Finance

24

TECHNOLOGYREVIEW.COM MIT TECHNOLOGY REVIEW VOL . 120 | NO. 2

S A

M D

’O R

A Z

IO

Upfront

Eyeing a Dropbox IPO Can the tech unicorn cash in on corporate users?

Of the big IPOs expected to occur this year, Dropbox’s could be one of the most intrigu- ing. When Dropbox last raised money, in 2014, it was valued at a hefty $10 billion. But large investors such as Fidelity and T. Rowe Price slashed the value of the Drop- box shares on their books by as much as 50 percent in 2015. The key concern: could a company whose free file storage service is used by hundreds of millions of people find enough paying customers to make a great business?

Investors may be in for a pleasant sur- prise. According to the company, sales are now running at more than $1 billion a year, up from around $400 million in 2014. That’s thanks in part to growing sales of Dropbox Business, a souped-up version of the free app that costs $150 per employee per year. The company has been cash-flow positive since early 2016, even as it has made heavy investments in engineering, sales, and IT infrastructure.

Now CEO and cofounder Dre w Houston is leading a new strategic charge. In addition to selling utilities to keep dig- ital files safe and accessible, Dropbox intends to offer software that businesspeo- ple use for hours each day to create con- tent and get work done. “This is a mature, very, very powerful software company,” says Bryan Schreier, a partner with ven- ture capital firm Sequoia Capital, which was an early investor in the company.

That doesn’t mean Dropbox will live up to that heady $10 billion valuation, which even at the time was widely seen as a sign of a bubble about to burst. Even at an annualized revenue of $1 billion, investors would need to think the com- pany is worth 10 times its current sales on the day it goes public. These days, the average cloud software company trades at just 4.7 times revenue, according to Bessemer Venture Partners.

Still, Schreier and other investors insist they are no longer worried about

MA17_upfront.indd 24 2/6/17 3:58 PM

25

TECHNOLOGYREVIEW.COM MIT TECHNOLOGY REVIEW

VOL . 120 | NO. 2

Dropbox’s fundamental business model. About 10 million new people start using the free consumer product every month. An increasing percentage of those users sign up for the $100-a-year Pro version, which offers more storage and sharing features. Many of those Pro customers use Dropbox at work, and once their employers realize how popular it is, they are more likely to step up to Dropbox Business, which is designed for use by teams rather than individuals. So far more than 200,000 companies have signed up for Dropbox Business, up from 50,000 in 2014. While most are small and medium-sized companies, a few big com- panies such as Expedia and News Corp. have more than 10,000 seats.

A successful push into productivity and collaboration software could give corporate customers much more to buy from Dropbox. The first example is Paper, which provides a kind of virtual white space where employees and contractors can share Excel spreadsheets, Google Docs, and other digital assets regardless of what device they are using. The idea is to tie together scores of different productiv- ity tools and fold in management tools to help teams keep projects on track. Paper has been in beta since late 2015 and offi- cially launched in January. “In five years, you could start a business on Dropbox: that is something we aspire to,” says chief operating officer Dennis Woodside, who declined to comment on IPO plans.

Dropbox is far from the only com- pany looking to change the way work is done. Google offers G Suite, which con- tains business versions of apps such as Google Docs and Gmail. Facebook has a collaboration service called Workplace. Microsoft is improving its cloud offerings as it seeks to defend the massive mar- ket share earned with its Windows and Office monopolies. Box has strong trac- tion with companies in highly regulated

industries like health care and financial services, while younger providers such as Asana, Atlassian, and Slack already han- dle elements of what Dropbox aims to do. According to Gartner analyst Karen Hobert, there are 130 companies just in the electronic file storage and sync market.

Yet even rivals see Dropbox as a likely survivor of the inevitable consolidation. The overall market opportunity for pro- ductivity and collaboration tools is $30 billion, if you replace all those PC disk drives and traditional Windows or Mac programs with cloud-based alternatives. “That’s an order of magnitude more than the combined revenue of all the players today,” says Box chief executive officer Aaron Levie. “As everything moves to

the cloud, there’s going to be plenty of opportunity.”

Dropbox has been bulking up for this opportunity since 2014, when Houston hired Woodside. A former McKinsey con- sultant, Woodside joined Google in 2003 as an operations expert before running U.S. sales and then the Motorola Mobil- ity cell-phone division. At Dropbox, he’s hired more than 200 salespeople, up from zero when the company relied solely on Internet clicks. The engineering team has more than doubled to more than 1,000 members, large by any measure. And he has overseen a massive, risky IT overhaul. While most companies are moving more of their business onto public cloud plat- forms like the one run by Amazon Web Services, Dropbox has shifted billions of its U.S. customers’ files away from Ama- zon’s platform to three of its own data centers. That way, Dropbox can tweak its

network to cut the time it takes to store and sync traffic.

The result is more of a traditional enterprise software company than the hyper-efficient app maker Houston founded in 2007. The idea for the com- pany came when Houston realized dur- ing a long bus ride that he’d forgotten the USB drive with his work files at home. The resulting cloud-storage app was a sensation with people who felt his pain. By 2012, Dropbox had 100 million reg- istered users.

Then things got difficult. Giants such as Amazon, Apple, Microsoft, and Google began giving away cloud storage capacity as a way to sweeten other offerings. As prices collapsed, cloud storage specialists faced an existential threat.

A successful move by Dropbox into the huge market for productivity and col- laboration software could brighten the outlook, but it will require the company to pull off two tough transformations at once. Dropbox is still evolving from a maker of a free consumer app to a cor- porate IT infrastructure company. Now it must also move from selling technol- ogy that’s designed to be as invisible as possible to making products people use throughout much of their day. Its com- petitor Box provides a cautionary tale. It introduced a Paper-like product three years ago called Box Notes. But Levie admits that its reception has been less than overwhelming. Box relaunched Notes with new features earlier this year.

Woodside responds that few com- panies have the scale, the technical expertise, and the brand to pull off its ambitious plans. “There’s close to two billion knowledge workers in the world, and I know this much: the tools they’ll be using in five years are not the ones they’re using today,” he says. “Is the number 500 million? A billion? I don’t know. But we have a shot.” —Peter Burrows

The tools workers will use in five years will be very different from today’s.

MA17_upfront.indd 25 2/6/17 3:58 PM

Copyright of MIT Technology Review is the property of MIT Technology Review and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.