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Season 2, Episode 5: The Dropbox IPO

Season 2, Episode 5: The Dropbox IPO

Mon, 26 Mar 2018 04:49

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!


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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 the window is 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 of the IPO happened 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 acquirer? 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. We're here in real time after Dropbox IPO and did one day of very successful trading to talk about Dropbox, the company. If you're new to the show, you can check out our slack at It's easy to either join the slack there or get email updates about when we have new episodes. 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. 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. Our presenting sponsor for this episode is not a sponsor but another podcast that we love and want to recommend called the founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and founder. So we knew there's a natural fit. We know the host of founders. Well, David Senra. Hi, David. Hey, Ben. Hey, David. Thank you for joining us. Thank you for having me. I like how they group us together and then they say it's like the best curriculum for founders and executives. It really is. We use your show for research a lot. I listened to your episode of the story of Akiyama Rita before we did our Sony episodes. It's this incredible primer. You know, he's actually a good example of why people listen to founders until acquired because all of his great entrepreneurs and investors, they had deep historical knowledge about the work that came before them. So like the founder of Sony, who did he influence? Steve Jobs talked about him over and over again. If you do the research, him, but I think this is one of the reasons why people love both of our shows and there's such good compliments is on acquired. We focus on company histories. You tell the histories of the individual people. You're the people version of acquired and where the company version of founders listeners. The other fun thing to note is David will hit a topic from a bunch of different angles. So I just listened to an episode on Edwin Land from a biography that David did. David, it was the third, fourth time you've done Polaroid. I've read five biographies of Edwin Land and I think I've made eight episodes of them because in my opinion, the greatest such a printer to ever do it, my favorite entrepreneur personally is Steve Jobs. And if you go back and listen to like a 20 year old Steve Jobs, he's talking about Edwin Land's My Hero. So the reason I did that is because I want to find out like I have my heroes. Who were their heroes? And the beauty of this is the people may die, but the idea is never to. And so Edwin Land had passed away way before the apex of Apple, but Steve was still able to use those ideas. And now he's gone and we can use those ideas. And so I think what acquires doing what a founder trying to do as well is find the best ideas in history and push them down to generations. Make sure they're not lost history. I love that. Well listeners, go check out the founders podcast after this episode. You can search for it in any podcast player. Lots of companies that David covers that we have yet to dive into here on acquired. So for more indulgence on companies and founders, go check it out. 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. You know, 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? It was 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, we love it. 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, 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 fundraiser is and every, it's always messy. Like there's no, there's some free, there is no deal with that a little bit of hair. Like there is no company without a, and 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 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, 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, he creates lots of essays. He's sort of like decent, decent list programmer, decent list programmer, right? So back in 2005, Paul was PG, was living in Cambridge, Massachusetts, not Cambridge, England, although he is English, and 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 days called VioWeb. VioWeb 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 huge. So I think that was the mid 90s when he started that. And his co-founder was Robert Morris. And so they started it in Boston and ends up getting acquired by Yahoo in 1998 for about $50 million. And then Trevor, Trevor Blackwell had worked for them at VioWeb. And so when Yahoo acquired the company, Trevor moves out to Silicon Valley, goes to work for Yahoo. Robert Welf, PG bounces around a bunch. Robert is actually a professor at MIT, professor at computer science, in addition to being co-founder of multiple companies. He stays in Cambridge. Paul eventually comes back to Cambridge. He's living in Cambridge. And he starts, he starts dating Jessica. And Jessica is working in marketing at an investment bank in Boston. And she's not super happy with banking. I know how that goes. And the culture there. And so she, she starts interviewing at VC firms about coming on and being one VC firm in particular about being the director of marketing at the VC firm. And one night, Paul and Jessica are out at dinner. And they're talking about Jessica's interview process. 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 opening. And one thing about PG that anybody who certainly has read any of his essays or knows of his reputation, he's kind of nothing if not opinionated. So they're walking back from dinner. And he just goes off on VC firms in general. And their practice is and how they operate. Remember, this is 2005. So the concept of quote unquote, founder, friendway is still years away at this point 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's been thinking about getting in danger, investing. He never really had. And he didn't know why. And this seemed like a good catalyst. And so he's like, well, start our own VC firm and you can work for work for that. Don't go work for these guys. So the next day, he calls up, he calls up Robert, who's still a professor at MIT 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. And says, hey, you know, I wanted, I had this, just going to have this idea. We want to do this. 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 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'd probably, they'd probably just moved from Boston out to Silicon Valley that summer. Yeah. And if you think about sort of the hype train of startup 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 sort of start up 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 to start up. Yeah. I mean, still a thing that you're sort of convincing people to do with you as if you're a total not job, if you're doing this totally. And I was in college right at this time. Like, as this was all happening down a 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, some crazy startup, you know, the air Schmidt was a Princeton alum. It was CEO. So it was like known, but it was like, it wasn't something people went and did even people in CES departments. You know, they all wanted to go work in finance. And so Paul has this idea. He says, you know, I want to get into angel investing. Jessica and I are going to start our own VC firm. But what we're going to do is we're going to start by the way 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, and, and then they'll, you know, that's how we'll get into it. Maybe some of these companies will turn into something. So Paul and Jessica put in $100,000 and Robert and Trevor each put in $50,000. They've $200,000 and that's what they start Y-combinator with. 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, 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 due winter programs in California, out in Mountain View, where Trevor was. I think the first Mountain View office was actually in like Trevor's office out in Mountain View. So he had separately, I forgot to mention this, he had started after VioWeb a company called, called AnyBots, which is the company that makes those telepresence video conferencing robots, you know, like the screen on the wheels that's in like Silicon Valley episodes and stuff. Oh yeah. Yeah. So I think, 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. And then they come back to, they come back to Boston the next summer of 2006 for the third batch and a company, a fateful company applies to them from MIT in that, in that third batch in the summer of 2006. 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 Zapni, 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 five million bucks on California. I got to get in on this. I need to start a company. He's super inspired. He sees Adam's kind of path through YC. Says he has to do it too. What turns out that Drew had a company on the side at MIT called Accolade, which was doing SAT tutoring. And so he applies to YCominator. I believe it was that winter with this SAT prep company. And you know, I realized he had applied with the, he had applied once before Dropbox. He had applied before Dropbox. Wow. 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 Paul and Tessa go like, this guy seems like, you know, this kid seems pretty talented, but like it's an SAT prep company. We're not going to, we're not going to 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 as a little fraternity brother go through and and probably Mark Zuckerberg too. You know, he's who now moved out to moved out to Palo Alto and and started Facebook out and you know, move Facebook from Boston out to California. 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. The Chinatown bus, I don't think it exists anymore, but it was super cool. I used to take this, you know, living in these coasts back in New York, goes this bus, this like super sketchy bus, that you would pay for in Chinatown in New York. Then it go like to Philadelphia or to Boston. Drew gets on it in embossonies, intending to do a bunch of work on 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, literally not on the bus. And so as legend has it, 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 born. 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. It's just a weird mental leap that you have to go back. And that was only 11 years ago. Now everything is always either actually downloaded in with you or easily available to you. And in all likelihood, you that's abstracted away from you in 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 certainly have. Now, he was not the only person that saw this, 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 from I think from Mercer Island High School at USC. And basically had the same thing happen and they started Box. Which also was going after the same opportunity as them at the time was also a consumer company. Yep. Also started as a consumer company before they then obviously pivoted into enterprise. But Drew knows nothing of this. He's just 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 going to get into IC with this company. 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. It also comes up. Anything you watch interviews you read with Drew or watch 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 ink. Yeah. So you read the one. In the S1 and when the initial investment by YC, the check is made out to even flowing. Yep. Yep. So you know, any better Pearl Jam. 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 time frame. Maybe it was trademark issues with the name or something like that. But so he submits his he applies to to the summer. Now it's now summer 2007. Application cycle for YCominator. He submits his application. It's it's out there online, publicly available. We'll link to it 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 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.txt. And first of all, it's cool because the YC application really hasn't changed much. But unfortunately, 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 business insider article that we will link to. And it remains, you know, I read this. 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 initial startup phase or seed funding, you know, version of an S1. Yeah. And it's it's really, really worth reading. It's it's it's it's great. But there's just let me let me take a quick aside. So so at this point. So early on in the YC process, 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 it's coming up. But we'll it'll be fun. You'll be watching it. So he so he applies with the text file. And he I think he mentions in the text file that he's going to do a video. So Paul emails him. He emails him back and he's like, Hey, you know, like this looks pretty good. But it's just you. You kind of need a co founder. But there's a problem, which is like the deadline. They're going to make their decisions and the batch is going to start in like two weeks at this point. So so Drew is is undeterred. He starts scrambling. He's like, All right. I need a co founder. I need somebody. You know, I'm an MIT. I should be able to find somebody. He he emails. I don't know if emails are calls or talks to Kyle Vogue, 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 Justin TV and Twitch, he would go on to found crews, which crews automation, which was self driving car technology that got acquired by for by GM for a billion dollars a couple years ago. So it's really quite them off here. 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 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 a rush. 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 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 they're going to go for it. David, so when you're chatting with entrepreneurs and you say like, Oh, 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 sentences. And you just like anything about my friend told me about this guy. And I met him for two hours. And like, you know, Arosh 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, why see takes a chance on them. So they accept their application. They start. And sometimes I don't know if it was after they started in YC or or before they decide that they're going to make a video. It's kind of an explainer video of how Dropbox works. And at this point, Drew, mostly Drew, maybe Arosh worked on it a little bit. Have gotten kind of an MVP prototype up and running. And we'll link to this video in the show notes too. We'll try to link to it. But it's pretty amazing when you watch this. Well, it's funny for two reasons. 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. All the little images on the file, the check marks and then the sinking, you know, the circle circular arrows when it's sinking and all that all the low level operating system hooks. It's all done. I mean, basically very little has changed. But David, it sounds like a feature to me. Yeah, you know, how could this be pig? So they make this video. And then they really also, this is the other core of the product on the distribution and marketing business side. They decide that they're going to throw in some like illusions to, to, you know, popular culture memes in the video. So like a bunch of the files that they're sinking are like, you know, they've got some Tom Cruise images. They've got Steve Bomber with his tongue out like all this stuff. It's funny watching it now. Like I don't even remember what have these things are referring to. And, and so then they they make the video and then they post the video on hack or news on Reddit, which Reddit had been in the first batch of fly combinator. I think the first batch. And, and dig, which was dig was huge at the time. The video goes viral. And then that's how they get their wait list for, for their first users. And then it's really 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, as Ben Thompson said, on the most recent episode of, of, expo, 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 know, even watching it now and, you know, you also go watch it, watch it too. 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 found out the company, which is you put stuff in a folder and it sinks is like the feature that David and I use to produce this show. Like, we upload our audio to Dropbox, it sinks and then we edit it. It's, you know, they just nailed it so hard out of the gate. Totally. I mean, like we, you know, are, we'll get more into this later in the show. But, you know, we had, we, we had a great, great designer for us at Wave who did our, did our logo, did our website, like, you know, did an amazing job. Guys, awesome. He worked at Facebook, like, you know, great. It all just runs on Dropbox, you know, like, it just has a Dropbox account. That's how we collaborated on all this stuff. And so then Ben, what you're referring to, when they post this on Hacker News, this is, this is like somebody replies to the comment. Comments on the comments. 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, you know, let's, 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, for acquired to produce, I mean, it's 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 then 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 think you should rethink if this is going to be big or not. Yeah. Uh-huh. And this, this surface this week is Sam Altman, who's now the CEO of Ycombinator tweeted, don't, uh, 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 to 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 and response. And then the, and then the, the guy who was criticizing was like, hey, actually, you have really good arguments. Like great best of luck to you. Like, so it actually is a really nice ending. It's true. Hackerdos was such a nice place. I know. And then the internet all, you know, went to hell. This was pre-cambered analytic and Russian trolls and all that. It is actually kind of interesting to look at, um, look at these objections, uh, with the lens on the company today. Like the concept, it doesn't seem very income generating. It's, it's kind of not like if, if you think about the non-business users, and we'll of course go 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, you know, you're, 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 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 MoZ, there's CarbonA, there's, I don't remember SugarSync. There's what a high-tech company, well, I forget the company that maybe it was SugarSync that became high-tailed that, anyway, there's, there's box, of course, um, which was at the time. Um, but then also there's the whole, there's the like the looming specter of Google. Sure. Sure. Sure feels like this is something the platform should provide. I don't know. Yeah. Right. You would think so. And for years, I mean, I remember even back like maybe even when I was in high school, like, definitely, I, I, they're in high school and college, but definitely in college. There were rumors like everybody was talking about that. Google is working on the G drive. And it's like going to be, you know, the most amazing thing you've ever seen. Oh, we were, we're in P.M. meetings deciding on, on feature said and the 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, you know, it's, it's competitive with SkyDrive, which then became one drive. Um, it, you know, 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 was exactly this and not this at all. And then like even a month ago, they, they changed again into two different things that are much less consumable and digestible and understandable. But it, it all speaks to like Dropbox just nailed the crap out of the user experience. And, and the small competitors and the large competitors just couldn't touch it. Well, even to this day, I 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. And it's, it's funny looking at how much it didn't change. I was, 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 hooks into Dropbox. And for better, for worse, like it's all still there. And, you know, there's a little bit of like, I've got some complaints about the fact that like, do I need, you know, 50 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 syncs. And every time they try and stray away from that, they get in the danger of doing what Google did and being confusing. But it does, it does leave you with this nice history of everything you've ever been a part of. It totally does. And it's funny. I mean, I was trying to figure out when I actually joined Sign 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 the 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 if you paid for them. The very first set of apps I download, like Dropbox is on there, you know, like, 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 Sign Up code is this. What is Dropbox? Share the love. Thank you. Get That's awesome. Yeah, for some reason, I couldn't find my, I think I signed up directly, but I didn't get any like email confirmation, so I don't know when it was. Anyway, so suffice to say there was a big market for what they were doing. So they get accepted into YC. Everybody's excited. They do YC that summer of 07, and then later that fall, they move out to San Francisco. What kind of is what Drew had always wanted to do? He wanted to follow ZobD and Adam out there. So they move out to San Francisco. They just finished YC and they need to raise funding. They need to raise a seed round. So they end up meeting Sequoia Capital. 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, go ahead 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 E for the IPO. It was actually another partner at Sequoia, Sumir 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. Sumir 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. You know, traction is great. They do an inside round. They do a $6 million series A in October 2008. But in the interim though, Sumir actually leaves the company leaves Sequoia in the summer of 2008, and he moves over to Excel where he's still a partner to this day. 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 because they really, the founders have the relationship with Sumir. And so while Sequoia owns, I believe a 23% ish of the company before IPO. 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'll definitely get into it later, but like people put north of $500 million into this company and owned less of a person, less of the company than Excel does having never let around. Yeah, totally. Well, it's a testament to, unlike what people thought at the time, the quality of the business model behind it or the scalability of it. So the board see, the Sequoia board see, ends up transitioning to Brian Shryer who joins Sequoia in April 2008 from Google. And then Brian's been on the board ever since. And he is actually the only venture investor on the board of Dropbox, which again, it's crazy. Wow. Andoline Sir 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 cement the Sequoia Y-combinator relationships. Sequoia 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 batch, where Greg McAdity would lead 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 McAdity leads that investment. And then, fun side fact, that of course, the most important thing of this whole episode pretty much directly leads to Wave to my, to my, to my venture firm and what we're, 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 were 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 years later, give Wave off the ground. And then our partner, 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 premium 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 is 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 it 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 I 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 that the number of users are so big, they make so much money. All throughout this Dropbox is just raking in cash. They're massively cash flow positive, even as a young startup. To give you as 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 that, you know, tried and true freemium model. Yeah. And even with that very small percentage, last year Dropbox made 300 million in free cash flow. That's cash flow profits, not revenue, which is incredible. So I'll do this. The company is super lean. It's like a it's like an engineer's like, you know, dream. They're only about 20 companies, 20 employees at the company through like 2011, 2012, the first few years. They're all engineers. There's nobody, you know, no business folks there. It's just this this viral and referral dynamic that's like, it's also the nice thing about having 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 level on a company. The company got in so big though. The product had to 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 acquiring the company. And this is sort of a famous meeting that happens where, you know, they talked for a little bit and it Steve, you know, 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 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 going to crush you. We're going to do, you know, just like the mythical G drive. You know, we're launching I call 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 still Steve jobs. But so after that, the company basically dropped back says, well, man, we just turned down a billion dollar plus acquisition offer from Apple. Maybe we should raise some more money. What could we raise money at? And they say they go out. They basically get every venture firm out there to participate in this round. Index ventures leads their series B. But benchmark is participating, gray lacks participating, IVP Goldman Sachs like 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 there was a decent gap in there where they didn't raise money only 6%. I mean, if you think about the delusion that the founders are typically taking, you know, 20 to 30% each 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 raise fewer rounds and take less delusion 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% delusion and they raised even more money. Yeah. So the next round a couple of years later, they raised $350 million at a 10 billion dollar valuation. This is in 2014, led by BlackRock, but Morgan Stanley comes in, T-Row Price, Salesforce comes into it. Crazy. But then, worth noting, just a few number of rounds. I mean, they IPO'd after their series C. Yeah. Yeah. Absolutely. I mean, we talked about this in the StitchFix episode. StitchFix obviously didn't raise the valuations that that Dropbox did, but if you can raise fewer rounds and take less delusion, 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 $100 billion in it to deploy, like companies tend not to IPO after their series C. Yeah. Yeah. Well, it's a different world these days. But then there is this kind of, we've talked about, we talked about a little bit on the soft bank episode. There's this sort of law of gravity with fundraising for startups 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. 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, or Facebook, or what have you. And in fact, a lot of people are coming from Facebook to Dropbox at this time. So let's tee this up. You know, amazing product, check. Perfect market fit, or perfect usage fit, check. Virol 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 highly acquisitive and go into email clients. And 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 enter prize 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. Yeah. Well, my favorite of all, it's 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. The craziest thing, it's easy to throw stones in retrospect. Of course, during this period, they become free cash flow positive. They're printing cash while they're lost in the woods. So I think it's hard to knock them too hard. Hard to knock them too hard, but they deserve some actually. The craziest, most cock-a-me-me thing ever, which is now completely buried in history. But of course, that's why we existed acquired to unearth these things. 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 going to be a platform. They build and launch the Dropbox platform. They launch this in 2013. 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 did two. I did majoring it, but I know a little bit about it. Tell me how this sounds to you. They want to Dropbox's files, right? But not just files. Dropbox is going to be the storage infrastructure and solution for all of computing across distributed multiple mobile devices. You're writing apps and you need storage. Your code needs to live somewhere. You need assets. You need 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. Or just a little on, like, okay, I could, if I'm an app developer, I could use all the native tools that the Android and iOS development systems provide me and all of the storage functions that they get me. Or I could just use this third party. Yeah. I mean, the biggest issue was that at Dropbox at this point, as an organization was trained that they can beat the platform provider because their killer use case of it's a folder on your computer that sinks and it sinks everywhere. Just nailed it so hard that you get bold and you decide that even though these platform providers have all these things for developers and we can do better and we can build the tool chain they want. And it's much, much harder competing with the platform itself when you're down at the developer level. And really 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's competing with the platform is always difficult. And Dropbox found one little tiny wedge into where you can actually meaningfully compete. Well, and 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 during 2013 to 2016. A, it's unclear if they were even solving real problems, attacking real problems. 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 Clujier Dropbox thing. Like, yeah, that's where it's all I can all do. It was always frustrating to me as a user too, because like you had that then Dropbox Carousel app that came out that was asked 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, it wasn't, it was the opposite of all the magic that the original Dropbox product provided. It was the opposite of the initial YC application, really. Yeah. So that was kind of till 2016. And then Drew talks about this, especially he, he read this great book that I've never read, but was, because I think it's out of print. I've been trying to find it, but was talked about a lot in business school. 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. Some day we'll have to find a way to do an acquired episode on that. Yeah. But the point of that Andy makes in this book is that when companies, you know, they're sort of like Ben Harowitz 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 again named Dennis Woodside from Google and Dennis is the COO at Dropbox now. He had previously, he'd been in 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 sort of enterprise aspect of Dropbox for business. And they refocus on the core customer base. So this was 2016. And once they do that, things really turn around. They get, they become, they've always been cash flow positive. But during those years, they actually dip down into cash flow negative. They become back to hugely cash flow positive. As we, as we mentioned last year in 2017, they go, they generate over $300 million of free cash flow. A big part of that, 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 decide 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. And this massively improves the company. Yeah. And that was, that was in sort of the first half of 2016, as when Dropbox really actually waned off of AWS in that year before, they were actually duplicating their data. So their costs were way high while they were doing that, 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 upfront 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 to actually store stuff and not give that margin away to Amazon. Because in the long term, we want to have our cost basis below. And we're supporting 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 it makes a big, huge, huge impact on the company was basically like all of the stuff that they could get away with during the first period of job box when they were just growing of not, you know, sort of efficiently managing the company, which makes sense when you're growing startup. You don't want to optimize for efficiency. You want to optimize for growth. But then those gears 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. And you can see that in the financials. So, so what let's, I want to make a statement here and then we'll revisit it later. So the, the successive drop box in the box, the drop box that you want to bet on is the one that is lean, mean, focused, building this very consumer-oriented, easy to understand, file sharing product, or let's even say file collaboration product that may permeate into, or does permeate into monetizing small business and teams users. Yeah. Well, I think it's, you know, if you tell you 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 in 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 four billion dollar, you know, valuation series B and certainly the 10 billion dollar 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. 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, I do. Yeah, it's happening. Are we, are we, are we both paying for Dropbox? Well, no, no, only one of us is. All right, I was going to say we should look into that. Yeah, exactly. So it's not as large of a market as the consumer market, but it's still, it's still pretty impressive. So anyway, February 2018, and to capture that, the way that Dropbox reports this in their S1, I know I'm fast forwarding it, I had a little bit, but I want to make this, this point is that they say of our 11 million paying users, and that's out of their, 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, the growth of the company and the use case and the vast majority of their users looks like individuals, the, 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% using Dropbox for businesses relatively constantly. 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, you know that there's this weird tension between you kind of have your one Dropbox and are you going to invite that personal Dropbox to the organization or are you going to try and create a new Dropbox and have multiple Dropbox is syncing and now with Selectives. Like that's where it actually gets a little bit hairy. And so the best Dropbox, like the Dropbox and their, their absolute best shining light is the Dropbox where I'm just using my personal Dropbox 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. Well, there are a lot fewer businesses that are going to do that there and there are a lot more, you know, acquired out there. Yep. So as we were alluding to with all this, finally, February 2018, the company files to go public, they set the initial pricing range for the IPO at $16 to $18 a share, which equates to a valuation much lower than the $10 billion valuation that they did in the last private round. Bannana 2014. Bannana, you know, there's a lot of hand-ranging where we're going to get into narratives in a sec here. Then they raised the range to $18 to $20 a share before they priced, they ultimately priced 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 that 8.1 is their non-deluded market cap. So that did not include options that we are that were issued, but not granted for future employees. And if you roll that in and you have a fully deluded market cap, it was 9.2 billion. Right. Right. Right. Good point, which is common in startup when you 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 finished 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. Yep. So every single shareholder who bought in, as it was at a private company valuation made money. Indeed. Maybe not a lot of money. But yeah, that's a quite a 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, if we can get in narratives later, actually, I haven't done the calculation, but Sequoans about a quarter, 23% ish of the company and they finished trading at roughly a $12 billion valuation. So what's going to make about a two and a half billion on the on the IPO? Yep. Yep. That sounds about right. Not bad. Not bad in a day's work or a decades work in that case. No. And when you look at the delusion per round, it's 24% for the first two, 6% than 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. And if you look at YC and assume that they, the news 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 at the series B. Interesting. 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, 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. But I think this is probably the first of many YC 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 and then we'll jump into narratives real quick. It takes a long time. And this is actually a core, you know, Sequoia ethos that, you know, the lemons ripen quickly in venture, but the apples take a long time. But when they do, they barrel a lot of fruit. That's how 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 when 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 sinks 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 the 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 start to feel like, oh, are we in a 2014, 2015 situation again? Now I'd argue the other side. Because what are we doing on Dropbox right now with acquired? We are, you know, being creative. Is it enlightened? I mean, maybe I'm just getting caught up a little bit in the semantics. But anyway, so this is the company's positioning. 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 was on work about work. TDS tasks like searching for content switching between applications and managing workflows. So what what their big positioning here is is that 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. Feels a little snaps. I think they're going to, I don't think they're going to have to happen. I don't think it's going to happen to them financially, but like the high flying mission statements there are starting to happen here are a little, a little much. Well, I think the question is, 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. Cavi, and 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 sinks? If they mean that, and I think if you like the financials, that's what they mean. I mean, that's what people pay Dropbox for who who pay them. Like that's that's pretty great. And like they're made a billion dollars in revenue last year on that. Yep. That's very true. And so they, this is apparently a thing now, the content collaboration platforms has a magic, magic quadrant with Gartner. 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 sinking files being this collaboration platform. So think Dropbox paper, they specifically call out a bunch of features, search, preview, smart sync, version history and showcase. So there's all these sort of, 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 because I've looked at it like very briefly, but I heard great things. It's effectively Google Docs compete, but with a subjectively more intuitive way of, of, of laying it out, of putting in the, the features and the, where all the controls are. It's tightly coupled with Dropbox instead of being outside of the ecosystem. Yeah. A better collaboration features. Let's see you sort of, and it's amazing to say better collaboration features than Google Docs because that's been their thing forever, but that, 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, should live. And at this point, you know, if I'm a organization, now maybe, maybe the market is, is just like for storage collaboration for such small enterprises that don't have Google Apps built in, but you know, I'm way, if I'm a small organization, I run on Google Apps. I'm going to use Google Drive, or could 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 the, 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, 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. And it's, 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, so, so, so, so, so, to sum up the narratives around, um, Dropbox, from their position, it's really, we're set apart by simple, intuitive design and 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 didn't, didn't come true. A lot of people worried about it being a down-round from the last fundraise, obviously, with trading up in the first day, the company was not able to benefit from a lot of that, a lot of the upside that happened in that trading on the first day, but the, the bankers that took them public were, lots of individual shareholders, all the employees that have their stock locked up, everyone benefits from that. And of course, we've had one day of trading. So, we'll see what continues to happen, but tons and tons of demand for Dropbox. So, that skeptic 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 cops. 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 think that's the right way to think about it. I think that's the, I like that way of thinking about it. And it probably can be a huge company just thinking about it like that. I totally agree. Yeah, I think that's like Skype is probably the closest, closest analogy here. Because 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 our Microsoft and Google. And you know, on the consumer side, it's just really hard to get people consumers to pay for storage. 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 Dropboxes a magical solution. That's true. There's three other sort of, I won't say skeptical, but narratives that the company wouldn't wouldn't put forth that Ben Thompson called out this week, this week, either on Exponent or when the S1 came out, he did in the Stratekery 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 access 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 would ask in the private company's 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. Yeah. So your point would be that like you can go a long time without intentionally using Dropbox. 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. A couple of other narratives. One is they can't decide if they want to focus on top line or bottom line. They're massively cost-cutting by spending years shifting to cheaper infrastructure, but they're still also trying to expand into into new markets and build things like paper and sort of risk being, 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. 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, they do report what they spend on sales and marketing that is broken out, but that doesn't, but Dropbox doesn't include their infrastructure, particularly for all the free accounts in sales and marketing. I think that's in cost of revenue. So it's difficult to understand, when we think about acquiring a customer for Dropbox, acquiring a paid user, how much money does Dropbox have to spend on them as a free user for years storing gigabytes of their files before there's an upsell opportunity? So it's difficult. If you really wanted to model it as a pure cost of customer acquisition lifetime value equation, 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 over subscribed 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 2016, they lost 210 million. Last year, they lost 11 million. And like they're well on track this year, maybe next year, to cross that finish line and become a true profitable company. Yeah, I think I'm positive. I think 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 would look more like a traditional business. Yep. 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, 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, 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 the balance sheet when they IPO'd. I don't know. I'll see if I can find the NES one while you're well, you look, you look while I pontificate. But I think in this case, they they had to go public because even though they were very efficient with their fundraising, the 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, whether it's Airbnb, Uber, or Lyft, or what would have you over the next year or two. You have to go public because your investors can't, you know, returns on paper aren't going to help them, you know, after a certain point, raise their next funds. But even more so, especially in San Francisco and the Bay Area, you can't pay your rent with, you know, illiquid drop-off shares. And so many employees at this point, you know, they need liquidity. So I think they had to, you know, if not now, and you know, all of these companies are going to have to in the next one to two to maybe three years. Yeah. So they, here it is, they had a 430 million in cash and cash equivalence on their balance sheet at the end of 2017. So they probably could have gotten to net income positive, you know, full profitability just based on the amount of cash they had left in the bank to kind of turn that corner and start shooting up. So I think the main reason to IPO here really is, really is for liquidity. Totally. Plus. You 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, I mean, they only raised $750 million in their IPO. Like, if you're soft bank, would you consider making a bet that Dropbox will be a 40 billion dollar company, you know, many years from now. Given their track record. Yeah. And it's actually worth floating a billion dollars their way to give them a few more years and then take them public. Yeah. Well, I'm going to save my thoughts on this for grading. All right. All right. Sounds good. So tech themes. Tech themes. Let's do it. All right. Well, one of my, one of my tech themes is definitely we saw this bring your own device thing that the the iPhone started and then Dropbox is really the first example and maybe Skype. Let's call it Dropbox of bring your own software as a service. So whatever, 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, at last, Ian, lots of other companies that sort of did the same thing. But Dropbox is certainly a pioneer of the model. Yeah. And it really is a new category of company that's been created over the last 10 years, 10 to 15 years. This, like you say, Broadly Consumeration 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. But and then they were, you know, this idea of round skipping when you're raising venture, like that is how you win, whether you're a founder or whether you're an early investor, the way you don't get diluted down to, to minimize ownership is by not raising, you know, by being able to when you raise money, minimize dilution and minimize the number of times you raise money. You know, we talked about building on AWS and and you know, at first 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, well, 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, is I think, you know, the two stories that we'd, 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 is 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, 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, you know, in a registry settings for, you know, or in, you know, Linux. Even if I move the CLL 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 Dropbox. And you could argue in a lot of ways for Y-combinator these days too. 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? And I think that's the, that's the trade off, you know, that 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 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 have a $10 billion IPO and still own a quarter of the company. This was largely because of this explosive growth that they were experiencing while still monetizing, mind you. So the fact they were monetizing meant like they weren't, you know, 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 delusion that you take through your subsequent rounds. And so do you think it's the right way to think about it that 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's certainly a plenty of consumer companies that where founders have been incredibly deluded. I think it's more though that Dropbox and Alassia and even more so in the episode we did on them is the cash flow dynamics of the business. Like they, Alassian 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 cash flow from operations. Dropbox very well could have done the same thing if they wanted. And when you have that as your batna, you know, it puts you in a very, very advantageous position for fundraising. Yeah. Yeah, it'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 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 and his updates and talked about it, which James on on exponent when they talked about the IPO. 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. 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 years, they could have done this a couple 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 same thesis for why Square has a big opportunity. 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. 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 on the M&A side or I forget what our highest graded IPOs are? No, certainly not. But I'm going to give this a B plus in that even with all the execution challenges over the last few years, like the opportunity set ahead of Dropbox because of I think this this growth in the market is going to be attractive. Yeah, it's funny in thinking about this. I realize 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 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 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 reporting in public company governance. 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 they raised. I think that cash will enable them to do interesting but not that interesting things so like do I think that they're going to three or four X the company over the next decade or maybe let's say the next five years I think it's kind of unlikely they do we think that they're going to get into the ranks of a $50 billion company a $100 billion company probably not like I think this was the best thing that they could do they're a great company but you know they're not they're not they're not ever going to be a huge company and I don't know that our greeting 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 IPO-ing like D yeah it's hard to penalize them for that though. Yeah well yeah the Amazon comparison is interesting right or soft bank right like you know you were your company was something and then you were successfully able to make it much much more than that that takes truly truly visionary founders and Dropbox tried to do that and failed once 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 as a near public company every two years you know that question does become where's where's your ceiling. Yep yep one that's 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 it high yeah high and going to keep rising. All right well I'll go with B plus than two. This was fun. List news let us know we're fully aware that our episodes have been getting longer. It's because we've just loved doing all the work diving into these companies and it's probably also why we're releasing episodes a little less frequently 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. I'll go first mine real quick is a good friend my college roommate sent this to me the other day. YouTube channel called lazy game reviews or LGR super fun it's this guy I don't know where the lazy comes from because it's definitely not lazy but it's like retro game and technology reviews and so like one of the most recent episodes is games on TI 83 calculators and it's like greatness to algebra 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 very fun to watch. Hmm cool mine is an article that friend of the show Mark sent in it is on on ours technical direct X 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 about ray tracing and using modern GPUs to do ray tracing instead of how we typically render thing 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 cutscene 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. This is what Pixar does right? Yep exactly and you look at a video game and like you can kind of see all the rough edges and you can you know the sometimes there's like things missing like you turn a corner and then suddenly bam you can see 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 map 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 grain 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 is a very it 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 direct X 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 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 yeah that sounds awesome yeah all right well listeners that is all we've got if you aren't subscribed and you want to hear more you can subscribe for your favorite podcast client and if you feel so inclined we would love a review on Apple podcasts have a great day