Egnyte Barges Into Crowded Corporate Cloud Business

Large companies enjoy a plethora of choices when they want to let employees share and collaborate on day-to-day files.

There’s Box, which as everyone knows has been on its way to an IPO since March. There’s also Dropbox, which has in recent months sought to parlay its success among consumers into a solid business in the workplace. Then there’s the office-oriented services like Google Drive and Microsoft’s Office 365.

The presence of those four alone — and indeed there are several more — might scare off anyone seeking to take them on. So what is it about Vineet Jain, the CEO of Egnyte, that makes him think he can do it?

Ask him, as I did recently over dinner at a vegetarian restaurant in New York, and he’s quick to rattle off Egnyte’s marketing slogan: “The cloud is not enough.” Talk long enough and he’ll repeat it several times, because it crystalizes in five words how the comparably tiny Egnyte aims to compete against bigger and better-funded rivals like Box and Dropbox.

Egnyte’s most direct competitor is Box. They go after the same customers, businesses large and small, and, on paper, offer a lot of the same features: Online file storage, sharing, collaboration and access from tablets and phones.

But here’s the difference: Where Box relies entirely on the cloud, asking its customers to trust it with their information, Egnyte offers the same features with additional storage hardware that companies can operate in their own offices. The extra hardware addresses the biggest and most fundamental problem that companies have with adoption of the cloud: They worry about letting their most sensitive files leave their direct control where wily hackers might get at it. Or they’re in heavily regulated industries or regions where they’re legally required to store certain data locally.

The result is a hybrid offering that Jain says is starting to resonate with customers who need the added flexibility. “There is absolutely a corporate mandate in many industries to adopt the cloud,” Jain said. “There’s so many advantages. But when you talk to the legal department or the financial department, they’re the ones who can’t go all-cloud. … At many companies, the cloud-only play only goes so far.”

The combined approach is working for Egnyte. So far it has landed 1.1 million users at 40,000 companies and is well on its way to turning a profit as early as the end of this year.

Still, its reach is small compared to Box, which according to its S1 filing with the U.S. Securities and Exchange Commission had a combined 25 million end users at 225,000 companies.

But consider that of Box’s total users, only seven percent — fewer than 2 million at 34,000 companies — are paying for it.

Box has the added weight of carrying 23 million free users, all of whom might one day convert to paying customers, but that nevertheless incur a sizable cost. In 2013, marketing costs at Box — which included the cost of those freebie accounts — totaled $171 million; though Box had $124 million in sales last year, spent $1.38 for every dollar it brought in.

Free riders are a problem Egnyte doesn’t have. Its free trial lasts only two weeks, meaning nearly 100 percent of its user base is paying. The company is on track to hit $50 million in revenue this year.

One reason is that bigger customers have been signing on. Recent additions include the Nasdaq stock exchange and retailers Home Depot, Ikea and the luxury fashion brand Coach. Bigger companies pay a higher rate, and that is driving up Egnyte’s average revenue per user. Customers signed this year are paying an annual average $64 per user, up from an average of $43 last year.

For Jain, it adds up to a bragging point that his counterpart at Box, CEO Aaron Levie, doesn’t have. Box is clear in its filing that it’s unlikely to make a profit for the foreseeable future. If current trends hold, Egnyte will be profitable no later than the first quarter of 2015, Jain says, and perhaps as soon as the fourth quarter of this year.

One reason why it will hit profitability faster is Egnyte’s hybrid cloud-plus customers connect it a host of other customers. Egnyte’s software runs on storage hardware from Netgear, Synology and NetApp, three companies with powerful, well-established sales relationships with other companies mulling their own move to the cloud.

The approach is a win for both parties, Jain says. “For a customer who’s invested a lot in storage equipment they already have, they get more use out of it, but when they sign on with us they also get to expand into the cloud,” Jain said. “At the same time the vendor, whether it’s NetApp or one of the others, gets to preserve its core business, which is selling storage boxes.”

More channel partners are coming later this year, he says. By the end of this year, he wants 70 percent of his sales to come from channel partners, and 30 percent from his own internal sales force, which should keep headcount, now about 300, relatively low. By comparison, at Box, Levie predicts maybe 30 percent of his revenue coming from channel sales within the next year to 18 months. Box employed a total of 972 as of Jan. 31, and Levie complained in an interview with Re/code that he couldn’t grow his internal sales force fast enough.

Channel sales are cheaper because they carry lower commission costs and require smaller internal sales teams. They’re also a huge driver of sales in the IT industry generally. At computing giant Hewlett-Packard, for example, channel sales have historically accounted for 70 percent of revenue.

Egnyte is smaller than Box in other ways. Since its founding in 2007 it has raised $62.5 million from investors including Kleiner Perkins, Google Ventures and Polaris Partners. The hard drive manufacturer Seagate and the telecom company CenturyLink made strategic investments last year. Box has raised a combined $414 million from a who’s-who panel of venture capital and private equity players, with at least three funding rounds bigger than that.

Despite all the effort he makes competing against it, Jain says he hopes Box carries off a successful IPO. “I sincerely want them to be successful with it,” he said. “It would prove that you can do well in this business.”

Jain hopes to take Egnyte public too, but says it’s unlikely before late 2015 or early 2016. “I want to build a big company,” he said. “I don’t wake up thinking about who I want to sell to. Being public is definitely an aspiration.”

This article originally appeared on Recode.net.