Acquired - Season 2, Episode 5: The Dropbox IPO

Episode Date: March 26, 2018

Acquired is live on the scene following Dropbox’s public market debut. From playing a central role in the early days of Y Combinator, to having Steve Jobs famously label the company a “feature not a product”, to pivoting from consumers to enterprise to developers and back again, the silicon valley history runs deep with this one. What twists and turns lie ahead for Dropbox as a public company? We speculate!Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!Links: Dropbox’s Y Combinator applicationOriginal Dropbox demo videoCarve Outs:Ben:  Raytracing comes to DirectXDavid: Lazy Game Reviews

It's roughly the same. And then they raised 350 at a $10 billion post money. So they sold 3% of the company. That's crazy. Welcome to episode two, season five of acquired the podcast about technology acquisitions and IPOs. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. We are coming at you 24 hours after the trading began for the initial public offering of Dropbox. David, what do you think? It was a big day here in San Francisco yesterday. Is the window open? Are we about to see a whole bunch of these? Are we about to see the stampede of unicorns? I wish.

I think we're... Well, I think the window's open. I don't think it's going to be a stampede, but maybe it'll be a slow procession, which would be a good thing for everybody. Listeners, as you know, on the show, we generally like to do most of our episodes taking a good amount of time since either the acquisition or the IPO happens so we can analyze, was it a good decision for an IPO? Was it a good

idea to hit the public markets and raise that money? And what did they end up doing with it? Or with an acquisition, what did the acquirer end up doing with the acquiree? 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. And so we are, you know, we're here in real time after Dropbox IPO and did one day of very successful trading to talk about Dropbox, the company. Yeah. So if you're new to the show, you can check out our Slack at Acquire.fm. It's easy to either join the Slack there or get email updates

about when we have new episodes. 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. We've got a great, great answer for you. You can review us on Apple Podcasts. So if you open up the podcast app, you can review us from there. And we appreciate any time you could take to leave a nice note that'll help other people find the show. Okay, listeners, now is a great time to tell you about longtime friend of the show, ServiceNow. Yes, as you know, ServiceNow is the AI platform for business transformation, and they have some new news to share. ServiceNow is introducing AI agents. So only the ServiceNow platform puts AI agents to work across every corner of your business. Yep. And as you know,

from listening to us all year, ServiceNow is pretty remarkable about embracing the latest AI developments and building them into products for their customers. AI agents are the next phase of this. So what are AI agents? AI agents can think, learn, solve problems, and make decisions autonomously. They work on behalf of your teams, elevating their productivity and potential. And while you get incredible productivity enhancements, you also get to stay in full control. Yep. With ServiceNow, AI agents proactively solve challenges from IT to HR, customer service, software development, you name it. These agents collaborate, they learn from each other, and they continuously improve, handling the busy work across your business so that your

teams can actually focus on what truly matters. Ultimately, ServiceNow and Agentic AI is the way to deploy AI across every corner of your enterprise. They boost productivity for employees, enrich customer experiences, and make work better for everyone. Yep. So learn how you can put AI agents to work for your people by clicking the link in the show notes or going to servicenow.com slash AI dash agents. Well, David, there's no shortage of fun history on the founding of Dropbox and how the whole thing came together. You ready to dig in? I am for sure ready to dig in. It's funny. I was thinking leading up to this, we recorded our last episode on SoftBank and Fortress and the Vision Fund exactly a week ago, right? Or maybe, or was it Sunday? Was it less than a week ago?

A little less than a week. A little less than a week ago. And I thought, you know, Dropbox, like, it's a pretty straightforward story. So, you know, of course, we do lots of research here. And, you know, it's the hallmark of the show. We love doing it this is what we love but i'm like okay this is great because we don't have a lot of time for this episode you know i'll be able to knock this out pretty quickly well per usual uh proved wrong

once again there is a lot to this story nothing is ever straightforward right like every formation of every company and every growth and every fundraise and every it's always messy like there's no there what there's some phrase there there is no deal, deal without a little bit of hair. Like there is no company without a, you know, tumultuous and twisty and often thrilling backstory. Yeah. And their own, you know, each company has its own unique history.

And, you know, I think that's what makes, makes this show so fun to do. And so with that, should we dive in? Let's do it. All right. Well, 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. I'm sure most of our listeners are familiar with it, and that is Y Combinator, the seed fund slash incubator that was started in 2005. And really,

the history of Dropbox and the history of Y Combinator, or YC as it's known these days, pretty intertwined. So let's start with YC. So back in the really early days, I think a lot of people know about Paul Graham, who is one of the founders of Y Combinator. He goes by PG. He's very prolific, writes lots of essays. He's sort of like... Decent Lisp programmer. Decent Lisp programmer, right. So back in 2005, Paul was, PG, was living in Cambridge, Massachusetts, not Cambridge, England, although he is English by birth. And actually today he and Jessica live in England, back in their, his native country. So it's 2005. He starts YC with Jessica Livingston, who then was his girlfriend and now is his wife and two other

folks, Trevor Blackwell, and Robert Morris. And so who are these people? Well, it turns out so Paul had been the founder of a company back in the dot-com days called ViaWeb. And ViaWeb was sort of like, I don't know, it was like an early Shopify. You know, it was like a... Yeah, it was the way to sell things on the internet. Yeah, exactly. It was like a commerce software solution for selling things online. And one of the first.

And they ended up... So I think that was the mid-eties when, when he started that, uh, and his co-founder was, uh, was Robert, Robert Morris. And so they started it in Boston and, um, ends up getting acquired by Yahoo in 1998 for about $50 million. And, and then Trevor, Trevor Blackwell had worked for them at via web. And so when, when Yahoo acquired the company, Trevor moves out to Silicon Valley, goes to work for Yahoo, Robert, well, PG bounces around a bunch. Robert is actually a professor at MIT professor of computer science. Um, in addition to being, you know, co-founder of multiple companies, uh, he stays in Cambridge. Uh, Paul eventually comes

back to Cambridge. He's living in Cambridge and, uh, he starts, he starts dating Jessica and Jessica is working in marketing at an investment bank in Boston. And, uh, she's not super happy with banking. I know how that goes, uh, and the culture there. And so she, she starts interviewing at VC firms about coming on and being, uh, one VC firm in particular about being the director of marketing, uh, at the VC firm. being, uh, or one VC firm in particular about being the director of marketing, uh, at the VC firm. And, uh, and one night Paul and Jessica are out at dinner and, um, you know, they're talking about Jessica's, uh, you know, interview process, uh, and the VC firm in typical VC firm fashion is like taking forever to get back to her, totally dragging their feet. The process is super opaque. And, uh, uh, one thing about PG that, uh, anybody who, um, you know, certainly

has read any of his essays or knows of his reputation, he's, uh, he's kind of nothing, if not opinionated, uh, so they're walking back from dinner and he just like goes off on VC firms, uh, in general and their practices and how they operate. Remember, this is 2005. So like the concept of quote unquote founder friendly is still years away at this point on the on the VC side. And he says, you know what? Screw it. Let's start our own VC firm. And he's been thinking about this for a while. He's ever since he writes about this, ever since the via web exit years before, he'd been thinking about getting into angel investing, he never really had, and he didn't know why. And this seemed like a good catalyst. And so he's like, we'll start our own VC firm and you can work for work for that. Don't go work for these guys. Uh, so the next day he calls up, he calls

up Robert, uh, who's still a professor at MIT, uh, and Trevor. And I believe Trevor, I don't know if he was back in Boston at this point, or if he was still out in Silicon Valley, um, and says, Hey, you know, I wanted, I had this, Jessica and I have this idea. We want to do this. Um, and concurrently with this, he had just given a talk at Harvard. So Paul has his PhD in computer science from Harvard. He'd gone back to Harvard and he'd given a talk at the Harvard Computer Society entitled How to Start a Startup. And he had talked to all these undergrads about like, you know, his experience, his journey starting a company and what it's like. And this is, you know, Facebook's like a year old, I think, at this point. And they probably they probably just moved from Boston out to out to Silicon Valley that summer.

Yeah. And if you think about sort of the hype train of startups since then, this is like, it's right before the wave crested. Like Facebook is taking off, but the American dream sort of of the high school college student is not drop out and start a startup yet, despite the fact that there have been some sort of, well, I guess there's still scars from the dot-com bust and it doesn't yet feel like you are likely to be successful if you drop out and start a startup. So it's still a thing that you're sort of convincing people to do with you as if you're a total nut job if you're doing this. Totally. And I was in college right at this time, like as this was all happening down at Princeton

in New Jersey, instead of up in Harvard, maybe my life would have been different if I'd been up in Cambridge. But yeah, like, you know, even, you know, Google had just gone public and everybody was like, Google, it's some crazy startup. You know, Eric Schmidt was a Princeton alum, he was CEO, so it was like known,

but it was like, it wasn't something people went and did. Even people in CS departments, you know, they all wanted to go work in finance. Um, and, uh, so, so Paul has this idea. He says, you know, I want to get an angel investing. Jessica and I are going to start our own VC firm. Um, but what we're going to do is we're going to start by, uh, the way we're going to get our first deal flow is we're going to run a summer program this summer. Uh, so this is in the spring of 2005 when they have the idea, we're going to get our first deal flow is we're going to run a summer program this summer. So this is in the spring of 2005 when they have the idea. We're going to run a summer program for all these undergrads. I just gave this talk at Harvard and we're going to

bring them in. We're going to have them start companies over the summer. It'll be summer projects for them. Probably most of them will go nowhere. And then that's how we'll get into it. Maybe some of these companies will turn into something. So Paul and Jessica put in a hundred thousand dollars and Robert and Trevor each put in $50,000. So they have $200,000 and that's what they start Y Combinator with. So, and at this point it is just marketed and called the summer founders program. There's no, no Y Combinator yet.

And no Y Combinator yet. They eventually, I actually don't know when they do but it was fairly early on they changed the name to Y Combinator which is a a math term for a function that generates other functions I guess it was I don't know if it was during the program or that they kind of realized that like oh no this is going to be the long-term thing it's not like we're not going to bootstrap an angel firm by funding, you know, kids in, in college. Like this is the thing we're going to help start these companies. So, uh, so they do the first batch that summer and then they decide it works so well. The companies are, are, you know, so impressive coming out of it more than they thought that they're going to keep it going year

round and they're going to alternate do winter programs in california uh out in mountain view uh where trevor was i think the first mountain view office was actually in like trevor's office uh on mountain view so he had separately uh i forgot to mention this he had started after via web a company called um called uh any bots which is the the company that makes those telepresence video conferencing robots, you know, like the screen on the wheels that's in Silicon Valley episodes and stuff. Oh, yeah. Yeah. So I think the initial YC office was in their office out in Mountain View.

So they come out, that's early winter 2006. They do the winter batch in Mountain View. So they come out, that's early winter 2006. They do the winter batch in Mountain View. And then they come back to Boston the next summer of 2006 for their third batch. And a company, a fateful company, applies to them from MIT in that third batch in the summer of 06. And it was an engineer from MIT who left school early to come start this company, but it was not Drew Halston. We're getting to that in a minute. It was Adam one year later, one year later. Yes. It was Adam Smith. And he had an idea for a company that we've, we've actually talked about in the past on this show to sort of like bring social elements and

personal information to email inboxes, starting with Outlook. And he started a company called Zobny, which is inbox backwards and applies to YC with it, ends up getting in. And then immediately after the program, he moves out to San Francisco, raises a bunch of money, and they're kind of like the new hot startup. And so what does all this have to do with Dropbox? So it turns out that Adam was the, in the same fraternity and actually the little brother of Drew Halston at MIT. And so Drew is back at MIT. He sees all this and he's like, man, my little brother in my fraternity just raised 5 million bucks out in California. I got to get in on this. I need to start a company. He's super inspired. You know, he sees Adam's kind of path through YC, uh, says he has to do it too. Well, it turns out that Drew, uh, had a

company on the side at MIT called accolade, which was doing SAT tutoring. And so he applies to Y Combinator, I believe it was that winter, with this SAT prep company. And, you know, I didn't realize he had applied with the, he applied once before Dropbox. He had applied before Dropbox with Accolade, which actually is a pretty good name for a company. Just turns out it was not a good business so he applies and uh and paul and jessica like oh this guy seems like you know this kid seems pretty talented but like it's an sat prep company we're not gonna we're not gonna fund this so they reject him but but drew is is undaunted he knows he wants to start a startup he wants to pursue the you know the dream that he saw his little fraternity brother go through and and probably mark zuckerberg too you know, who'd now moved out to, moved out to, um, uh, Palo Alto

and, uh, and started Facebook out and, you know, moved Facebook from Boston out to California. Um, he continues with accolade. He's still working on it. And then this is where now the canonical founding story of Dropbox comes into play. So one day while he's at MIT working on Accolade on the side, Drew decides he's going to go take a weekend trip down to New York and he gets on the Chinatown bus, uh, the Chinatown bus. I don't think it exists anymore, but it was super cool. I used to take this, you know, live it in the East coast back in New York. It was this bus, this like super sketchy bus that you would pay for in Chinatown in New York. And then it'd go like to Philadelphia or to Boston.

Drew gets on it in Boston. He's intending to do a bunch of work on Accolade on the bus. He opens up his laptop and he realizes he's forgotten his thumb drive. So all of his files that he has that he was going to work on for accolade aren't with him on the bus uh literally not on the bus and uh and so so as legend has it he's he's so frustrated he says you know what i'm going to fix this i'm an engineer at mit he starts coding a solution for file sync on the bus and that was how dropbox was. You know, it's tough thinking back to that time where it's possible for you to not have all your files with you at all time. And then without

LTE networks, not even be able to reach them. Like it's, it's just a weird, like mental leap that you have to go back. And that was only 11 years ago, you know, like now everything is always either actually downloaded in with you or easily available to you. And in all likelihood, sort of you that's abstracted away from you and the user experience so that it feels like it's with you, but it actually ends up getting downloaded from the cloud on demand. And most of these things we've come a long way in 11 years. We, we certainly have now. He was not the only person that saw this, uh, saw this vision at the time. I mean, famously, another team of young kids in college out in California had the same idea. Actually, they're from Seattle, I think from Mercer Island High School at USC, uh going after the same opportunity as them at the

time was was also a consumer company yep also started as a consumer company before they then obviously pivoted pivoted into into enterprise uh but drew drew knows nothing of this he's uh he's just he's looking for a great business opportunity he wants to be a founder he's got this company he sees this and he realizes as he's coding this up and it starts to work over the next couple days he's like this is it i'm gonna get into yc with this company uh so he incorporates it he's super pumped he's got like the best name he can imagine for it not dropbox but even flow because he's a huge pearl jam fan uh it also comes up you know anything you watch interviews you read with drew or or uh or or watch of him giving he's a huge music fan he's in a band

loves pearl jam so he calls the product even flow and actually the company was still named even flow even flow inc yeah so read the s1 in the s1 and when um the initial investment by yc the check is made out to even flow ink yep yep so uh you know eddie vetter i've hurled you um but uh but pretty quickly i actually i wasn't able to find the story of how or why they changed the product name from even flow to dropbox because it happens by the time he applies to YC, which is in like within like a month or two of this timeframe. Um, maybe it was trademark issues with the name or something like that.

Um, but so he submits his, he applies to, to the summer. Now it's now summer 2007, uh, application cycle for Y Combinator. Um, he submits his application. It's, it's now summer 2007 uh application cycle for y combinator um he submits his application it's it's out there online publicly available we'll link to it uh in the show notes and actually

so it used to be a little note on this so it was a text file that lived in drew's dropbox and was public and you it was i always thought it was the coolest thing that like you could go to dropbox and look at the application for dropbox that the dot txt and first of all it's cool because the yc application really hasn't changed much um but unfortunately it's it's no longer available there drew must have moved some files around in his dropbox getting ready for the ipo or something but it is available in a in a business insider article that we will link to and it remains you know i i read this um i think I end up reading it probably every other year or so, but it is absolutely the canonical example of how to clearly articulate

the problem you're going after, how you know that you are solving it, why you feel your solution is the best. Like if you ever want to benchmark one of your ideas and particularly the clarity you have around the opportunity in front of you against one of the best you got to check out the dropbox yc application very very worth reading it's like the um initial startup phase or or seed funding you know version of an s1 yeah and it's uh it's really really worth reading it's it's um it's it's great but there's just let me let me take a quick aside so so uh at at this point so early on in the yc process uh drew posts the dropbox to hacker news and says hey here's my here's my yc no no this comes this comes a little bit later all right i'll hold okay it's coming up but we'll it'll be fun you'll have a lot to say so he so he applies with the text file uh and and he i think he mentions

in the text file that he's going to do a video um so paul emails him emails him back and he's like hey you know like this looks pretty good but um it's just you you kind of need a co-founder um but there's a problem which is like the deadline they're going to make their decisions and and the batch is going to start in like two weeks at this point so so drew is is undeterred uh he starts scrambling he's like all right i need a co-founder i need somebody you know i'm at mit i should be able to find somebody he he emails i don't know if he emails or calls or talks to uh kyle vote uh who then ends up would end up being in the same batches as them as dropbox that summer with justin tv which of course would become twitch is like mind-blowing thinking about the fact that they're

in the same batch totally mind-blowing trying to help each other find co-founders so kyle was also at mit and and then kyle would then after long after um uh justin tv and twitch he would go on to found cruise which cruise automation which was self-driving car technology that got acquired by, for, by GM for a billion dollars a couple of years ago. Uh, so it's really quite the mafia here. Um, so Drew and Kyle were in the MIT entrepreneurs club together. Drew's just talking to anybody trying to find like good leads on a co-founder and Kyle, uh, Kyle says, Hey, you know, I'm busy.

I got my own thing I'm working on, obviously. But I know this guy who lives on my floor in my dorm who's a pretty good coder and his name's Arash and why don't you guys get together? So Drew's like, sure, done. They get together the next day in the student center. Apparently they jam for a couple hours as legend has it. By the end of this couple hour meeting, they have decided this is by the way, not how you're, it's not the best way to

find a co-founder. They've decided to work together. They've decided to drop out of school. They've decided that, uh, that they're going to go for it. David. So when you're chatting with entrepreneurs and you say like, Oh, how did you, how do you guys know each other? You look for like, we worked together for five years at this previous company, or we've been best friends since high school, or like we know each other, we finish each other's sentences. And you, I just like laughing thing about like, my friend told me about this guy and I met him for two hours and like, you know, Arash is the CTO today, like at IPO.

Amazing. Amazing. I mean, basically like, you know, when you ask the question about how do you, you know, Arash is the CTO today, like at IPO. Amazing. Amazing. I mean, basically, like, you know, when you ask the question about how do you, you know, how do you know each other when you're talking to co-founders? The one answer you don't want is we don't. And that was their answer. But hey, you know, YC takes a chance on them. So they accept their application.

They start, um, and, uh, sometime, I don't know if it was after they started in YC or, um, uh, or before they decide that they're going to make a video, um, kind of an explainer video of how Dropbox works. And at this point, drew, uh, mostly drew, maybe Arash worked on it a little bit, um, have gotten a kind of an MVP prototype up and running and running uh and we'll link to this video in the show notes too uh we'll try to link to it but um it's pretty amazing when you watch this well it's funny for two reasons but but one it's basically dropbox today like within weeks everything that dropbox is today and still like the core of the product is there. Uh, all the little, um, images on the file, the check marks, and then the sinking, you know, the, the, the

circle circular arrows when it's sinking and all that, uh, all the low level operating system hooks, uh, it's all done. I mean, basically very little has changed. Um, but David, it sounds like a feature to me. Yeah. You know, how could this be big? Um, so they, they make this video and then they really also, this is the other core of the product on the distribution and marketing business side. Um, they decide that they're going to throw in some like allusions to, to, you know, popular culture memes, uh, in the video. So like a bunch of the files that they're syncing are like, you know, they've got some Tom Cruise images. They've got Steve bomber with his tongue out, like all this stuff. Um, it's funny watching it now. Like

I don't even remember what half these things are referring to. Um, and, uh, and so then they, they, they make the video and then they post the video on Hacker News on Reddit, which Reddit had been in the first batch of Y Combinator. I think the first batch. And Digg, which was Digg was huge at the time. The video goes viral. And then that's how they get their wait list for their first users. And then it's really it was just such a clear clear video like you look at this and and like there's definitely product i suppose it's

like product usage fit as uh as ben thompson said on the most recent episode of uh of um exponent but it really is like you look at it and you go oh yeah no i understand exactly how that works and i definitely want it yep i mean it's really you, even watching it now and, um, you know, you all should go watch it, watch it too. Um, it is Dropbox today. And like, it was, it was magical at the time. Still is in a lot of ways. And like the feature that came out three weeks after they founded the company, which is you put stuff in a folder and it syncs is like the feature that David and I use to produce this show. Like we upload our audio to Dropbox, it syncs, and then we edit it. It's, you know, it, they just nailed it so hard out of the gate.

Totally. I mean, like we, you know, our, we'll get more into this later in the show, but, you know, we hired, we had a great, the show but um you know we hired we had a great great designer uh for us at wave who did our uh did our logo did our website like you know did an amazing job this guy's awesome he worked at facebook like you know great it all just runs on dropbox you know like it just has a dropbox account and that's how we collaborated on all this stuff um and uh so then, what you were referring to, when they post this on Hacker News, this is like somebody replies to the comment,

comments on the post. From Brandon M. on April 5th, 2007, I have a few qualms with this app. And the first one is about being a Linux user. So already, let's narrow the market. For a Linux user, you can already build such a system yourself quite trivially by getting an FTP account, mounting it locally with a curl FTPFS, and then using SVN or CVS on the mounted file system for windows or Mac. This FTP account could be accessed through built-in software. And David, you know,

I don't know why we don't do this for Acquired to produce. I mean, it's just so obvious. That sounds so much more fun than just putting stuff in a folder and having it work. Two, it doesn't actually replace a USB drive. And there's more about that. It doesn't actually solve the connectivity issue. Three, it does not seem very viral or income generating so you know david i uh i think you i think you should rethink if this is going to be big or not yeah well and

this this surfaced uh this week because sam altman who's now the ceo of y combinator tweeted don't um i think don't let the haters get you down and link to it. And it is just so, uh, it's, it's always, always good to see something like this and remember it. And when you're going through the tougher times as a founder and you need to put your head down and barrel through it. Yeah. On the other hand though, it's a great parable, but if you read the rest of the thread, uh, I forget the user who, who had replied to, to the link, uh, with these arguments. So Drew gets in and responds to him right away. And he has really great arguments in response.

And then the guy who was criticizing was like, hey, actually, you have really good arguments. Great, best of luck to you. So it actually is a really nice ending. It's true. Hacker News was such a nice place. I know. And then the internet all went to hell.

This was pre-Cambridge Analytica and Russian trolls and all that. It is actually kind of interesting to look at these objections with the lens on the company today. Like the concept, it doesn't seem very income generating. It's kind of not. Like if you think about the non-business users, and we'll of course get to this later in the show, but it's like, oh, this is a really nice thing. People, will consumers pay for this? So there's another parable in there that's your earliest

objections are often the demons that stay with you your entire time as a company, even through tremendous success. Yep. Totally. Um, well, and, and at the time too, you know, we mentioned this earlier, but there are like a thousand other companies out there trying to do the same thing. There's Mosey, there's Carbonite, there's, I don't know, SugarSync. Um, there's what, uh, high tech company. I forget the company that maybe it was SugarSync that became Hytale. Anyway, there's Box, of course, which was Box.net at the time. But then also there's the looming specter of Google. Sure feels like this is something that platforms should provide.

I don't know. Yeah, right. You would think so. And for years, I mean, I remember even back, maybe even when I was in high school, like definitely either in high school or in college, but definitely in college, there were rumors like everybody was talking about that Google is working on the G drive and it way that we were going to communicate with the cloud for Office for iPad. And that kept coming up. And it's like, well, we can't build for something we don't know if it's going to exist or not. We can't decide if it's competitive with SkyDrive, which then became OneDrive.

Eventually, Google Drive launched and it was, we can talk about this later, but it was not this at all. And then it was exactly this and then it, but it was not this at all. And then it was exactly this. And then it was exactly this and not this at all. And then like even a month ago, they changed it again into two different things that are much less consumable and digestible and understandable. But it all speaks to like Dropbox

just nailed the crap out of the user experience. And the small competitors and the large competitors just couldn't touch it. Well, even to this mean at wave we run we use google apps and so we store all of our you know all of our documents and files on g drive google made a change to the sync client a major change to sync client like two months ago and it completely nerfed all of our stuff like you know and it's like dropbox since day one it just works you know yeah yeah it and it's it's funny looking at how much didn't change i was uh i was getting ready for this show and looking back at all the things in my dropbox to try and like it's almost actually nostalgic to look back at all the stuff in there because

like every project and company I've worked on for the last decade has in some way had its, its hooks into Dropbox and, uh, for better or for worse, like it's all still there. And, um, you know, there, there, there's a little bit of like, I've got some complaints about the fact that like, do I need, you know, 50 root level, or I guess first level shared folders with people that I don't collaborate with anymore. Or, you know, the whole model is very predicated on like, it's a folder that you put stuff in that sinks. And every time they try and stray away from that, they get in the danger of doing what Google did and being confusing. Um, but it does, it does leave you with this nice history of everything you've ever been a part of. Oh, it totally does. Um, and, uh, it's funny. I mean, I was trying to figure out, uh, when I

actually joined, signed up for Dropbox. I couldn't, there's no way to figure out as best as I can tell when your account was created. But what I did find was an email from when the app store, when ios app store launched and it used to be because it was all done through itunes you would get receipts when you would download email receipts when you would download apps even though they were free like because it was like structured as you as if you paid for them the very first set of apps i download like dropbox is on there you know like uh it's just so core it's so important for what you do. Yeah, it's funny. Now you've got me like wanting to search back. What's the first email I had that had Dropbox in it?

9708. I've been invited to the Dropbox beta by Paul. September 7th, 2008. Love for you to try it out. Your beta signup code is this. What is Dropbox? Share the love. Thank you. GetDropbox.com. That's awesome. you to try it out. Your beta signup code is this. What is Dropbox? Share the love. Thank you.

GetDropbox.com. That's awesome. Yeah. For some reason I couldn't find my, I think I signed up directly, uh, but I didn't get any like email confirmation, so I don't know when it was. Anyway. So suffice to say there, there was a big market for what they were doing. So they get accepted into YC. Everybody's excited. Um, they do YC that summer of Oh seven. And then later that fall, uh, they move out to San Francisco, um, which kind of is what drew had always wanted to do. Uh, he wanted to follow Zabdi and Adam out there. So they move out to San Francisco and, uh, they just finished YC and they need to raise a funding, need to raise a seed round. So they end up meeting Sequoia Capital.

And this is where things get interesting. So there's a famous, supposedly a famous meeting where Mike Moritz, the legendary investor, and at the time, co-head of Sequoia, comes to their brand new office in San Francisco on a Saturday afternoon and meets with them. And then Sequoia decides to invest and then they sign the term sheet and get it done the following Monday, all of which may be true. But what doesn't get talked about a bunch, and there was actually a big Recode article about this week on the eve of the IPO. It was actually another partner at Sequoia, Samir Gandhi, who was an MIT alum and

was part of the MIT network that made the inroads with Drew and Arash, got excited about them, and then ended up leading the investment for Sequoia. So that was in the fall of 2007. Samir and Sequoia do a $1.2 million seed round in the company as convertible debt, as we alluded to earlier. And then the following year, the company is doing really well after they launch. Traction is great. They do an inside round. They do a $6 million Series A in October 2008. But in the interim, though, Samir actually leaves the company, leaves Sequoia, uh, in the summer of 2008 and he moves over to Excel where he's still a partner, um, to this day. So, uh, so that was before the series a got done. And then that's how Excel ends up coming in and doing a

little bit of the series a, uh, because they really, the founders have the relationship with Samir. Um, and so while Sequoia owns a, I believe a 23% ish of the company, uh, before IPO, um, Excel ends up owning about 5% of the company as well, which is by far the second largest VC shareholder in the company, which we'll get into later, which is amazing. I mean, you will definitely get into it later, but like people put north of $500 million into this company and owned less of the company than Excel does having never led around. Yeah, totally. Well, it's a testament to, unlike what people thought at the time, the quality of the business model behind it, um, or the scalability of it. Uh, so the board seat, the Sequoia board seat ends up transitioning to Brian Schreier who joins Sequoia in April, 2008, uh, from Google. And then Brian's been on the board, um, ever since. Uh, and he is actually

the only venture investor on the board of Dropbox, uh, which again is crazy. Wow. Wow. Condoleezza Rice is not a venture capitalist. Not last time I checked, but there's some fun other side history here. So really when Sequoia does this investment in Dropbox, that really cements the Sequoia Y Combinator relationship. Sequoia had invested in a few other YC companies in the past, most notably Looped, which was Sam Altman's company that was part of the first, where Greg McAdoo had led the investment for Sequoia was on the board there so much so that the next year in 2009, Sequoia actually ends up investing in Y Combinator itself. And Greg McAdoo leads that investment. And then fun side fact that of course, the most important thing of

this whole episode, uh, pretty much directly leads to wave to my, firm and what I'm doing now with my partners, Riley and Sarah, because Greg, by investing in YC in 2009, he ends up meeting the founders of Airbnb who are in that batch the summer of 2009, ends up investing in Airbnb. My partner, Riley, joined the company shortly thereafter. And then Greg really helped us a couple of years later, get Wave off the ground. And then our partner, Sarah Sarah was at Dropbox at the time. So all of this is all coming back home here. It is a new mafia, the new mafia, but anyway, back on track, this is really like the start of the go-go years for Dropbox. So we talked a little bit earlier about, you know, it's got this product that just

works when nothing else on the market does. It also has this amazing viral distribution and freemium mechanics that they put in place where both you use Dropbox to collaborate like we're doing on this podcast. And so it naturally virally spreads the product, but they also put in place this kind of gamified incentive to do so so that everybody that you share Dropbox with who signs up for the product, you get more free storage. This worked so hard on me. Like I was a referral maniac to get more space. And I think it was 250 meg per person who signed up for an account that you invited. Which back in the day was a lot of storage. Yeah, because I think you got two gig for free i

have no idea what it is now but you two gig for free and i think i was up north of like 11 gigs from inviting friends and at some point there was some educational multiplier where for everyone you invited you got double or something because they they knew that their growth was in students yeah it was it was crazy and it works so well. Most of it is still to this day, the vast majority of Dropbox users don't pay them anything or just free users, but the small percentage who do just the number of users are so big. They make so much money all throughout this Dropbox is just raking in cash. They're massively cashflow positive, even as a young startup. To give you guys a sense today, we'll get to these numbers, but today half a billion people have accounts and 2.2% of them are paying. So it really is that tried and true freemium model. Yeah. And even with that very small percentage,

last year, Dropbox made 300 million in free cashflow. That's cashflow profits, not revenue, which is incredible. So all through this, the company is super lean. It's like an engineer's dream. There are only about 20 employees at the company through 2011, 2012, the first few years. They're all engineers. There's nobody, no business folks there uh it's just this this viral and referral dynamic that's like that's also the nice thing about having uh the operating system be your user interface i mean shy of like a very basic web interface they basically don't have to do any product design it other than really like system design and then engineering that system. Yep. And this leads to one of, if not, if not the probably biggest error of Steve Jobs's career, of which there weren't that many of them where he sees this. And, you know, like many people saw

this and thought, well, okay, this is like a feature. This isn't a product, let alone a company. The company had gotten so big though, the product had gotten so big in 2011, Steve jobs invites drew to come down to Cupertino to visit him. And it was really clear that Apple was very interested in, in acquiring the company. Uh, and this is sort of a famous meeting that happens where, you know, they talk for a little bit and Steve unclear how much he implied this or not it kind of comes out later sort of in the rough order of magnitude of about a billion dollars that apple was kind of interested in paying for um to acquire dropbox at the time drew says no essentially or implies no and steve kind of goes off and is like you know you're a feature you're

not a product you're not a company like we're gonna crush you and is like, you know, you're a feature. You're not a product. You're not a company. Like, we're going to crush you. We're going to do, you know, just like the mythical G drive. You know, we're launching iCloud. Mobile me will destroy you. Oh, man. Incredible. Obviously, he was wrong.

But apparently the rest of the meeting went really well. Drew talks about it and says, you know, that part was over in about 20 minutes. And then the rest of the time, Drew just talked to Steve about like being a founder and then all the lessons learned along the way. And supposedly, he was really magnanimous. So, you know, even when making mistakes, he's still Steve Jobs. um but so after that uh the company basically dropbox says well man we just turned down a billion dollar plus acquisition offer from apple maybe we should raise some more money uh what could we raise money at and they so they go out they basically get every venture firm out there to participate in this round index venturesures leads their Series B, but Benchmark is participating,

Greylock's participating, IVP, Goldman Sachs. This is party round of party rounds from people who usually don't do party rounds. Right. $250 million. You're really rounding up the troops to pile it up to that number. Yeah. So I mean, most companies would be ecstatic if they could raise a Series B at a valuation of $250 million. Dropbox raises cash of $250 million at a $4 billion valuation. So they only sell like 6% of the company in this Series B. Yeah. And to give folks a sense, I mean, typically at each one of these rounds, you sell 20 to 30% of your company to the next venture investor. And so their seed round that was a 1.2 on a post money of 5, 24%. That series A also from Sequoia,

where they raised 6 million, 24%. And then you get to this round, which it was from 2008 to 2011. So that, you know, there was a decent gap in there where they didn't raise money, only 6%. I mean, if you think about the dilution that the founders are typically taking, you know, 20 to 30% of its time just didn't happen. Yep. It's really... And the early venture firms. I mean, obviously, they were very lucky to be blessed with a business model that just printed cash. But this is like a clinic in, you know, if you're a founder or an early investor, you're aligned with this. Like, you know, if you can, uh, raise fewer rounds and take less dilution in each of them, fast forward today, when the, today, when the company went public,

you know, drew still owns 25% of the company. That's incredible. Yeah. Yeah. I mean, it helps, it helps that the next round that they raise was only a 4% dilution and they raised even more money. Yeah. So the next round, a couple of years later, they raised $350 million at a $10 billion valuation. This is in 2014 led by BlackRock. Uh, but Morgan Stanley comes in T row price, Salesforce comes into it. Um, crazy. Uh, but then also worth noting just the few number of rounds i mean they they ipo'd after their series c yeah yeah absolutely i mean we talked about this in the stitch fix episode uh stitch fix obviously didn't raise the valuations that um uh that dropbox did but

if you can raise fewer rounds and take less dilution it works out better for everybody and it's funny like thinking if let's rewind 10 15 years like of course it's not out of the ordinary to ipo after a series c but in the world that we're at where we've gotten so far that you have a soft bank vision fund that has a hundred billion dollars in it to deploy like companies tend not to ipo after their series c yeah yeah. Yeah. Well, it's a, it's a different world these days, but then there is this kind of, we've talked about, uh, we talked about a little bit on the soft bank episode. There's this sort of law of gravity with fundraising for startups, uh, that if you raise the money, you're going to spend the money. Yeah. The lean mean years of Dropbox are over. They come to an end as this is happening.

And that turns out to be not so great for Dropbox. Um, so they have all of this money, these grand ambitions. They said no to Steve jobs. Everybody thinks Dropbox is going to be the next like Google, uh, or Facebook or what have you. Um you um and in fact a lot of people were coming from facebook to dropbox at this time so let's tee this up you know um amazing product check perfect market fit or perfect uh usage fit check um viral great great viral distribution check tons of cash in the bank check cohesive brilliant business strategy question mark well check but then uncheck unfortunately i know i know we should go into photo sharing and we should be highly acquisitive and go into email clients and we should definitely email clients.

We're going to go into the enterprise, but not really. But now we're going to go into the enterprise. Actually, whoops, we're going to go into the enterprise this way, and specifically this type of enterprise. Also, we think that we're going to monetize our consumers better. Oh, back to the enterprise. Yep. Well, and my favorite of all, so what we're referring to is basically the years like kind

of 2013-ish to 2016 are kind of like the lost years for Dropbox. They hire a ton of people. They do a ton of stuff. They build all this stuff. They go into all these markets. Like none of it makes any sense. None of it works. Um,

the, the craziest thing, it's easy to throw stones in retrospect. Um, of course, during, during this period, they become free cashflow positive.

They're, they're printing cash while they're lost in the woods. So I think, you know of course during during this period they become free cash flow positive they're they're printing cash while they're lost in the woods so i think yeah you know it's hard to knock them too hard hard to knock them too hard but but but they deserve some noxious the craziest most cockamamie thing ever which is now completely buried in history but of course that's why we existed acquired to unearth these things they of, of course, everybody has to be, if you're going to be a Google, a Facebook, whatever, you have to be a platform. Everybody's got to be a platform. So they build and launch the Dropbox platform. They launched this in 2013

and they do a big developers conference. They call it DBX, Dropbox for Developers. The vision of the Dropbox platform. Ben, you're a computer scientist you studied cs and undergrad i mean i did too i didn't major in it but i know a little bit about it so so tell me tell me how this sounds to you they want to you know dropbox is files right but not just files dropbox is going to be the the storage uh infrastructure and solution for all of computing across distributed mobile devices. So, you know,

you're writing apps and you need storage. Your code needs to live somewhere. You need assets that you need to execute. You need databases. Don't do that locally on your device or in the cloud. Do it in Dropbox. Does this make sense to you, Ben? Well, it's AWS plus all the actual storage and compute on your devices in dropbox right yeah well i mean as long as they're not building a platform that allows me to authenticate and give you all of my data and all the data of everybody i've ever met i don't think there should be that big of an issue yeah yeah or just let alone like okay i could uh if i'm an app developer i could use use all the native tools that the Android and

iOS development systems provide me and all of the storage functions that they give me. Or I could just use this third party. Yeah. I mean, the biggest issue was that Dropbox at this point, you know, as an organization was trained that they can beat the platform provider because their killer use case of it's a folder on your, your computer that syncs and it syncs everywhere, just nailed it so hard that, you know, you get, you get bold and you decide that, uh, you know, even though these platform providers have all these things for developers and, and, um, you know, we, we can do better and we can

build the tool chain they want. And it's, it's much, much harder competing with the platform itself when you're down at the developer level. Um, and, and really in, in most cases, like if you look at anybody that's trying to be a better voice assistant, you lose unless you're the home button on iOS, you know, there there know, there's competing with the platform is always difficult. And Dropbox found one little tiny wedge into where you can actually meaningfully compete. Well, I think it's to pull forward a tech theme here, as we so often do on this show. I think it's that like, they just kind of lost sight of what it was that was so brilliant about Dropbox in the first place, which was, which was, you know,

two things. One, they solved a real problem that a lot of people had and two, they made it just work, you know, and all this stuff that they were doing, uh, during 2013 to 2016, a, it's unclear if they were even solving real problems, uh, attacking real problems. Um, but B it didn't just work. Like I could use the native you know stuff within within ios and android or i could use this kludger dropbox thing like yeah it was that's orthogonal to what it was always frustrating to me as a user too because like you had that then dropbox carousel app that came out that was asking for photos access in my system and the dropbox app wanted to get it hooks into it too. And you just

couldn't, you couldn't figure out like how much access you were supposed to give it and what it was supposed to replace for you. And it was, it was duplicative and confusing. It just wasn't, wasn't, it was the opposite of all the magic that the original Dropbox product provided. It was the opposite of the, the initial YC application really. Um, yeah. So that was kind of till 2016. Uh, and then, uh, and drew talks about this, uh, supposedly he, he read this great book that I've never read, but it was, uh, cause I think it's out of print. I've been trying to find it, uh, but was talked about a lot in business school, a great book by Andy Grove, the former CEO of Intel called only the paranoid survive. 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. It's like the most bold business decision of all time. Totally, totally. That would be a great episode. Someday we'll have to find a way to do an acquired episode on that. Yeah. But the point that Andy makes in this book is that when companies, you know, there's sort of like Ben Horowitz paraphrases it as like wartime and

peacetime, you know, that like in peacetime, which Dropbox was in during all of this, like they could go do lots of things and try lots of things and invest a lot of money and stuff. But now like the company's kind of going sideways. They're stuck at this massive valuation. People are starting to question what's going on. They're bleeding talent. Now it's wartime. And in wartime, you have to, you can't do lots of things. You got to do one thing and it's got to be the right thing. And you got to do it better than anyone.

So overnight, and I think a lot of this was helped by the Dropbox hired a guy named Dennis Woodside from Google. And Dennis is the COO at Dropbox now. He had previously, he'd been at Google a long time. He ran Motorola within Google. He was like kind of a turnaround guy taking like stuff that was struggling or stuff that Google brought in like Motorola for other reasons, turning it around, making it work. They cut all this stuff. They kill mailbox, they kill carousel, they kill the developer platform. They way scale back the, um, the, uh, sort of enterprise aspect of Dropbox for business.

And they refocus on the core customer base. Um, so this was 2016. Um, and once they do that, things really turn around. Uh, they get, um, they become, they've always been cashflow positive, but during those years, they actually dip down into cashflow negative. They become back to hugely cashflow positive. As we, as we mentioned last year in 2017, they go, they generate over $300 million of free cashflow. A big part of that and part of the doubling down is over the last couple of years, they've transitioned off of AWS. So for most of Dropbox's life, it was all running on S3 in AWS.

They decided to build their own data centers and bring it all in house and their cost of goods sold goes way down. So even though revenue basically doubles over the last couple of years, the cost of goods sold actually goes down from where it was at the lower revenue base. Um, and this massively improves the company. Yeah. And that was, that was in sort of the first half of 2016 is when Dropbox really actually waned off of AWS in that year before, you know, they were, they're actually duplicating their data. So their costs were way high while they were doing that transition and making sure that everything was working as expected. And it's interesting to look at this because you start to see the company shift to this mindset of lean operations, not only in cutting all these product lines in a very Steve Jobsian way, but also changing their cost structure

where they're saying, look, we're going to make this big investment up front where we're going to use two, three years of engineering resources and take on all these capital leases to create our own data centers and build our own technology, you know, 97.8% of our users don't pay us anything and we're holding other files. We need to have the cheapest possible way to hold their files. Yep. Yep. And, um, and it makes a big, you know, huge, huge impact on the company. It was basically like all of the stuff that they could get away with during the first period of Dropbox when they were just growing, of not, you know, sort of efficiently managing the company, which makes sense when you're a growing startup. You don't want to optimize for efficiency. You want to optimize for growth.

But then those years in the middle where they just got way too fat and lazy, well, not lazy, but way too overly ambitious without good rationale for it. Now they're back to, they've really professionalized really. It's an efficiently run company. Um, and you can see that in the financials. So, so, so let's, um, I want to make a statement here and then we'll revisit it later. So the, the success of Dropbox and the box, the Dropbox that you want to bet on is the one that is lean, mean uh building this very consumer oriented easy to understand file sharing product or let's even say file collaboration um product that that may

permeate into or does permeate into um monetizing small business and teams users yeah well i think it's you know if you take if i if i look at this from a venture investing perspective 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 like 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 then the the $4 billion, you know, valuation series B and certainly the $10 billion series C, those were people coming in and investing on the promise of the future. But the promise of the future, there was actually no data that like those promises were had any hope

of coming true. Um, so like maybe they would, maybe they wouldn't, but nobody knew. I think that's the difference here. And so back where you are with Dropbox today and at the IPO is, you know what this company is and you know what the market is. Now, the question is, how big is the market for collaborative file sharing and people paying for it, especially in a SMB type use case, which is really, you know, as a personal user, I don't pay for Dropbox, but as a, you know, acquired user, uh, I do. Yeah. It's happening in the market. Are we both paying for Dropbox? Uh, well, no, no, uh, only one of us is. All right. I was gonna say we should look into that. Yeah, exactly. Um, so it's not not as as large of a market as the consumer market but it's still it's still pretty impressive um so anyway february 2018 and

and to capture that uh the way that dropbox reports this in in their s1 i know i'm fast forwarding ahead a little bit but i want to make this point, is that they say of our 11 million paying users, and that's out of their 500 million, approximately 30% use Dropbox for work on a Dropbox business team plan. And we estimate that an additional 50% use Dropbox for work on an individual plan, which is what we do, collectively totaling about 80% of our users. So 80% of that 2.2%, so 80% of people who pay are using it for business purposes. Yep. And so even though the growth of the company and the use case and the vast majority of their users looks like individuals, the place where they make 80% of their revenue is people using it for work.

And I think this was, to be fair to Dropbox, I think there was a little bit of a head fake that the market did to them where, you know, say, let's assume 30%, you know, using Dropbox for business is relatively constant. Like you could identify that those are enterprises. The other 50% that they estimate are SMBs using Dropbox. There's no way really to tell that they're businesses. Like you can't tell that we're businesses. Like you signed up for Dropbox with your Gmail account, not with the acquired account, right?

Yep. And that is a thing too that like, you know, everyone who's used Dropbox personally for a long time and then enters an organization, like you know that there's this weird tension between you kind of have your one Dropbox and are you going to invite that personal drop box to the organization are you going to try and create a new drop box

and have multiple drop boxes syncing and now with selectives like that's where it actually gets a little bit hairy and so the best drop box like the drop box in their their absolute best shining light is the drop box where i'm just using my personal drop box and i'm sharing stuff out of that with other people and not where i'm officially raising my hand and saying I'm a business. Yep. Yep. Uh, well, there are a lot fewer, um, businesses that are going to do that there. And there are a lot more, you know, acquired out there. Yep. Um, so, uh, as we were alluding to with all this, finally, February, 2018, the company files to go public.

Uh, they set the initial pricing range for the IPO at 16 to $18 a share, which, uh, equates to a valuation much lower than the $10 billion valuation that they did in their last private round 2014. You know, there's a lot of hand wringing. We're going to get into narratives in a sec here. Then they raise the range to 18 to $20 a share before they price. They ultimately price at $21 a share, which is equivalent to, and this was Thursday night, equivalent to an $8.1 billion market cap, still below 10. And I should say, it's important to note that that 8.1 is their non-diluted market cap. So that did not include options that were issued but not granted for

future employees. And if you roll that in and you have a fully diluted market cap, it was 9.2 billion. Right, right, right. Good point. Which is common in startup when you're funding startups that the ungranted option pool is counted as part of the company. Less clear when it comes to public companies. So important to remember. 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. And that's a pop. Yeah, major pop. It's about 40% on the first day of trading. So every single shareholder who bought in at a private company valuation made money.

Indeed. Maybe not a lot of money, but Sequoia Capital made a lot of money. Yeah. So it's actually, do you want to, it's going to be one of my sort of investment themes later, investment slash tech themes, but do you want to dig into that before we get into narratives? No, I mean, we can get into narratives later. I actually haven't done the calculation, but Sequoia owns about a quarter, 23% ish of the company. And they finished trading at roughly a $12 billion valuation. So what's Sequoia make about a two and a half billion on the, on the IPO? Yep. Yep. Sounds about right. Not, not bad. Uh, not bad in a day's work or a decade's work in that case. No. And, uh, when you, when you look at the dilution

per round, it's 24% for the first two, 6%, then 4%. So really, I mean, the way that they raised money, if you had gotten in early, you made a ridiculous amount of money. If you got in later, you just didn't own that much of the company, even if you paid a ton for it. Um, and if you look at YC and assume that they, their, their new story came out that Y Combinators sold about half of their shares in the Series B when index led. They typically take 7% as part of the accelerator program, would have gotten diluted down to 4%. So their value of their shares would have been about $150 million at that point and would have been able to clear about $75 million for YC's operations by selling as a part of that round. Yeah, that's when they sold it, the Series B.

Interesting stuff. But today, at the market cap that the company closed at yesterday, even YC's remaining stake is, what, about half a billion dollars? Let's see. So in the series C, uh, their remaining stake would have been about 170 million. So maybe about 200. Oh, okay. So probably about the same, maybe a little more. Yeah. Yeah. Yeah. But I think this is probably the first of, uh, of many YC, uh, IPOs that we'll see where they all they will take home about that much cash over and over and over again over the next several years yeah well that's a to pull another theme forward uh and then we'll jump into narratives uh real quick um it takes a long time

and this is actually a core you know sequoia ethos that uh lemons ripen quickly in venture, but the apples take a long time to bear fruit. But when they do, they bear a lot of fruit. All right, listeners. Our next sponsor is a new friend of the show, Huntress. Huntress is one of the fastest growing and most loved cybersecurity companies today. It's purpose-built for small to mid-sized businesses and provides enterprise-grade security with the technology, services, and expertise needed to protect you. They offer a revolutionary approach to managed cybersecurity that isn't only about tech, it's about real people providing real defense around the clock. So how does it work?

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head on over to huntress.com slash acquired or click the link in the show notes. Our huge thanks to Huntress.com slash acquired or click the link in the show notes. Our huge thanks to Huntress. Narratives. I think we've kind of covered this basically. Yeah. But what I want to do is I think when we've had the most fun with the narrative section, it's been what we were able to tease out.

What is the company saying? And what are the skeptics saying? And so I've got a few here. So Dropbox went from it's a folder that you put stuff in that syncs to looking at the first page of their S1 now with these crazy graphics and completely new brand as of just a few months ago is unleashed the world's creative energy by designing a more enlightened way of working which here's where my bias is about to come out that scares the crap out of me like the company made an amazing product by a folder that you put stuff in that sinks and like generated a ton of cash on that and this is where i start to get out on my ledge a little bit and and and starting to feel like uh-oh are we in a 2014 2015 situation again now i'd argue the other side uh because what are we doing on dropbox right now with acquired we are you know being creative is it enlightened i mean like

maybe i'm just getting caught up a little bit in the semantics but anyway so this is this is the company's positioning um they they say our market opportunity has grown as we've expanded from keeping files in sync to keeping teams in sync today dropbox is well positioned to reimagine the way that work gets done we're focused on reducing the inordinate amount of time and energy the world wastes on work about work tedious tasks like searching for content switching between applications and managing workflows so what what their big positioning here is, is that our market opportunity is not just syncing files, it's this reimagining of the way work gets done, which is, again, and I'll play the skeptic here,

similar to 2013, 2014, a bet that you're making, I think, with very little data. I mean, the bet here is on Dropbox paper and a lot of the collaboration features and a lot of the, it's asking you to dream with them a little bit, which I'm very familiar with and operating in the seed stage. But it continues to strike me the amount that, you know, public company investors at big banks are also asked to dream with someone at the time of IPO. yeah it feels well it feels a little snappy to me i think they're gonna i don't think they're gonna happen to them i don't think it's gonna happen to them financially but like uh it it the the high flying mission statements that are starting to to happen here are a little yeah a little much well i think the question is um by reimagining whatever

flowery language they used do they mean you you know you need to make a big bet on us because of paper which i don't even know what dropbox paper does i'm very likely to ever even try it let alone use it caveat i don't know what it is but i've actually heard really amazing things well okay fair enough but i'm not like looking desperate for a solution to whatever it is so do they mean that or do they mean by reimagining how the world works a magic folder that you put stuff in and it syncs if they mean that and i think if you look at the financials that that's what they mean i mean that's what people pay dropbox for who who paid them um like that's that's pretty great and like they made a billion dollars in revenue last year on that yep that's very true and so they um um

this is apparently a thing now the content collaboration platforms has a magic magic quadrant with gartner um and dropbox has been in it as a as a leader for the last two years. And so part of what they're selling in the in the prospectus here is, you know, can we will continue to be a leader in this emerging category, the category itself is growing, the opportunity is to expand from syncing files being this collaboration platform. So think Dropbox paper, they specifically call out a bunch of features search preview smart sync version history and and showcase so there's all these sort of um and this is where i think it's a lot smarter than the way that they were trying to expand before it's it's focused like all of these things are sort of no-brainer ways

to make the existing workflows better rather than betting on completely new workflows, except for Dropbox paper. Yeah. So wait, what is Dropbox paper? It's a, and I'm going to mess this up cause I've looked at it like very briefly, but heard great things. but with a subjectively more intuitive way of laying it out, of putting in the features and where all the controls are. It's tightly coupled with Dropbox instead of being outside of their ecosystem. Yeah, better collaboration features.

Let's use sort of, and it's amazing to say better collaboration features than Google Docs because that's been their thing forever. But that is the promise. Interesting. I don't know. I'm I'd love to be proven wrong, but I'm skeptical. Like to me, that sounds like Dropbox carousel and photos like carousel may well have been a better product. But like Google and Apple own the phones and devices. And so that's where the photos should leave should live and at this point you

know if i'm a uh organization now maybe maybe the market is is um just like for storage collaboration for such small enterprises that don't have google apps built in but you know i'm wave i'm a small organization i run on google apps i'm gonna use google use Google Drive, use Google Docs, and Google Drive for that type of paper like product. Just because that's where my organization lives. So here, this is I just opened up the Dropbox paper landing page. And I was hoping to see some maybe like features or like illustrations of here's the killer features that are better than the word processing that you're used to. And it just says bring ideas to life. Dropbox paper is a new type of doc where teams can bring ideas to life in a single place. There's a video and then it says there's testimonials. So

there's companies that have used it and then a sign up button, see how paper can make your ideas better and brighter. So they're very much not positioning as as like here's the they're not selling on features here um and it's i i don't know i'm very curious what the strategy is to convert people to using this who are already dropbox customers over what they're already using so well the the the so to sum up the narratives around uhbox, from their position, it's really we're set apart by simple and intuitive design, an open ecosystem, viral bottom-up adoption, performance and security, and we're moving out of just a folder that sinks into broader team collaboration and workflow. Great. Okay. There's a lot of reasons to be skeptical. So as we saw, which, which didn't,

didn't come true. Um, a lot of people were worried about it being a down round from the last fundraise, obviously with trading up in the first day, um, the, the company was not able to benefit from, um, a lot of that, uh, uh, a lot of the upside that happened in that trading on the first day. But, um, the, the bankers that took them public were, uh, lots of individual shareholders, all the employees that have their stock locked up. Um, everyone benefits from that. And of course we've had one day of trading, so we'll see what continues to happen, but, um, tons and tons of demand for Dropbox. So that skeptic, um, um, narrative that we've been seeing in the news over the last few weeks really didn't play out. The other things that people have pointed out is that, as David and I said, they're quite erratic.

If you look at the last 10 years of headlines, every six months there's a new way to push into business, and they sort of continue to have trouble exactly figuring out how do they go to bigger businesses. And maybe the market is just SMBs. And that's actually a huge market and will continue to grow. But that is a major concern. And Aaron Levy gave a great Aaron Levy style interview in Axios. And if you don't follow Aaron Levy on Twitter, you should. Because he's probably the most entertaining person. I mean, definitely the most entertaining

CEO, but a very entertaining person to follow. And he just gives very great, straightforward, compelling answers. But in this one, he talks about how he says there's never been a B2B that looks like this because the Axios was looking for sort of comps. Does it look like Atlassian? Does it look like Box? How should we think about this? 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. One is a consumer business like a Spotify or Netflix or Pandora, albeit with extremely low conversion rates to paid and i just put that in and he says and the other is a sort of smb type company maybe like hubspot i i think that's the right way to think about it like i think that's the um i like that

way of thinking about it and it probably can be a huge company just thinking about it like that i i totally agree yeah i think it it's like Skype is probably the closest, uh, closest analogy here. Um, cause I don't, you know, I don't, maybe they can figure something out in the future. I don't have a lot of faith that they can crack into big enterprise because box is already there, frankly, as are Microsoft and Google. Um, and, uh, you you know on the consumer side um it's just really hard to get people consumers to pay for storage um so but on the other hand like there i just keep coming back to there are a lot of you know organizations that look like acquired out there for which dropbox is a magical solution it's true 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 S1 came out, he did in the Stratechery Daily Update.

And all three of them are really great points. One is that the S1 is confusing and lacks data, and specifically monthly active users. There's this big chart that doesn't actually have numbers associated with it that is signups is the axis instead of monthly active users. And they recently just deleted the data of 100 million inactive accounts last year. And so if you're going to talk about sort of active versus inactive, but then all you're going to show us is the user build for signups. It's a, you know, David, if I were to pitch you a company and I were to show you a graph of signups, you would probably ask me like, how many of these are active users? That's kind of the first

question that any venture investor would ask in a private company's companies round so it's probably great but it's it's concerning that that's not part of the s1 at all although i don't know given the nature of the dropbox product i totally hear the criticism i don't know though that active users are the right way to think about it because the product it's like there is no ui to the product you know it just lives within the operating system so if you're using if you have installed dropbox you're an active user um yeah so so your point would be that like uh you can go a long time without intentionally using dropbox uh and they still sort of retain you as a user yeah i think a better, two better metrics would be one, some way to capture like percentage of storage quota that users are using, right? Because as you get higher up towards the top, you're going to become more likely to convert to paid. And then the most important thing is the rate of conversion from free to paid and the velocity of that and cohorts of that it's true in knowing that we know sort of the most important thing um a couple of other narratives one is is they can't decide if they want to focus on top line or bottom line they're

they're massively cost cutting by spending years shifting to to cheaper infrastructure but they're still also trying to expand into into new markets and and build things like paper and sort of um you know risk being we we've seen the company be a little lost in the woods before so it's always concerning to see to see that a little bit um i don't know if that's totally a fair criticism i could see why you would do both things the last is that it's difficult for us to calculate the cost of customer acquisition because as you dig into this um they do report what they spend on sales and marketing um that is broken out but that doesn't but dropbox doesn't include uh their infrastructure particularly for all the free accounts in sales and marketing i think that's in cost of revenue

so it's it's difficult to understand sort of when when we think about acquiring a customer for dropbox a customer acquiring a paid user like how much money does dropbox have to spend on them as a free user for years storing gigabytes of their files before um before there's an upsell opportunity so it's difficult um if you really wanted to model it as like a pure cost of customer acquisition lifetime value um equation um I feel like if I were a series D investor that could go ask the company a bunch of detailed information and look at analytics, I would want to dig into that more. And as a public company investor who only has access to the S1, it makes me a little uncomfortable. Yep. I agree.

So that said, none of those narratives make this a bad company. And they traded great on the first day and they were massively oversubscribed and got to bump up the price a few times before they hit the street. Everyone made money. They're continuing to have great free cash flow. And they're on a really great path toward profitability, like not just free cash flow, but like complete and total profitability. In 2015, they lost $330 million. In 2015, they lost 330 million. In 2016, they lost 210 million. Last year, they lost 11, or I'm sorry, 111 million. And like they're well

on track this year, maybe next year to cross that finish line and become a true profitable company. So- Yeah, I think, uh, um, it's been a while since we saw an IPO go out like this. That was a big name tech one that was so close to being profitable and, and, uh, would look more like a traditional business. Yep. Um, and I think really, you know, the last few years, as we talked about, they have really executed very well on this, the crowning achievement being, um, you know, the last few years, as we talked about, they have really executed very well on this. The crowning achievement being, you know, the building of their own data centers and moving off of AWS.

Yep. Yep. Well, should we quickly spin through what would have happened otherwise? Yeah, let's do it. And I guess what that is in this case is they didn't need to go public. They certainly don't need the cash. They're generating cash. They could have stayed private forever.

They didn't need to raise more money. I think in this case, the cash they had on their balance sheet when they IPO'd. I don't know. I'll see if I can find it in the S1 while you're. You look while I pontificate. But 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. You know, you can't... And there are going to be so many other of these companies, you know, whether it's Airbnb or Uber or Lyft or, you know, you, you can't, and they're going to be so many other of these

companies, you know, whether it's Airbnb or Uber or Lyft or, you know, what, what have you over the next year or two, um, you have to go public because, because your investors, you know, can't, uh, can't, you know, returns on paper, uh, aren't going to, uh, aren't going to help them, you know, after a certain point raise their next funds, but even more so, you know, especially in San Francisco and the Bay area, you can't pay your rent with, you know, illiquid Dropbox shares. Um, and so many employees at this point, um, you know, they need, uh, they need liquidity. Um, so I think they, I think they had to, you know, if not now in, you know, all of these companies are going to have to in the next one to two to maybe three years. Yeah. So they, um, here it is. They had a 430 million in cash and cash equivalents on their balance sheet at the end of 2017. So they probably could

have gotten to, um, net income positive, you know, full profitability, uh, just based on the amount of cash they had left in the bank to, to kind of turn that corner and start, start shooting up. So, um, I think the main reason to IPO here really is, uh, really is for liquidity. Yeah, totally. Should we do themes? Yeah. But I mean, what here's, I mean, here's, we just did soft bank. Like what if they just go raise, uh, I mean, they only raised $750 million in their IPO. Like, if you're SoftBank, would you consider making a bet that Dropbox will be a $40 billion company, you know, many years from now? Given their track record?

Yeah. And it's actually worth floating a billion dollars their way uh to give them a few more years and then take them public yeah well i'm gonna save my thoughts on this for grading all right all right sounds good um so tech themes tech themes let's do it all right um well one of my 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. So whatever you're using at home that's your really phenomenal software user experience, you're going to do that in the workplace too.

And their sales model really reflects that, where the vast, vast majority, I think 90% of revenue is generated from self-service channels. So people who purchase a subscription through the website or app instead of dealing with a salesperson, like a traditional enterprise software. And so you see this work in Slack, atlassian lots of other um companies that sort of did the same thing but dropbox is certainly a pioneer of the model yep indeed um and it really is a new category of company that's um been created over the last 10 years 10 to 15 years um uh this um you know like you say, broadly consumerization of IT,

bring your own device enabled, but really it's enterprise companies and SMB companies, companies serving B2B who don't sell to CIOs, who are adopted by the users and then purchased via credit cards. I think we have covered all of my tech themes throughout this very long episode. Thank you listeners for bearing with us. Um, but, uh, and then they were,

you know, this idea of round skipping when you're raising venture, like that is how you win, uh, whether you're a founder or, or whether you're, you know, an early investor, um, the way you don't get diluted down to de minimis ownership is, is by, by not raising, you know, by, by being able to, when you raise money, minimize dilution and minimize the number of times you raise money. Um, you know, we talked about building on AWS and, and, and, you know, at first head that enables quick, you know, going to market through that, but then eventually, you know, if you get to a certain scale, you need to move off of it. That's been, you know, what we didn't talk as much on this episode, but lots of people have talked about that. But I think the thing that my main theme for this episode that I, you know, just want to highlight again, um, is I think, you know, the two stories that we, the intertwined stories we told of Y Combinator and Dropbox. I think the moral here is, is, you know, sort of the, what each of them have as their mantras, which is, you know, Y Combinator is solve a real problem. You know, that's what they say to the advice that they make something people want, make something people want, you know, exactly make something people want is how they

phrase it. But when you're starting a company, when you're building a product, you have to solve a real problem, make something people want. And then on the Dropbox side, their moral of the story is, is make it just work, you know, make something people you want, make something people want, but it has to just work like it has to be productized. You can't be mucking around in the, you know, in the registry settings for, you know, or in, you know, Linux. David, if I, or in, you know, Linux. David, if I move this DLL over here, then... Totally. Like, you know, that is not going to be a mass market product. And I think when you pair

those two things is like, make something people want, solving a real problem, and then make it just work. Like, that's when the magic happens. But I think the other thing, you know, in sort of the second half of the story, certainly for Drop dropbox and you could argue in a lot of ways for y combinator these days too um as the organizations have success and get bigger then there's this temptation to go beyond that you know and then you start building products and doing things where it's like unclear does anybody want them and do they just work you know um and uh and i think like that's the that's the trade-off you know that uh both in startups and then as they grow that you have to you have to manage

i have one tech theme that's one that i've been wondering about and i i think i have examples and counter examples but i want to phrase it to you so drew got to own 25 at ipo of this company that's pretty unusual for a founder to to have a 10 billion dollar ipo and still own own a quarter of the company um this was largely because of this explosive growth that they were experiencing while still monetizing, mind you. So the fact that they were monetizing meant like they weren't burning cash into a hole to grow as fast as they were. But it exhibited these characteristics of a consumer company. And when you have consumer company growth metrics, you're able to minimize dilution that you take through your subsequent rounds. And so do you think it's the right way to think about it that his ownership percentage at IPO

is because their growth model looks consumery? Or better phrased, do consumer companies allow founders to preserve more founders' equity? I don't think necessarily. I mean, there certainly are plenty of consumer companies where founders have been incredibly diluted. I think it's more, though, that Dropbox and Atlassian even more so in the episode we did on them is the cash flow dynamics of the business. Atlassian is the extreme of this.

They never raised a dollar of primary capital. They could fund all of the growth of the company just from cashflow from operations. Dropbox very well could have done the same thing if, uh, if they wanted. Um, and when you have that as your BATNA, um, you know, it puts you in a very, very advantageous position for fundraising. Yeah. Yeah. That's a great point. You want to grade? Let's do it. I think I, we've talked about the good, the bad, the ugly of Dropbox, uh, um, in this episode, the good and the magic of the company is the product market fit of the core product. And, you know, Ben Thompson wrote about this in his updates and talked about it with James on, on exponent when they talked about the IPO. Um, and yet the

frustrating thing about the company is like, they haven't been able to expand beyond that. And, you know, Ben and James were very frustrated by that. Um, but here's, I ultimately think having survived that and being where they are now, this is actually a really attractive company. And the decision to IPO now, yes, if they hadn't gone off and walked in the woods for a couple of years, they could have done this a couple of years ago. But ultimately, the question in front of us, as you were saying in narratives, is like, what's the future? I think this market is both bigger than people think it is of the small businesses, but even more importantly, I think the rate of creation of new organizations that are going to be in the Dropbox customer sweet spot over the next decade is going to massively accelerate.

It's the, it's the same thesis for why square, uh, has a big opportunity. Um, there are lots and lots of people that are going to be starting small businesses, going to be being entrepreneurs of various types or, or like acquired doing this as a side project. Um, and Dropbox is the perfect, one of the suite of tools that is going to be, they're going to need to run their businesses. So, you know, I think, look, is this a, is this an Instagram? Is this a, uh, uh, on the M and a side, or I forget what our highest graded, uh, IPOs are. No, certainly not. Um, but I'm going to give this a B plus, um, in that even with all the execution challenges over the last few years, like the opportunity set ahead of Dropbox, uh, because of, I think this, this growth in the market, um, is going to be attractive. Yeah. It's funny. And thinking about this, I realized we have, there's sort of a little bit, not a flaw, but sort of a, I don't love the way that we do IPO grading

as much as acquisition grading, because the way that we say we evaluate this is was how good of a decision was it for the company to take the cash in this way to do something with it and the question is is that compared and the way we do this is we compare it on an absolute basis because we always go well the future growth ahead of it wasn't as big as instagram and like um what we probably should do is is look at the company like dropbox amazing job super successful company great at so many things created a 10 billion dollar market cap that's publicly traded real liquid shares if we compare it on a relative basis to what were their options like this is this is totally an a plus. This was great. Like they went out, they are now publicly traded. They got all their stuff in order to, to have this sort of,

uh, reporting and public company governance. Um, they, they issued a good number of shares. So lots of people are incentivized for the success of the company, but you know, it's still less than 10% of the company's shares are actually publicly traded based on what they raised. I think that cash will enable them to do interesting but not that interesting things. So do I think that they're going to 3 or 4x the company over the next decade, or let's say the next five years? I think it's kind of unlikely like do we think that they're going to get into the ranks of of a 50 billion dollar company a hundred billion dollar company probably not like i think this was the best thing that they could do they're a great company um but you know they're not they're not

they're never going to be a huge company and i don't know that our grading should penalize them for that so i think the a plus job on doing what they should have done when they should have done it relative to what Amazon did with their capital by IPOing like D. Yeah, it's hard to see. It's hard to penalize them for that, though. Yeah. Well, yeah, the Amazon comparison is interesting, right? Or SoftB interesting, right? Or, or soft bank, right? Like, you know, you're, you were, your company was something and then you were successfully able to make it much, much more than that. Uh, that takes truly, truly visionary

founders. Um, and Dropbox tried to do that and failed once. Um, and who knows if they'll be successful in the future but the ipo was probably a really great thing for them you know even if they won't be a multi-hundred billion dollar market cap company and of course the counter argument for that is they'll be profitable next year revenue has has almost doubled is from 2015 to 2017 so like they're still growing at a ridiculous clip so then you if you're doubling as a near public company every two years, you know, the question does become,

where's your ceiling? Yep, yep. Well, and that was the argument that I was making in grading, which is I think the ceiling just for Dropbox as it is today is going to keep rising. Still pretty high, yeah. High and going to keep rising

all right well i'll go with b plus then too uh this was fun uh listeners let us know uh we're fully aware that our episodes have been getting longer um it's because we've just loved doing all the work diving into these, uh, companies. And it's probably also why we're releasing episodes a little less frequently. Um, but let us know your feedback. Let us know what you think. If this is way too long, you want shorter, hit us up in the Slack. If you love it, let us know that too.

Yep. Carbots. Let's do it. Um, I'll go first mine uh real quick is a good friend my college roommate uh sent this to me the other day uh a youtube channel called lazy game reviews or lgr uh super fun it's this guy i don't know where the lazy comes from because it's definitely not lazy but um it's like retro game and technology reviews and so like uh one of the most recent episodes is games on ti83 calculators and it's like great nostalgia from back when i was in high school or early pc gaming like the sims or the need for speed or that

kind of stuff um very fun to watch cool mine is uh an article that friend of the show mark sent in um it is on on ars technica directx ray tracing is the first step toward a graphics revolution did you see anything about this in the last week no there's been both a lot of news from nvidia and from microsoft uh about ray tracing and uh using modern gpus to do ray tracing instead of how we typically render things, do real-time rendering. So as a quick primer, the way that, let's say you're watching a movie or you're seeing a cut scene in a video game, it looks way better than the things that are rendered in real-time for the video game because they use a completely different process to render them. They render them in, you know, like two to three seconds a day on render farms where there's tons of machines that can work in parallel and can do all kinds of

really crazy cool smooth stuff um and this is what pixar does right yep exactly and you look at a a video game and like you can kind of see all the rough edges and you can you know sometimes there's like things missing like you turn a corner and then suddenly bam you can see a reflection on someone's helmet that wasn't there a second ago and you're like why wasn't that available a second ago the traditional way that you render do real-time rendering is is by mapping polygons that effectively triangles and then drawing the textures on top and then drawing the light sources on top of that and what they do is they build it up from the furthest z position to the closest z position the same way that your eye sort of perceives things as like okay build this layer build that layer build that layer and that way

that it's it's kind of like a stack where the last thing rendered is the thing that you see and so obviously that this gets expensive if you're using very tiny triangles or if you're if you're taking advantage of or if you're showing the light that would sort of be occurring everywhere, instead of just in the in the place where you're looking. So it does miss out on some reflections, it misses out on the ability to do things in a very fine grained way. And if you are in graphics programming, I'm certainly messing this up. So I apologize. But ray tracing solves a lot of these problems. And it is a very is like a total leap forward but it's extremely computationally expensive so you can't typically do it in real time well this new directx api and

and a lot of the new hardware a lot of the new advances in gpus are starting to allow real-time ray tracing so we can start to move toward movie quality graphics in in real-time environments so i'm very excited to see what the, where the future of that will take us. Well, especially for VR and AR. Oh yeah. It's going to be huge.

Oh yeah. So again, my, my apologize to people who, who study and work on this and actually know it, but my, from reading a couple of articles, think it sounds very cool.

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