Dropbox: Tech’s Hottest StartupPosted: October 28, 2011
This is an intriguing story-in-progress; it may crash, burn or take off but it will propagate a lot of money and learning. I thought this overview by Victoria Barret of Forbes was a good summary of Dropbox.
Whether it succeeds or “fails” is beside the point; these guys are having a great adventure, learning a ton, and building a great set of business contacts.
Here is the Dropbox team: http://www.dropbox.com/about
Here are a couple of good videos:
Here’s that rare Steve Jobs story, one that’s never been told, about the company that got away. Jobs had been tracking a young software developer named Drew Houston, who blasted his way onto Apple’s radar screen when he reverse-engineered Apple’s file system so that his startup’s logo, an unfolding box, appeared elegantly tucked inside. Not even an Apple SWAT team had been able to do that.
In December 2009 Jobs beckoned Houston (pronounced like the New York City street, not the Texas city) and his partner, Arash Ferdowsi, for a meeting at his Cupertino office. “I mean, Steve friggin’ Jobs,” remembers Houston, now 28. “How do you even prepare for that?” When Houston whipped out his laptop for a demo, Jobs, in his signature jeans and black turtleneck, coolly waved him away: “I know what you do.”
What Houston does is Dropbox, the digital storage service that has surged to 50 million users, with another joining every second. Jobs presciently saw this sapling as a strategic asset for Apple. Houston cut Jobs’ pitch short: He was determined to build a big company, he said, and wasn’t selling, no matter the status of the bidder (Houston considered Jobs his hero) or the prospects of a nine-digit price (he and Ferdowsi drove to the meeting in a Zipcar Prius).
Jobs smiled warmly as he told them he was going after their market. “He said we were a feature, not a product,” says Houston. Courteously, Jobs spent the next half hour waxing on over tea about his return to Apple, and why not to trust investors, as the duo—or more accurately, Houston, who plays Penn to Ferdowsi’s mute Teller—peppered him with questions.
When Jobs later followed up with a suggestion to meet at Dropbox’s San Francisco office, Houston proposed that they instead meet in Silicon Valley. “Why let the enemy get a taste?” he now shrugs cockily. Instead, Jobs went dark on the subject, resurfacing only this June, at his final keynote speech, where he unveiled iCloud, and specifically knocked Dropbox as a half-attempt to solve the Internet’s messiest dilemma: How do you get all your files, from all your devices, into one place?
Houston’s reaction was less cocky: “Oh, s–t.” The next day he shot a missive to his staff: “We have one of the fastest-growing companies in the world,” it began. Then it featured a list of one-time meteors that fell to Earth: MySpace, Netscape, Palm, Yahoo.
Dropbox’s ascent has been just as stunning. The 50-million-user figure is up threefold from a year ago, and it has solved the “freemium” riddle, with revenue on track to hit $240 million in 2011 despite the fact that 96% of those users pay nothing. With only 70 staffers, mostly engineers, Dropbox grosses nearly three times more per employee than even the darling of business models, Google. Houston claims it’s already profitable but won’t reveal margins.
It’s only going to get better. That 96% of nonpaying customers is throwing their stuff into Dropbox at such a pace that thousands of people each day blow through the free 2 gigabytes of storage, and upgrade to 50 gigs for $10 a month or 100 gigs for $20. Even if Houston doesn’t sign up a single customer in 2012, his sales will double. As we go over this math Houston pauses to garnish this lovely inevitability: “But we will sign up many, many customers.”
Dropbox has become a verb over the past year (“Dropbox me”), and Silicon Valley has taken keen notice. By 2008 Houston had raised $7.2 million—enough cash, given its robust economic model, to get it to its current stage. This past August Houston decided to go for the kill. He invited seven of the Valley’s elite venture firms through Dropbox’s San Francisco digs over a four-day stretch, and asked them for offers by the following Tuesday.
Only one came back to him quickly. Just before midnight the eve offers were due, Dropbox’s head of business development—a former venture capitalist —suggested Houston either delay the round or even pull it. Houston’s reply: “We said Tuesday. It isn’t Tuesday.”
Sure enough, every firm came back interested the next morning. Houston eventually made a deal, which closed in late September, that included Index Ventures as lead, Sequoia, Greylock, Benchmark, Accel, Goldman Sachs and RIT Capital Partners. Many stretched their deal definitions to get in. It’s the stuff of instant Silicon Valley legend: While the soft market, and Houston’s insistence on dealing only with platinum-plated VCs, crimped his valuation a bit, five-year-old Dropbox still raised a whopping $250 million on a $4 billion valuation. “This is the hot company,” says one prominent investor who didn’t get in. “Everyone wanted to be a part of it.” Houston’s estimated 15% stake is worth, on paper, $600 million.
Leaning back on an Aeron chair two weeks after the deal closed, across from a customized neon sign that reads “ITJUSTWORKS” with “just work” popping out in blue, Houston muses on what he will do with his new quarter-billion-dollar war chest. Their single-room office on gritty Market Street will soon give way to an 85,000-square-foot spread with views of the Bay as his staff will swell from 70 to 200, still an absurdly low number given the company’s size. And he will see whether he can realize the vow he made to Jobs about building a major company, or else fall prey to the MySpace-esque hazards he predicted. “I have to learn how to be big,” he says.
It’s just before midnight on a Monday, and Houston has turned his favorite late-night watering hole, the bar in San Francisco’s W Hotel, into a fraternity party—literally. The first to arrive is Adam Smith, who was a fellow Phi Delta Theta at the Massachusetts Institute of Technology before dropping out to start an e-mail search company, Xobni. Then come Chris, Jason and Joe (who has a Dropbox tattoo on his arm because he feels “Drew is changing the world”), more MIT brothers aiming to live a California dream they all imagined back in Cambridge as “billionaires, bottles and babes.” With girlfriends in tow, Smith and Houston gulp glasses of Pinot and reminisce about the summer they spent coding in boxers because the A/C was down. “Those were the days,” smiles Houston with his arm around Smith. “Just me and my code. None of this hiring and firing business.”
Houston clearly draws strength from this group—he has even recreated the fraternity living experience in San Francisco, moving into the same downtown building as Smith and ten other entrepreneurs. If dropping out of college was a watershed moment for the likes of Bill Gates, Michael Dell and Mark Zuckerberg, then staying in was equally transformative for Houston, particularly his fraternity experience.
The just-me-and-my-code default, after all, is wired into his DNA. His father is a Harvard-trained electrical engineer; his mother, a high school librarian. Growing up in suburban Boston he began tinkering at age 5 with an IBM PC Junior. His mother, correctly deducing that her son was becoming a code geek, made him learn French and hang out with the jocks, and refused to let him skip a grade. During summers in New Hampshire she took away his computer, even as he griped about being bored in the woods. “She was subtle about making me normal, I guess, and I can appreciate it now.”
At 14 Houston signed up to beta test an online game, and began rooting out security flaws. They soon hired him as their networking programmer, in exchange for equity. That year, at a school assembly, one speaker asked the group: “Raise your hand if you know what you want to be when you grow up.” Houston was the only kid out of 250 with his hand up. “I wanted them to call on me, but it was rhetorical. I wanted to run a computer company.” He worked at startups throughout high school and college. Dropbox is his sixth.
By freshman year at MIT it seemed his mom had failed. Most of his time was spent coding. He was finally convinced by Daniel Goleman’s book Emotional Intelligence that “smarts weren’t enough” if he wanted to run a company. So he spent the ensuing summer on the roof of his frat reading business books. “No one is born a CEO, but no one tells you that,” says Houston. “The magazine stories make it sound like Zuckerberg woke up one day and wanted to redefine how the world communicates with a billion-dollar company. He didn’t.” Then he signed up to be rush and social chair, “a crash course in project management and getting people to do stuff for you.” (His roommate, Joe, recalls otherwise: “No one else wanted to do it.”)
When Adam Smith left the house in September 2006 to start Xobni in San Francisco, it gave Houston proper motivation. “If he could do it, I knew I could,” says Houston. “I wanted to live the dream and felt stuck eating Hot Pockets.” His M.B.A. from Phi Delta Theta was complete.
The idea for Dropbox was born three months later on a bus to New York. He planned to work during the four-hour ride from Boston but forgot his USB memory stick, leaving him with a laptop and no code to mess with. Frustrated, he immediately started building technology to synch files over the Web. Four months later he flew to San Francisco to pitch his idea to Paul Graham of incubator Y Combinator.
But Graham insisted he have a cofounder before even submitting his application. Houston had two weeks to find the right person. A friend referred him to Ferdowsi, the only son of Iranian refugees, who was studying computer science at MIT. They talked for two hours back in Boston and “got married on the second date,” as Houston describes it. Ferdowsi dropped out of school with just six months to go.
Dropbox landed $15,000 from Y Combinator, enough to rent an apartment and buy a Mac. Keen to make Dropbox work on every computer, he spent 20 hours a day trying to reverse-engineer the guts of it.
Dropbox answered a new, vexing problem for a world where people carry a phone or two, and perhaps a tablet, but have files and photos stuck on multiple PCs, laptops and mobiles. “Devices are getting smarter—your television, your car—and that means more data spread around,” says Houston. “There needs to be a fabric that connects all these devices. That’s what we do.”
After one simple download of the Dropbox app someone could store any file instantly “in the cloud.” Once it’s there they can access that file from any other device and invite others to see it, too. An update to the file on one machine shows up on another.
Months later the duo presented Dropbox at a Y Combinator event. Immediately after, a slick-looking guy started chatting up Ferdowsi in Farsi. Pejman Nozad got his start as an investor during the dot-com era by exchanging commercial real estate for stakes in startups, notably PayPal. He operates out of the family’s rug store (“I thought it was a joke,” says Houston) and entertained the pair with Persian tea in the back. Within days he had Houston and Ferdowsi in front of Sequoia, the firm that backed Google and Yahoo, claiming, falsely, Dropbox was fielding multiple VC offers. “Basically he was our pimp,” says Houston.
Sequoia’s senior partner, Michael Moritz, showed up at Houston and Ferdowsi’s apartment the following Saturday morning. “They were bleary-eyed,” recalls Moritz. Pizza boxes climbed the walls and blankets cluttered the corners. He told his partners to do the deal, and Dropbox landed $1.2 million. “I’ve seen a variety of companies attacking parts of his problem, like Plaxo,” says Moritz. “Big companies would go after this, I knew. I was betting they have the intellect and stamina to beat everyone else.”
Houston and Ferdowsi spent the next year pulling all-nighters. They were perfectionists. One time Houston had to track down a copy of Windows XP for Sweden because it had a unique coding quirk that was stalling Dropbox slightly. Ferdowsi had a designer spend hours tweaking the shade of Dropbox’s button inside the file system on a Mac. It was a touch darker than the Apple buttons, and it drove him “crazy” for weeks. “I am the gatekeeper here,” says Ferdowsi. “Everything has to be just so.”
Dropbox stayed lean, which enabled it to sail through the meltdown. In 2008 it had nine employees and 200,000 customers. Two and a half years later it had added five workers. Users rose tenfold.
Houston and Ferdowsi moved offices again and often just slept at work. They were getting every customer service e-mail and ignoring messages from their VCs. They toyed with advertising. “That’s what you’re supposed to do: hire a marketing guy, buy Google AdWords,” says Houston. “We sucked at it.” It was costing them $300 to hook one sign-up. Their challenge was marketing a product to solve a problem people didn’t realize they had and weren’t searching for. Ferdowsi from the start insisted Dropbox’s home page be a simple stick-figure video showing what the product does. No table of features and pricing; instead, a story about a guy who loses stuff and goes on a trip to Africa.
So rather than advertise, they turned their small but loyal customer base into salespeople, giving away 250 megabytes of free storage in exchange for a referral. One-quarter of all new customers still come to Dropbox this way. Within two and a half years the snowball had rolled into a $4 billion valuation.
The opportunity in front of Drew Houston revealed itself again a few months ago during a booze-fueled lunch at VC Ron Conway’s Belvedere, Calif. bayside villa. As Houston carefully explained what Dropbox did, he was cut off in the exact way that Steve Jobs had so many years ago: “I know, I use it all the time.” Rather than a tech CEO, his drinking buddy was rapper Will.i.am of the Black Eyed Peas, who told Houston he used Dropbox to collaborate with producer David Guetta on the hit “I Got A Feeling.”
Such tipping point anecdotes now pour in. After his laptop crashed during final exams one law student wrote in: “Without Dropbox I would have failed out of law school and be living under a bridge.” A watch design firm just outside of Venice, Italian Soul, uses Dropbox to create new pieces with a designer in Mendoza, Argentina, the hulking 3-D files living painlessly in the cloud. Haitian relief workers kept up-to-date records of the deceased and shared those names with Miami and other cities. Professional sports teams inventory videos of opponents’ plays, accessible wherever the team is playing. Last Thanksgiving even the shadowy Ferdowsi, donning a Dropbox hoodie, was mobbed by star-struck teens in an arcade in Kansas City, his hometown. “That’s when I knew we’d hit it,” says Ferdowsi.
Houston believes Dropbox is ushering in a new wave of computing, where people are untethered from their files. “Your data follows you.”
To pull this off Dropbox must manage incredible volume and stunning complexity—while making that all simply disappear to anyone using the service. Every day 325 million files are saved to Dropbox (old files and newly created ones), which must slide seamlessly onto any device. Houston and his geeks have built tendrils into 18 different operating systems, four browsers and three mobile software systems. When even the smallest software update comes out, Dropbox has to make sure it still works. In June a password breach exposed up to 68 accounts, underscoring the risk Houston faces as the company holding the keys to 50 million people’s digital attic. “I cannot express how deeply sorry I am,” he e-mailed the exposed users, appending his personal cellphone number. “Dropbox is my life.”
There’s also the issue of competition. Houston rattles off the list: “Apple, Google, Microsoft, Amazon in a way, then there’s IDrive, YouSendIt, Box.net, dozens of startups, even e-mail … people sending themselves everything.” While he believes Dropbox will torpedo the backup industry within five years, he especially fears iCloud, which will surely push itself upon the 222 million people who’ve bought iPhones, iPods and iPads, and Google’s rumored Drive product (1 billion people visit Google sites monthly, according to Comscore, and 190 million worldwide now have an Android device).
So Houston must combat a MySpace-like implosion by spending a lot of his war chest on ubiquity. He’s protecting his flank against Google via a new deal with phonemaker HTC, which will make Dropbox the default cloud storage option on every one of its Android phones. Deals with six other phone firms are almost inked; PC and television makers are next. Houston has hired a team to tailor Dropbox to businesses. A couple hundred outside developers are making apps for Dropbox.
Houston needs to delegate more. His spiky chestnut hair now boasts patches of premature gray. The Phi Delta M.B.A. still remains the company’s CFO, something that he’s knee-deep in résumés trying to change. A big step on the road from startup code geek to tech tycoon.
Last month Houston spent an evening with Mark Zuckerberg plotting ways to collaborate over generous portions of bison meat (the Facebook cofounder is eating only what he kills this year). As he walked out of Zuckerberg’s relatively modest Palo Alto colonial, clearly en route to becoming the big company CEO he had told Steve Jobs he would be, Houston noticed the security guard parked outside, presumably all day, every day and pondered the corollaries of the path: “I’m not sure I want to live that life, you know?” And then got into his Zipcar and drove back to San Francisco.