into the enterprise and will have to make heavy investments in security. McClure said the company needs a European data center.

“Today, Box stores all customer data and files in the United States,” McClure wrote in a research brief. “Box did not report a geographic revenue breakout in the S1 but given the geopolitical and regulatory environment, companies outside the U.S. are hesitant to begin or are prohibited from storing data in the U.S. Cisco and IBM have discussed the fact that security concerns (specific to NSA spying) are inhibiting international sales of hardware. So you can say it’s impacting cloud SaaS and storage.”

Cloud companies also are dealing with what McClure calls the “Snowden effect.” Users are concerned that if a cloud provider holds their data and the encryption keys, then the data can be turned over to the federal government if it is subpoenaed.

“Concerns would be mitigated if Box offers users a method of holding and managing their own key,” McClure said.

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