Season 2, Episode 5: The Dropbox IPO

In this episode of Acquired, hosts Ben Gilbert and David Rosenthal, along with guest C, dissect the journey of Dropbox from its inception to its recent IPO. They explore the company's early viral growth, fueled by a simple yet powerful product—a folder that syncs files across devices—leading to significant cash flow and minimal dilution across funding rounds. Despite a period of strategic drift where Dropbox ventured into various markets without clear success, the company refocused on its core offering, resulting in a return to strong cash flow generation. The IPO itself, initially seen as a potential down round from the last private valuation, turned out to be a triumph, with shares popping 40% on the first day of trading. The hosts debate Dropbox's future, considering its move from file-syncing to broader team collaboration, and the skepticism around its ability to penetrate larger enterprise markets. They also touch on the importance of liquidity for investors and employees, and the unique position of Dropbox as a B2B company with consumer-like growth, ultimately grading the IPO positively.

• Company raised $350 million at a $10 billion post-money valuation.
• Sold only 3% of the company, indicating a high valuation for a small equity percentage.

"And then they raised 350 at a $10 billion post money. So they sold 3% of the company."

• This quote highlights the fundraising round's details, emphasizing the large valuation and the small portion of equity sold.

• Introduction of the hosts, Ben Gilbert and David Rosenthal.
• The podcast "Acquired" focuses on technology acquisitions and IPOs.
• Episode timing coincides with Dropbox's IPO.

"I'm Ben Gilbert." "I'm David Rosenthal, and we are your hosts."

• These quotes introduce the hosts of the podcast.

• Discussion on the potential for a wave of unicorn IPOs following Dropbox's IPO.
• Speculation on whether there will be a "stampede" or a more gradual procession of tech IPOs.

"Is the window open? Are we about to see a whole bunch of these? Are we about to see the stampede of unicorns?"

• This quote reflects the curiosity and speculation about the IPO market's opening for tech unicorns following Dropbox's IPO.

• The hosts prefer to analyze acquisitions and IPOs after some time has passed.
• Current events sometimes necessitate immediate discussion due to compelling company narratives.
• The episode focuses on Dropbox's recent IPO and its success.

"But sometimes the current narratives and the story is so juicy and there's such a good backstory to the company and a narrative to talk about how they got where they got where we just got to do it."

• This quote explains why the hosts are discussing Dropbox's IPO in real-time, despite their usual format of retrospective analysis.

• The podcast encourages listener engagement via their Slack channel and email updates.
• They request listener reviews on Apple Podcasts to help others find the show.

"And if you have listened to the show and you're thinking, hey, I like this, how can I help these guys out? Would love to contribute to the show in some way."

• This quote is a call to action for listeners to support and engage with the podcast.

• Statsig is highlighted as a successful Series B startup.
• The company's impressive metrics include experiments shipped to over 1.2 billion end users and 130 billion events processed per day.
• Statsig has high-profile AI company clients and has evolved into a full-fledged product understanding platform.

"In the past month, Statsig shipped actual live product experiments to over 1.2 billion end users." "Stats now processes about 130 billion events per day."

• These quotes emphasize Statsig's growth and the scale of their operations, which is part of an advertisement segment.

• The history of Dropbox is intertwined with Y Combinator (YC).
• YC played a significant role in the early development and funding of Dropbox.
• Drew Houston's inspiration for Dropbox came from a personal need for file synchronization.

"To really, truly do justice to the history of Dropbox, you kind of also have to talk about the history of another organization that sort of, surprisingly, we haven't talked that much yet about on this show, but it's pretty important."

• This quote introduces the significance of Y Combinator in the context of Dropbox's history.

• Drew Houston was inspired by his fraternity brother's success to apply to Y Combinator.
• Houston initially applied with a SAT prep company, which was rejected.
• The idea for Dropbox emerged from a personal frustration with file access during a bus trip.

"Drew is undeterred. He knows he wants to start a startup. He wants to pursue the dream that he saw his little fraternity brother go through."

• This quote captures Drew Houston's determination to start a successful company and his inspiration drawn from his fraternity brother's success.

• Drew Houston met his co-founder Arash Ferdowsi through a mutual acquaintance.
• Despite a brief meeting, they decided to partner and drop out of school to work on Dropbox.
• The name "Dropbox" replaced the original name "Evenflo" before applying to Y Combinator.

"He starts scrambling. He's like, alright, I need a co-founder."

• This quote describes Drew Houston's urgent search for a co-founder, leading to his partnership with Arash Ferdowsi.

• Dropbox had an MVP prototype that is essentially unchanged in today's product.
• Features included file images, checkmarks for synced files, circular arrows for syncing, and low-level operating system hooks.
• The core product functionality was established early and has remained consistent.

"Within weeks, everything that Dropbox is today and still the core of the product is there."

• This quote emphasizes that the fundamental aspects of Dropbox's product were developed quickly and have remained stable over time.

• Dropbox used pop culture memes in their marketing video to engage viewers.
• The video was posted on Hacker News, Reddit, and Digg, leading to viral spread and the creation of a waitlist for early users.
• The video effectively demonstrated product use and desirability.

"They decide that they're going to throw in some, like, allusions to popular culture memes in the video."

• This quote indicates that Dropbox's marketing strategy included using pop culture references to make their video more engaging and relatable.

• Ben Thompson's concept of 'product usage fit' was exemplified by Dropbox's clear and understandable video.
• The simplicity of putting files in a folder to sync was a feature used by the podcast hosts themselves.
• Dropbox's ease of use and reliability were key to its widespread adoption.

"Such a clear, clear video. You look at this and there's definitely product usage fit."

• This quote highlights the clarity and effectiveness of Dropbox's video in communicating the product's usefulness and ease of use.

• Early critiques on Hacker News included doubts about the product's market, the ability to replicate functionality with FTP and SVN, and the potential to generate income.
• Sam Altman referenced these criticisms in a tweet, emphasizing the importance of perseverance for founders.
• Drew Houston, Dropbox's CEO, engaged with critics constructively, leading to a positive resolution.

"I have a few qualms with this app and the first one is about being a Linux user."

• This quote exemplifies the initial skepticism some users had about Dropbox's utility and market potential.

• Dropbox faced competition from other companies like Mozy, Carbonite, Sugarsync, and Box.
• Speculation about Google developing a similar product, the 'G Drive,' created uncertainty.
• Despite competition, Dropbox's user experience was superior, and it remained unaffected by changes in Google's sync client.

"There's Mozy, there's carbonite, there's, I don't know, Sugarsync."

• This quote lists some of Dropbox's competitors, highlighting the crowded market in which Dropbox operated.

• Dropbox's referral system was a key part of its viral marketing, offering more free storage for each user referred.
• The majority of Dropbox users are non-paying, but the freemium model still led to significant profits.
• Dropbox's lean operations and engineering focus contributed to its success.

"This works so hard on me. I was a referral maniac to get more space."

• This quote reflects the effectiveness of Dropbox's referral program in motivating users to spread the word and expand the user base.

• Dropbox was accepted into Y Combinator and later moved to San Francisco to raise funding.
• Sequoia Capital, led by Samir Gandhi, invested in Dropbox's seed round.
• Sequoia and Accel became significant VC shareholders after subsequent funding rounds.

"Sequoia had invested in a few other YC companies in the past, most notably looped."

• This quote discusses Sequoia Capital's history with Y Combinator and its investment in Dropbox, highlighting the venture firm's role in Dropbox's early funding.

• Dropbox's expansion into various markets, such as photo sharing and email clients, was seen as a deviation from its core product.
• Despite generating cash flow, Dropbox's direction during 2013-2016 was unclear and led to some strategic errors.
• The company attempted to become a platform for all computing storage, which was not well-received.

"They build and launch the Dropbox platform."

• This quote describes Dropbox's attempt to expand beyond file syncing into a broader platform, which was a strategic misstep.

• Despite strategic errors, Dropbox remained cash flow positive and continued to grow.
• The company's simple and reliable core product allowed it to maintain a strong market position.
• Dropbox's fundraising and lean operations minimized dilution for founders and early investors.

"All throughout this, Dropbox is just raking in cash."

• This quote conveys the financial success of Dropbox, even during periods of strategic uncertainty, due to its strong core product and business model.

• Discusses the challenge of competing against platform providers at the developer level.
• Highlights the difficulty of being a better voice assistant or similar tool when not integrated as a core feature (like the iOS home button).
• Dropbox's success is attributed to finding a unique niche where they could compete effectively.

"And really in most cases, if you look at anybody that's trying to be a better voice assistant, you lose, unless you're the home button."

• This quote emphasizes the competitive advantage of being a built-in feature on a platform, something third-party developers struggle to match.

• Reflects on Dropbox losing sight of its original brilliance: solving a real problem and just working.
• Critiques Dropbox's attempts from 2013 to 2016 to expand into areas that were perhaps unnecessary or not well-executed.
• Compares the simplicity and effectiveness of Dropbox's original product to the complexity and confusion of additional features like Dropbox Carousel.

"I think it's that they just kind of lost sight of what it was that was so brilliant about Dropbox in the first place, which was two things. One, they solved a real problem that a lot of people had, and two, they made it just work."

• This quote summarizes the core strengths of Dropbox's early success and implies that they veered away from this simplicity.

• Discusses the influence of Andy Grove's book "Only the Paranoid Survive" on Dropbox's strategic shifts.
• Describes the transition of Intel from memory to CPU business as a bold move that Dropbox emulated by refocusing on core offerings.
• Explains the concept of "wartime" and "peacetime" in business, with Dropbox entering wartime and needing to focus on doing one thing right.

"And in this book, Andy talks about when intel got out of the memory business and into the cpu business and basically completely shifted the company."

• This quote highlights the importance of strategic pivots in business, using Intel as a historical example.

• Describes Dropbox's decision to cut various product lines and refocus on their core customer base in 2016.
• Details the financial turnaround, with Dropbox becoming cash flow positive again after a period of being cash flow negative.
• Highlights the significant investment and operational shift in moving away from AWS to build their own data centers, reducing costs and increasing efficiency.

"They cut all this stuff. They kill mailbox, they kill Carousel, they kill the developer platform. They way scale back the enterprise aspect of Dropbox for business, and they refocus on the core customer base."

• This quote explains Dropbox's strategic decision to eliminate non-core products and services to streamline their operations and focus on their primary market.

• Discusses the venture investing perspective on Dropbox's growth and market fit.
• Compares early investment rounds based on strong data and signals to later rounds that were more speculative about Dropbox's future.
• Reflects on the IPO and the clarity it provides about Dropbox's market, particularly in collaborative file sharing for SMBs.

"When Sequoia led the seed round and then did the inside round for the a, they were investing on the promise of the future, but there was very strong data and signal that the market was there, that the market fit was the product market fit was there, that there was a ton of growth ahead of the company."

• This quote discusses the rationale behind early investments in Dropbox, which were based on solid evidence of market demand and growth potential.

• Details Dropbox's IPO pricing strategy and the initial undervaluation compared to private rounds.
• Mentions the first-day trading success, with a share price pop that exceeded expectations and previous valuations.
• Addresses the importance of considering both non-diluted and fully diluted market caps when evaluating a company's public market valuation.

"Then, when they finally finish trading yesterday on their first day of trading, they end at $28.48 a share, which, no matter how you count it, is above the $10 billion watermark."

• This quote captures the successful outcome of Dropbox's IPO day, with share prices closing above the anticipated value.

• Discusses the returns achieved by Y Combinator and Sequoia Capital from their investments in Dropbox.
• Sequoia's significant ownership stake and the dilution effect across funding rounds are analyzed.
• Y Combinator's strategy of selling shares during the Series B round and the remaining stake valuation at IPO are evaluated.

"Sequoia owns about 23% ish of the company and they finished trading at roughly a $12 billion valuation. So what's going to make about a 2.5 billion on the. On the ipo?"

• This quote outlines the substantial financial gain Sequoia Capital made from Dropbox's IPO, highlighting the long-term value of early-stage investments.

• Identifies a segment of the transcript as an advertisement for Vanta, a trust management platform.
• The ad describes Vanta's services and offers a promotional deal for acquired listeners.

(The advertisement content is not included in the study notes as per the user's instructions.)

• Explores the narratives surrounding Dropbox's positioning and market opportunity.
• Discusses the skepticism regarding Dropbox's erratic history and challenges in targeting larger businesses.
• Analyzes the company's rebranding efforts and the introduction of Dropbox paper as a potential pivot to broader team collaboration.

"Dropbox went from it's a folder that you put stuff in that syncs to looking at the first page of their s one now with these crazy graphics and completely new brand as of just a few months ago, is unleash the world's creative energy by designing a more enlightened way of working."

• This quote captures the transformation in Dropbox's messaging from a simple file-syncing service to a platform aiming to revolutionize the way work is done, which is met with both interest and skepticism.

• The speaker discusses the unique position of Dropbox as a B2B company resembling consumer businesses.
• Dropbox's comparison to Skype if it had been taken public.
• The dual nature of Dropbox as a consumer business (like Spotify, Netflix) with low conversion rates to paid, and an SMB-type company (like HubSpot).

"So he says there's never been a B2B company that looks like this, which is partially because consumerization of the enterprise is brand new. I think that it's more like Skype, if Skype had been taken public. And there's probably two comps within the structure of Dropbox."

• The quote highlights the novelty of Dropbox's business model, blending consumer and enterprise elements, and suggests comparable companies for analysis.

• The S-1 filing of Dropbox is criticized for being confusing and lacking in data, particularly monthly active users.
• The deletion of 100 million inactive accounts and the reliance on signups as a metric are points of concern.
• The difficulty in calculating the cost of customer acquisition due to the way Dropbox categorizes infrastructure costs.

"There's three other sort of, I won't say skeptical, but narratives that the company wouldn't put forth that Ben Thompson called out this week either on exponent or when the S-1 came out he did in the Stratechery daily update."

• This quote introduces skepticism about the way Dropbox presents its data and growth, as highlighted by industry analyst Ben Thompson.

• The nature of Dropbox's product, which integrates into the operating system, challenges the traditional metric of active users.
• The suggestion that storage quota usage and the conversion rate from free to paid are better metrics for Dropbox's success.
• The importance of understanding Dropbox's customer acquisition costs and the implications on the company's valuation.

"I think two better metrics would be one, some way to capture percentage of storage quota that users are using. Because as you get higher up towards the top, you're going to become more likely to convert to paid."

• The quote proposes alternative metrics to gauge Dropbox's performance and potential for converting users to paid plans.

• Discussion of Dropbox's financial losses over the years and its trajectory toward profitability.
• The company's successful IPO and the positive trend in free cash flow and potential for income positivity.
• The comparison of Dropbox's IPO to other tech companies that went public while close to profitability.

"In 2015, they lost 330 million. In 2016, they lost 210 million. Last year they lost 111 million. And they're well on track this year, maybe next year, to cross that finish line and become a true profitable company, an income positive."

• This quote outlines Dropbox's financial improvements over the years, indicating its approach to profitability.

• The speakers discuss Dropbox's IPO and the need for liquidity for both investors and employees.
• The potential for staying private versus the benefits of going public, including employee compensation and the ability to pay rent in expensive areas like San Francisco.

"I think in this case, they had to go public because even though they were very efficient with their fundraising, both investors and then also, but even more so, employees need liquidity."

• The quote explains the strategic decision for Dropbox to go public, emphasizing the necessity for providing liquidity to stakeholders.

• The trend of "bring your own software as a service" (SaaS) and Dropbox's role as a pioneer in the model.
• The shift from selling to CIOs to user adoption and credit card purchases in B2B companies.
• The concept of "round skipping" in venture fundraising and the importance of minimizing dilution.
• The balance between leveraging AWS for quick market access and eventually moving off it due to scale.
• Y Combinator's mantra of solving real problems and Dropbox's focus on creating a seamless product.
• The challenge for successful organizations to avoid expanding beyond their core competencies.

"One of my tech themes is definitely, we saw this bring your own device thing that the iPhone started and then Dropbox is really the first example, and maybe Skype, but let's call it Dropbox of bring your own software as a service."

• The quote identifies Dropbox as an early example of the BYOD and BYOSaaS trends, reflecting the evolving sales model in enterprise software.

• Discussion about the founder of Dropbox owning 25% at IPO and whether consumer company growth metrics contributed to this.
• The relationship between explosive growth, monetization, and minimizing dilution.
• The cash flow dynamics of Dropbox and Atlassian as examples of companies that could fund growth from operations, influencing fundraising terms.

"Do you think it's the right way to think about it, that his ownership percentage at IPO is because their growth model looked consumer?"

• This quote raises the question of whether the consumer-like growth model of Dropbox allowed the founder to retain significant equity.