Season 2, Episode 5: The Dropbox IPO

[0] It's roughly the same.

[1] And then they raised $350 at a $10 billion post money.

[2] So they sold 3 % of the company.

[3] God, it's crazy.

[4] Welcome to episode two, season five of Acquired, the podcast about technology acquisitions and IPOs.

[5] I'm Ben Gilbert.

[6] I'm David Rosenthal.

[7] And we are your hosts.

[8] We are coming at you 24 hours after the trading began for the initial public offering of Dropbox.

[9] David, what do you think?

[10] It was a big day here in San Francisco yesterday.

[11] Is the window open?

[12] Are we about to see a whole bunch of these?

[13] Are we about to see the stampede of unicorns?

[14] I wish.

[15] I think we're...

[16] Well, I think the window's open.

[17] I don't think it's going to be a stampede.

[18] But maybe it'll be a slow procession, which will be a good thing for everybody.

[19] 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 happens so we can analyze, you know, was it a good decision?

[20] 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?

[21] What did the acquirer end up doing with the acquiree?

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

[23] And so we are, you know, we're here.

[24] We're here.

[25] here in real time after Dropbox IPOed and did one day of very successful trading to talk about Dropbox the company.

[26] Yeah.

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[35] Okay, listeners, now is a great time to thank one of our big partners here at Acquired, ServiceNow.

[36] Yes, ServiceNow is the AI platform for business transformation, helping automate processes, improve service delivery, and increase efficiency.

[37] 85 % of the Fortune 500 runs on them, and they have quickly joined the Microsoft's at the NVIDias as one of the most important enterprise technology vendors in the world.

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[39] They're also a major partner of both Microsoft and Nvidia.

[40] I was at Nvidia's GTC earlier this year and Jensen brought up ServiceNow and their partnership many times throughout the keynote.

[41] So why is ServiceNow so important to both Nvidia and Microsoft companies we've explored deeply in the last year on the show?

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[49] And when you get in touch, just tell them Ben and David sent you.

[50] Thanks, ServiceNow.

[51] Well, David, there's no shortage of fun history on the founding of Dropbox and how the whole thing came together.

[52] You ready to dig in?

[53] I am for sure ready to dig in.

[54] And 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?

[55] Or maybe, or was it Sunday?

[56] Was it less than a week ago?

[57] A little less than a week ago.

[58] And I thought, you know, Dropbox, like, it's a pretty straightforward story.

[59] So, you know, of course we do lots of research here.

[60] And, you know, it's the hallmark of the show.

[61] We love doing it.

[62] This is like, okay, this is great because we don't have a lot of time for this episode.

[63] you know, I'll be able to knock this out pretty quickly.

[64] Well, per usual, proved wrong.

[65] Once again, there is a lot to this story.

[66] Nothing is ever straightforward, right?

[67] Like, every formation of every company and every growth and every fundraise and every, it's always messy.

[68] Like, there's no, there's some phrase, there is no deal without a little bit of hair.

[69] Like, there is no company without a, you know, tumultuous and twisty and often thrilling backstory.

[70] Yeah, and their own, you know, each company has its own unique.

[71] history and you know i think that's what makes uh makes this show so fun to do and uh so with that should we dive in let's do it all right well to really truly um do justice to the history of dropbox you kind of also have to talk about the history of another organization that uh 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.

[72] And that is Y Combinator, the seed fund slash incubator that was started in 2005.

[73] And really the history of Dropbox and the history of Y Combinator or YC as it's known these days, pretty intertwined.

[74] So let's start with YC.

[75] 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.

[76] He goes by PG, he's very prolific, writes lots of essays, he's sort of like...

[77] Decent, Decent Lisp programmer.

[78] Decent Lisp programmer, right.

[79] So back in 2005, Paul was, PG, was living in Cambridge, Massachusetts, not Cambridge, England, although he is English by birth, and actually today he and Jessica live in England, back in their, his native country.

[80] So it's 2005.

[81] He starts YC with Jessica Livingston, who then was his girlfriend and now is his wife.

[82] And two other folks, Trevor Blackwell and Robert Morris.

[83] And so who are these people?

[84] Well, it turns out, so Paul had been the founder of a company back in the dot -com days called ViaWeb.

[85] And ViaWeb was sort of like, I don't know, it was like an early Shopify.

[86] You know, it was like a...

[87] Yeah, it was the way to sell things on the internet.

[88] Yeah, exactly.

[89] It was like a commerce software solution for selling things online and one of the first.

[90] And they ended up huge.

[91] So I think that was the mid -90s when he started that.

[92] And his co -founder was Robert, Robert Morris.

[93] And so they started it in Boston and ends up getting acquired by Yahoo in 1998 for about $50 million.

[94] And then Trevor, Trevor Blackwell, had worked for them at Via Web.

[95] And so when Yahoo acquired the company, Trevor moves out to Silicon Valley, goes to work for Yahoo, well, PG bounces around a bunch.

[96] Robert is actually a professor at MIT, professor of computer science.

[97] In addition to being co -founder of multiple companies, he stays in Cambridge.

[98] Paul eventually comes back to Cambridge.

[99] He's living in Cambridge.

[100] And he starts dating Jessica.

[101] And Jessica is working in marketing at an investment bank in Boston.

[102] And she's not super happy with banking.

[103] I know how that goes.

[104] And the culture there.

[105] And so she starts interviewing at VC firms about coming on and being, or one VC firm in particular about being the director of marketing at the VC firm.

[106] And one night, Paul and Jessica are out at dinner.

[107] And, you know, they're talking about Jessica's interview process.

[108] And the VC firm in typical VC firm fashion is like taking forever.

[109] to get back to her, totally dragging their feet.

[110] The process is super opaque.

[111] And one thing about PG that anybody who, you know, certainly has read any of his essays or knows of his reputation, he's kind of nothing if not opinionated.

[112] So they're walking back from dinner and he just like goes off on VC firms in general and their practices and how they operate.

[113] Remember, this is 2005.

[114] So like the concept of quote unquote founder friendly is, you know, still years away at this point on the on the on the VC side and he says you know what screw it let's start our own VC firm and and he's he's been thinking about this for a while he's you know ever since he writes about this ever since the via web exit years before he'd been thinking about getting into angel investing he never really had and he didn't know why and this seemed like a good catalyst and so he's like we'll start our own VC firm and you can work for work for that don't go work for these guys So the next day, he calls up, he calls up Robert, who's still a professor at MIT, and Trevor.

[115] 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, Jessica and I have this idea.

[116] We want to do this.

[117] And concurrently with this, he had just given a talk at Harvard.

[118] So Paul has his PhD in computer science from Harvard.

[119] He'd gone back to Harvard and he'd given a talk at the Harvard conference.

[120] Computer Society entitled How to Start a Startup.

[121] And he had talked to all these undergrads about like, you know, his experience, his journey starting a company and what it's like.

[122] And this is, you know, Facebook's like a year old, I think, at this point.

[123] And they'd probably, they'd probably just move from Boston out to, out to Silicon Valley that summer.

[124] Yeah.

[125] And if you think about sort of the hype train of startup since then, this is like, it's, it's right before the wave crested.

[126] like Facebook is is taking off but but the American dream sort of of the high school college student is not drop out and start a startup yet despite the fact that there have been some sort of well I guess there's still scars from the dot com bust and it doesn't yet feel like you are likely to be successful if you drop out and start a startup 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 mean I was in college right at this time, like, as this was all happening, down at Princeton in New Jersey instead of up in Harvard.

[127] Maybe my life would have been different if I'd been up in Cambridge.

[128] But yeah, like, you know, even, you know, Google had just gone public.

[129] And everybody was like, Google, some crazy startup.

[130] You know, Eric Schmidt was a Princeton alum.

[131] It was CEO.

[132] So it was like known, but it was like, it wasn't something people went and did.

[133] Even people in CS departments, you know, they all wanted to go work in finance.

[134] And so Paul has this idea.

[135] He says, You know, I want to get an angel investing.

[136] Jessica and I are going to start our own VC firm.

[137] 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.

[138] So this is in the spring of 2005 when they have the idea.

[139] We're going to run a summer program for all these undergrads.

[140] I just gave this talk at Harvard.

[141] And we're going to bring them in.

[142] We're going to have them start companies over the summer.

[143] It'll be summer projects for them.

[144] Probably most of them will go nowhere.

[145] and, and then they'll, you know, that's how we'll get into it.

[146] Maybe some of these companies will turn into something.

[147] So Paul and Jessica put in $100 ,000, and Robert and Trevor each put in $50 ,000.

[148] So they have $200 ,000, and that's what they start Y Combinator with.

[149] And at this point, it is just marketed and called the Summer Founders program.

[150] There's no Y Combinator yet.

[151] No Y Combinator yet.

[152] They eventually, I actually don't know when they do, but it was fairly early on.

[153] They changed the name to Y Combinator, which is a math.

[154] term for a function that generates other functions.

[155] 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.

[156] It's not like, we're not going to bootstrap an angel firm by funding, you know, kids in college.

[157] Like, this is the thing.

[158] We're going to help start these companies.

[159] So they do the first batch that summer.

[160] And then they decide it works so well.

[161] The companies are, you know, so impressive coming out of it more than they thought.

[162] that they're going to keep it going year -round, and they're going to alternate do winter programs in California out in Mountain View, where Trevor was.

[163] I think the first Mountain View office was actually in, like, Trevor's office on Mountain View.

[164] So he had separately, I forgot to mention this, he had started after VioWeb, a company called AnyBots, which is the company that makes those telepresence video conferencing robots, you know, like the screen on the wheels.

[165] that's in like Silicon Valley episodes and stuff.

[166] Oh, yeah.

[167] Yeah.

[168] So I think the initial YC office was in their office out in Mountain View.

[169] So they come out that's early winter 2006.

[170] They do the winter batch in Mountain View.

[171] And then they come back to, they come back to Boston the next summer of 2006 for their third batch.

[172] And a company, a fateful company, applies to them from MIT in that, in that third.

[173] batch in the summer of 06, and it was an engineer from MIT who left school early to come start this company.

[174] But it was not Drew Halston.

[175] We're getting to that in a minute.

[176] It was Adam...

[177] One year later.

[178] One year later, yes.

[179] It was Adam Smith.

[180] And he had an idea for a company that 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.

[181] And he started a company called Zobny, which is inbox backwards, and applies to YC with it, ends up getting in.

[182] 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.

[183] And so what does all this have to do with Dropbox?

[184] So it turns out that Adam was in the same fraternity and actually the little brother of Drew Halston at MIT.

[185] And so Drew is back at MIT.

[186] he sees all this and he's like, man, my little brother in my fraternity just raised five million bucks out in California.

[187] I got to get in on this.

[188] I need to start a company.

[189] He's super inspired.

[190] He sees Adams kind of path through YC, says he has to do it too.

[191] Well, it turns out that Drew had a company on the side at MIT called Accolade, which was doing SAT tutoring.

[192] And so he applies to Y Combinator, I believe it was that winter with this SAT prep company.

[193] And, you know, Paul...

[194] Oh, I didn't realize he had applied with the...

[195] He applied once before Dropbox?

[196] He had applied before Dropbox with Accolade, which actually is a pretty good name for a company.

[197] That is.

[198] Just turns out it was not a good business.

[199] So he applies and Paul and Jessica like, oh, this guy seems like, you know, this kid seems pretty talented, but like it's an SAT prep company.

[200] We're not going to fund this.

[201] So they reject him.

[202] but but drew is is undaunted he knows he wants to start a startup he wants to pursue the you know the dream that he saw his little fraternity brother go through and and probably mark Zuckerberg too you know he's who now moved out to moved out to palo Alto and uh and started facebook out and you know move facebook from boston out to california um he continues with accolade he's still working on it and then this is where now the canonical founding story of dropbox comes into play so one day while he's at MIT, working on Acklead 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.

[203] The Chinatown bus, I don't think it exists anymore, but it was super cool.

[204] I used to take this, you know, live it in the East Coast back in New York.

[205] It was this bus, this, like, super sketchy bus that you would pay for in Chinatown in New York, and then it'd go, like, to Philadelphia or to Boston.

[206] Drew gets on it in Boston.

[207] He's intending to do a bunch of work on Acklead on the bus.

[208] he opens up his laptop and he realizes he's forgotten his thumb drive.

[209] 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.

[210] And so as legend has it, he's so frustrated, he says, you know what, I'm going to fix this.

[211] I'm an engineer at MIT.

[212] He starts coding a solution for file sync on the bus.

[213] And that was how Dropbox was born.

[214] You know, it's tough thinking back to that time where it's possible for you to not have all your files with you at all time and then without LTE networks, not even be able to reach them.

[215] Like, it's just a weird, like, mental leap that you have to go back.

[216] And that was only 11 years ago, you know?

[217] Yeah.

[218] Like now everything is always either actually downloaded in with you or easily available to you.

[219] And in all likelihood, sort of 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.

[220] And most of these things, we've come a long way in 11 years.

[221] We certainly have.

[222] Now, he was not the only person that saw this, saw this vision at the time.

[223] I mean, famously, another team of young kids in college out in California had the same idea.

[224] Actually, they're from Seattle, I think from Mercer Island High School at USC.

[225] And basically had the same thing happen.

[226] And they started box.

[227] Which also as was going after the same opportunity as them at the time was also a consumer company.

[228] Yep.

[229] Also started as a consumer company before they then obviously pivoted into enterprise.

[230] But Drew knows nothing of this.

[231] He's just looking for a great business opportunity.

[232] He wants to be a founder.

[233] He's got this company.

[234] He sees this and he realizes as he's coding this up and it starts to work over the next couple of days.

[235] he's like, this is it.

[236] I'm going to get into YC with this company.

[237] So he incorporates it.

[238] He's super pumped.

[239] He's got like the best name he can imagine for it.

[240] Not Dropbox, but EvenFlo, because he's a huge Pearl Jam fan.

[241] It also comes up, you know, anything you watch interviews you read with Drew or watch of him giving.

[242] He's a huge music fan.

[243] He's in a band.

[244] Loves Pearl Jam.

[245] So he calls the product EvenFlo.

[246] And actually the company was still named.

[247] to even flow ink.

[248] Even flow ink.

[249] Yeah.

[250] So if you read the S1.

[251] In the S1 and when the initial investment by YC, the check is made out to Evenflow Inc. Yep.

[252] Yep.

[253] So, you know, Eddie Vedder.

[254] I've furled it.

[255] 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.

[256] Because it happens by the time he applies to YC, which is in like, within like a month or two of this time frame.

[257] Maybe it was trademark issues with the name or something like that.

[258] But so he submits his, he applies to the summer now, it's now summer 2007 application cycle for Y Combinator.

[259] He submits his application.

[260] It's out there online, publicly available.

[261] We'll link to it in the show notes.

[262] And actually, so it used to be a little note on this.

[263] So it was a text file that lived in Drew's Dropbox and was public.

[264] And I always thought it was the coolest thing that you could go to Dropbox and look at the application for Dropbox, the dot TXT.

[265] And first of all, it's cool because the YC application really hasn't changed much.

[266] But unfortunately, it's no longer available there.

[267] Drew must have moved some files around in his Dropbox getting ready for the IPO or something.

[268] But it is available in a Business Insider article that we will link to.

[269] And it remains, you know, I read this.

[270] 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.

[271] 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.

[272] Very, very worth reading.

[273] It's like the initial startup phase or seed funding, you know, version of of an S -1.

[274] Yeah.

[275] And it's, it's really, really worth reading.

[276] It's, it's, it's, it's great.

[277] But there's just, let me, let me take a quick aside.

[278] so, at, at this point, so early on in the YC process, Drew posts the drop box to Hacker News and says, hey, here's my, here's my, no, no, this comes, this comes a little bit later.

[279] All right, I'll hold.

[280] Okay.

[281] It's, it's coming up, but we'll, it'll be fun.

[282] You'll have a lot to say.

[283] So he, applies with the text file.

[284] And I think he mentions in the text file that he's going to do a video.

[285] So Paul emails him, emails him back.

[286] And he's like, hey, you know, like this looks pretty good.

[287] But it's just you.

[288] You kind of need a co -founder.

[289] But there's a problem, which is like the deadline, they're going to make their decisions.

[290] And the batch is going to start in like two weeks at this point.

[291] So Drew is undeterred.

[292] He starts scrambling.

[293] He's like, all right, I need a co -founder.

[294] I need somebody.

[295] you know, I'm at MIT, I should be able to find somebody.

[296] He emails, I don't know if he emails or calls or talks to, Kyle Vogue, who then ends up, would end up being in the same batch as them as Dropbox that summer with Justin TV, which, of course, would become Twitch.

[297] It's like mind -blowing thinking about the fact that they're in the same batch.

[298] Totally mind -blowing.

[299] Trying to help each other find co -founders.

[300] So Kyle was also at MIT, and then Kyle would then after, long after, um, uh, Justin T .B. and Twitch, he would go on to found Cruise, which, cruise automation, which was self -driving car technology that got acquired by GM for a billion dollars a couple years ago.

[301] So it's really quite the mafia here.

[302] So Drew and Kyle were in the MIT Entrepreneurs Club together.

[303] Drew's just talking to anybody trying to find like good leads on a co -founder.

[304] And Kyle, Kyle says, hey, you know, I'm busy.

[305] I got my own thing I'm working on, obviously.

[306] But I know this guy who lives on my floor in my dorm, who's a pretty good coder, and his name's Arash, and why don't you guys get together?

[307] So, Drew's like, sure, done.

[308] They get together the next day in the student center.

[309] Apparently, they jam for a couple hours, as legend has it.

[310] By the end of this couple hour meeting, they have decided, this is, by the way, not how you are, it's not the best way to find a co -founder.

[311] They've decided to work together.

[312] They've decided to drop out of school.

[313] They've decided that they're going to go for it.

[314] David, so when you're chatting with entrepreneurs and you say like, oh, how did you guys know each other?

[315] You look for like, we work together for five years at this previous company or we've been best friends since high school or like, we know each other, we finish each other's sentences.

[316] I just like laughing.

[317] My friend told me about this guy and I met him for two hours.

[318] And like, you know, Arash is the CTO today.

[319] Like at IPO.

[320] Amazing.

[321] Amazing.

[322] Amazing.

[323] I mean, basically like, you know, when you ask the question about how do you, you know, how do you know how do you know each other when you're talking to co -founders?

[324] The one answer you don't want is we don't.

[325] And that was their answer.

[326] But hey, you know, YC takes a chance on them.

[327] So they accept their application.

[328] They start.

[329] And sometime, 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, kind of an explainer video of how Dropbox works.

[330] And at this point, Drew, mostly Drew, maybe Arash had worked on it a little bit, have gotten kind of an MVP prototype up and running.

[331] And we'll link to this video in the show notes too.

[332] We'll try to link to it.

[333] But it's pretty amazing when you watch this.

[334] Well, it's funny for two reasons.

[335] But one, it's basically Dropbox today.

[336] Like within weeks, everything that Dropbox is today, and still, like, the core of the product is there.

[337] All the little images on the file of the check marks and then the sinking, you know, the circle, circular arrows when it's sinking and all that.

[338] All the low -level operating system hooks.

[339] It's all done.

[340] I mean, basically, very little has changed.

[341] But, David, it sounds like a feature to me. Yeah, you know, how could this be big?

[342] So they make this video.

[343] 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 allusions to, you know, popular culture memes in the video.

[344] So like a bunch of the files that they're syncing are like, you know, they've got some Tom Cruise images.

[345] They've got Steve Bomber with his tongue out, like all this stuff.

[346] It's funny watching it now.

[347] Like I don't even remember what half these things are referring to.

[348] And so then they make the video And then they post the video on Hacker News on Reddit, which Reddit had been in the first batch of Y Combinator.

[349] I think the first batch.

[350] And Dig, which was, dig was huge at the time.

[351] The video goes viral.

[352] And then that's how they get their wait list for their first users.

[353] It was just such a clear, clear video.

[354] Like, you look at this 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, um, exponent.

[355] But it really is like, you look at it and you go, oh, yeah.

[356] No, I understand exactly how that works and I definitely want it.

[357] Yep.

[358] I mean, it's really, you know, even watching it now and, um, you know, you also go watch it, watch it, watch it too.

[359] Um, it is Dropbox today.

[360] And like, it was, it was magical at the time.

[361] Still is in a lot of ways.

[362] And like, and, like, the feature that came out three weeks after they founded 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.

[363] Like we upload our audio to Dropbox, it sinks and then we edit it.

[364] It's, you know, it, they just nailed it so hard out of the gate.

[365] Totally.

[366] I mean, like we, you know, our, we'll get more into this later in the show.

[367] But, you know, we had a great, great designer for us.

[368] at Wave, who did our logo, did our website, like, you know, did an amazing job.

[369] This guy's awesome.

[370] He worked at Facebook.

[371] Like, you know, great.

[372] It all just runs on Dropbox, you know?

[373] Like, it just has a Dropbox account.

[374] And that's how we collaborated on all this stuff.

[375] And so then, Ben, what you were referring to, when they post this on Hacker News, uh, this is, this is like, somebody replies to the comment, comments on the post.

[376] From Brandon M on April 5th, 2007.

[377] I have a few qualms with this app.

[378] And the first one is about being a Linux user.

[379] So already, you know, let's narrow the market.

[380] For a Linux user, you can already build such a system yourself quite trivially by getting an FTP account, mounting it locally with curl FTPFS and then using SVN or CVS on the mounted file system.

[381] For Windows or Mac, this FTP account could be accessed through built -in software.

[382] And David, you know, I don't know why we don't do this for acquired to produce.

[383] I mean, it just, it's so obvious.

[384] That sounds so much more fun than just putting stuff in a folder and having it work.

[385] Two, it doesn't actually replace a USB drive.

[386] And there's more about that.

[387] It doesn't actually solve the connectivity issue.

[388] Three, it does not seem very viral or income generating.

[389] So, you know, David, I think you should rethink if this is going to be big or not.

[390] Yeah.

[391] Wow.

[392] And this surfaced this week because Sam Walt who's now the CEO of Y Combinator tweeted, don't, I think don't let the haters get you down and link to it.

[393] And it is just so, it's always good to see something like this and remember it when you're going through the tougher times as a founder and you need to put your head down and barrel through it.

[394] Yeah.

[395] On the other hand, though, it's a great parable.

[396] But if you read the rest of the thread, I forget to the user who had replied to the link with these arguments.

[397] So Drew gets in and responds to him right away.

[398] and he has really great arguments in response and then the guy who was criticized and was like hey actually you have really good arguments like great best of luck to you so it actually is a really nice ending it's true hackerdews was such a nice place I know and then the internet all you know went to hell this was pre -Cambridge Analytica and Russian trolls and all that it is actually kind of interesting to look at look at these objections with the lens on the company today.

[399] Like the concept, it doesn't seem very income generating.

[400] It's kind of not.

[401] Like if you think about the non -business users, and we'll, of course, get to this later in the show, but it's like, oh, this is a really nice thing.

[402] People, will consumers pay for this?

[403] So there's another parable in there that's, your earliest objections are often the demons that stay with you your entire time as a company even through tremendous success.

[404] Yep.

[405] Totally.

[406] 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.

[407] There's Mosey, there's carbonate, there's, I don't know, sugar sink.

[408] There's what a high to company.

[409] I forget the company that maybe it was sugar sink that became high tail that anyway, there's this box, of course, which was box .net at the time.

[410] But then also there's the whole, there's the like the looming.

[411] specter of Google.

[412] Sure feels like this is something the platforms should provide.

[413] I don't know.

[414] Yeah.

[415] Right.

[416] You would think so.

[417] And for years, I mean, I remember even back, like, maybe even when I was in high school, like, definitely in high school or in college, but definitely in college.

[418] There were rumors.

[419] Like, everybody was talking about the Google is working on the G -drive, and it's like going to be, you know, the most amazing thing you've ever seen.

[420] Oh, we were in PM meetings deciding on feature set 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 competitive with sky drive 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 it again into two different things that are much less consumable and digestible and understandable.

[421] But it all speaks to like Dropbox just nailed the crap out of the user experience.

[422] And the small competitors and the large competitors just couldn't touch it.

[423] Well, even to this day, I mean, at Wave, we run, we use Google apps.

[424] And so we store all of our, you know, all of our documents and files on GDrive.

[425] Google made a change to the sync client, a major change to the sync client like two months ago.

[426] completely nerfed all of our stuff like you know and it's like drop box since day one it just works you know yeah yeah it and it's it's funny looking at how much didn't change i was uh i was getting ready for the show and looking back at all the things in my drop box 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 it's hooks into Dropbox and for better for worse like it's all still there and um you know there there's a little bit of like I've got some complaints about the fact that like do I need you know 50 root level or I guess first level shared folders with people that I don't collaborate with anymore or you know the whole model is very predicated on like it's a folder folder that you put stuff in that sinks and every time they try and stray away from that they get in the danger of doing what Google did and being confusing, but it does leave you with this nice history of everything you've ever been a part of.

[427] Oh, it totally does.

[428] And it's funny.

[429] I mean, I was trying to figure out when I actually joined up for Dropbox.

[430] I couldn't.

[431] There's no way to figure out as best as I can tell when your account was created.

[432] 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, 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.

[433] The very first set of apps I download, like Dropbox is on there, you know?

[434] It's just so core.

[435] It's so important for what you do.

[436] Yeah, he's funny.

[437] Now you've got me like wanting to search back.

[438] What's the first email I had that, uh, that had Dropbox in it?

[439] Uh, 9708.

[440] I've been invited to the Dropbox beta by Paul, uh, September 7th, thousand eight love for you to try it out your beta sign up code is this what is dropbox share the love thank you get dropbox dot com that's awesome yeah for some reason i couldn't find my i think i signed up directly uh but i didn't get any like email confirmation so i don't know when it was anyway so suffice to say there there was a big market for what they were doing so they get accepted into yc everybody's excited um they do yc that summer of o seven and then later that fall, they move out to San Francisco, which kind of is what Drew had always wanted to do.

[441] He wanted to follow Zabdi and Adam out there.

[442] So they move out to San Francisco and they just finished YC and they need to raise funding, need to raise a seed round.

[443] So they end up meeting Sequoia Capital.

[444] And this is where things get interesting.

[445] So there's a famous, supposedly a famous meeting where Mike Moritz, the legendary investor.

[446] And at the time, you know, co -head of Sequoia comes to their brand new office in San Francisco on a Saturday afternoon and meets with them.

[447] And then Sequoia decides to invest.

[448] And then they sign the term sheet and get it done the following Monday, all of which may be true.

[449] But what doesn't get talked about a bunch, and there was actually a big recode article about this week on the eve of the IPO, it was actually another partner at Sequo.

[450] Samir Gandhi, who was an MIT alum and was part of the MIT network that made the inroads with Drew and Arash, got excited about them and then ended up leading the investment for Sequoia.

[451] So that was in the fall of 2007.

[452] Samir and Sequoia do a $1 .2 million seed round in the company as convertible debt, as we alluded to earlier.

[453] And then the following year, the company is doing really well after they launch.

[454] traction is great.

[455] They do an inside round.

[456] They do a $6 million series A in October 2008.

[457] But in the interim, though, Samir actually leaves Sequoia in the summer of 2008, and he moves over to Excel, where he's still a partner to this day.

[458] So that was before the series A got done.

[459] And then that's how Excel ends up coming in and doing a little bit of the series A, because the founders have their relationship with Samir.

[460] 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.

[461] Which is amazing.

[462] I mean, we'll definitely get into it later, but people put north of $500 million into this company and owned less of a person less less less of the company than than excel does having never let around yeah totally it's uh well it's a testament to um unlike you know what people thought at the time the uh the quality of the business model behind it um or the scalability of it uh so the board seat the sequoia board seat ends up transitioning to brian schreier who joins secoia in april 2008 from Google and then Brian's been on the board ever since.

[463] And he is actually the only venture investor on the board of Dropbox, which again is crazy.

[464] Wow.

[465] Condoleezza Rice is not a venture capitalist.

[466] Not last time I checked.

[467] But there's some fun other side of history here.

[468] So really when Sequoia does this investment in Dropbox, that really cements the Sequoia Y Combinator relationship.

[469] Sequoia had invested in a few other YC companies in the past, most notably looped, which was Sam Altman's company that was part of the first batch, where Greg McAdoo had led the investment for Sequoia was on the board there, so much so that the next year in 2009, Sequoia actually ends up investing in Y Combinator itself, and Greg McAdo leads that investment.

[470] And then fun side fact, that, of course, the most important thing of this whole episode, pretty much directly leads to waive to my venture farm.

[471] And what I'm doing now with my partners, Riley and Sarah, because Greg, by investing in YC in 2009, he ends up meeting the founders of Airbnb who are in that batch, the summer of 2009, ends up investing in Airbnb.

[472] My partner, Riley, joined the company shortly thereafter.

[473] And then Greg really helped us a couple years later get wave off the ground.

[474] And then our partner, Sarah, was at Dropbox at the time.

[475] So all of this is all coming back home here.

[476] It is, the new mafia.

[477] the new mafia.

[478] But anyway, back on track, this is really like the start of the go -go years for Dropbox.

[479] 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.

[480] 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.

[481] And so it naturally, virally spreads the product.

[482] But they also put in place this kind of game.

[483] Amified incentive to do so so that everybody that you share Dropbox with who signs up for the product, you get more free storage.

[484] This worked so hard on me. Like I was a referral maniac to get more space.

[485] And I think it was 250 meg per person who signed it for an account that you invited.

[486] Which back in the day was a lot of storage.

[487] Yeah, because I think you got two gig for free.

[488] I have no idea what it is now.

[489] But two gig for free.

[490] And I think I was up north of like 11 gigs from inviting friends.

[491] And at some point, there was some educational multiplier where, for everyone you invited, you got double or something because they knew that their growth was in students.

[492] Yeah, it was crazy.

[493] And it works so well.

[494] Most of it still to this day, the vast majority of Dropbox users don't pay them anything or just free users.

[495] But the small percentage who do, just the number of users are so big, they make so much money.

[496] All throughout this, Dropbox is just raking in cash.

[497] They're massively cash flow positive, even as a young startup.

[498] 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.

[499] So it really is that, that, you know, tried and true freemium model.

[500] Yeah.

[501] And even with that very small percentage, last year, Dropbox made 300 million in free cash flow.

[502] That's, you know, cash flow profits, not revenue, which is incredible.

[503] So all through this, the company is super lean.

[504] It's like, it's like an engineer.

[505] like, you know, dream, uh, they're only about 20 companies, 20, 20 employees at the company through like 2011, 2012, the first few years.

[506] They're all engineers.

[507] There's nobody, you know, no business folks there.

[508] Uh, it's just this, this viral and referral dynamic that's like, that's also the nice thing about having, uh, the operating system be your user interface.

[509] I mean, shy of like a very basic web interface.

[510] They basically don't have to do any product design, other than really like system design and then engineering that system.

[511] Yep.

[512] And this leads to one of if not the probably biggest error of Steve Jobs' career, of which there weren't that many of them.

[513] Where he sees this, and like many people saw this and thought, well, okay, this is like a feature.

[514] This isn't a product, let alone a company.

[515] The company had gotten so big, though, the product had gotten so big.

[516] In 2011, Steve Jobs invites Drew to come down to Cooper Tien.

[517] know to visit him.

[518] And it was really clear that Apple was very interested in in acquiring the company.

[519] And this is sort of a famous meeting that happens where, you know, they talk for a little bit and it, Steve, unclear how much he implied this or not.

[520] 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.

[521] Drew says no, essentially, or implies no. And Steve kind of goes off and is like, you know, you're a feature.

[522] You're not a product.

[523] You're not a company.

[524] Like, we're going to crush you.

[525] We're going to do, you know, just like the mythical G drive.

[526] You know, we're launching ICloud.

[527] Mobile me will destroy you.

[528] Oh, man. Incredible.

[529] Obviously, he was wrong.

[530] But apparently the rest of the meeting went really well.

[531] Drew talks about it and says, you know, that part was over in about 20 minutes.

[532] And then the rest of the time, Drew just talked to Steve about being a founder and all the lessons learned along the way.

[533] And supposedly he was really magnanimous.

[534] So, you know, even when making mistakes, he's still Steve Jobs.

[535] But so after that, the company basically Dropbox says, well, man, we just turned down a billion -dollar -plus acquisition offer from Apple.

[536] Maybe we should raise some more money.

[537] What could we raise money at?

[538] And so they go out, they basically get every venture firm out there.

[539] there to participate in this round.

[540] Index Ventures leads their Series B, but Benchmark is participating, Grey Locks participating, IVP, Goldman Sachs, like this is party round of party rounds from people who usually don't do party rounds.

[541] Right, $250 million.

[542] You're really rounding up the troops to pile it up to that number.

[543] Yeah.

[544] So, I mean, most companies would be ecstatic if they could raise a Series B at a valuation of $250 million.

[545] Dropbox raises cash of $250 million at a billion dollar valuation.

[546] So they only sell like 6 % of the company in this series B. Yeah.

[547] And to give 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.

[548] And so their seed round that was a 1 .2 on a post money of 5, 24%.

[549] That series A, also from Sequoia, where they raised 6 million, 24%.

[550] And then you get to this round, which it was from 2008 to 2011, so that, you know, there was a decent gap in there where they didn't raise money, only 6%.

[551] I mean, if you think about the dilution that the founders are typically taking, you know, 20 to 30 % of its time, just didn't happen.

[552] Yep.

[553] It's really...

[554] And the early venture firms.

[555] I mean, obviously they were very lucky to be blessed with a business model that just printed cash.

[556] But this is like a clinic in, you know, If you're a founder or an early investor, you're aligned with this.

[557] Like, you know, if you can raise fewer rounds and take less dilution in each of them, fast forward today when the company went public, you know, Drew still owns 25 % of the company.

[558] That's incredible.

[559] Yeah.

[560] Yeah.

[561] I mean, it helps.

[562] It helps that the next round that they raised was only a 4 % dilution and they raised even more money.

[563] Yeah.

[564] So the next round, a couple years later, they raised $350 million at a $10 billion dollar, valuation this is in 2014 led by black rock uh but morgan stanley comes in t row price sales force comes into it um crazy uh but then also worth noting just a few number of rounds i mean they they ipoed after their series c yeah yeah absolutely i mean we talked about this in the stitch fix episode uh stitch fix obviously didn't raise the valuations that um uh that drop box did but if you can raise fewer rounds and take less dilution it works out better for everybody and it's funny like thinking if let's rewind 10, 15 years, like, of course, it's not out of the ordinary to IPO after a Series C, but in the world that we're at where we've gotten so far that you have a SoftBank Vision Fund that has a $100 billion in it to deploy, like, companies tend not to IPO after their Series C. Yeah.

[565] Yeah.

[566] Well, it's a different world these days.

[567] But then there is this kind of, we've talked about, we talked about a little bit on the SoftBank episode.

[568] 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.

[569] Yeah, the lean, mean years of Dropbox are over.

[570] They come to an end as this is happening.

[571] And that turns out to be not so great for Dropbox.

[572] So they have all of this money, these grand ambitions, they said no to Steve Jobs.

[573] Everybody thinks Dropbox is going to be the next, like, Google.

[574] or Facebook or what have you.

[575] And in fact, a lot of people were coming from Facebook to Dropbox at this time.

[576] So let's tee this up, you know, amazing product, check, perfect market fit, or perfect usage fit, check.

[577] Viral distribution, check, tons of cash in the bank, check, cohesive, brilliant business strategy, question mark.

[578] Well, check, but then uncheck, unfortunately.

[579] I know.

[580] I know.

[581] We should go into photo sharing.

[582] And we should be highly inquisitive and go into email clients.

[583] And we're going to...

[584] We're going to go into the enterprise, but not really.

[585] But now we're going to go into the enterprise.

[586] Actually, oops, we're going to go into the enterprise this way and specifically this type of enterprise.

[587] Also, we think that we're going to monetize our consumers better.

[588] Oh, back to the enterprise.

[589] Yep.

[590] Well, in my...

[591] favorite of all that so what we're referring to is basically the years like kind of 2013 -ish to 2016 are kind of like the lost years for Dropbox they hire a ton of people they do a ton of stuff they build all this stuff they go into all these markets like none of it makes any sense none of it works the craziest thing it's easy to throw stones in retrospect um they're of course during during this period they become free cash flow positive yeah they're printing cash while they're lost in the woods.

[592] So I think, you know, it's hard to knock them too hard.

[593] Hard to knock them too hard, but, but they deserve some noxious.

[594] The craziest most cockamamie thing ever, which is now completely buried in history.

[595] But of course, that's why we existed acquired to unearth these things.

[596] They, of course, everybody has to be, if you're going to be a Google, a Facebook, whatever, you have to be a platform.

[597] Everybody's got to be a platform.

[598] So they build and launch the Dropbox platform.

[599] They launched this in 2013.

[600] And they do a big developers conference.

[601] they call it DBX, Dropbox for developers.

[602] The vision of the Dropbox platform.

[603] Ben, you're a computer scientist.

[604] You studied CS and undergrad.

[605] I mean, I did too.

[606] I didn't major in it, but I know a little bit about it.

[607] So tell me how this sounds to you.

[608] They want to, you know, Dropbox is files, right?

[609] But not just files.

[610] Dropbox is going to be the storage infrastructure and solution for all of computing across distributed mobile devices.

[611] So, you know, you're writing apps and you need.

[612] need storage, you need, you know, your code needs to live somewhere.

[613] You need assets that you need to execute.

[614] You need databases.

[615] Don't do that locally on your device or in the cloud.

[616] Do it in Dropbox.

[617] Does this make sense to you, Ben?

[618] Well, it's AWS plus all the actual storage and compute on your devices in Dropbox, right?

[619] Yeah.

[620] 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.

[621] Yeah.

[622] Yeah, yeah.

[623] Or just let alone, 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 give me. Or I could just use this third party?

[624] Yeah, I mean, the biggest issue was that Dropbox at this point, you know, as an organization was trained that they can beat the platform provider because their killer use case of, It's a folder on your computer that sinks and it sinks everywhere, just nailed it so hard that, you know, you get bold and you decide that, you know, even though these platform providers have all these things for developers and, you know, we can do better and we can build the tool chain they want.

[625] And it's, it's much, much harder competing with the platform itself when you're down at the developer level.

[626] And really in most cases, like, if you look at.

[627] at anybody that's trying to be a better voice assistant.

[628] You lose unless you're the home button on iOS.

[629] You know, there's, um, competing with the, the platform is always difficult and Dropbox found one little tiny wedge into where you can actually meaningfully compete.

[630] Well, and I think it's to pull forward a tech theme here, um, as we so often do on this show.

[631] 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.

[632] One, they solved a real problem.

[633] that a lot of people had and two they made it just work you know and all this stuff that they were doing uh during 2013 to 2016 a it's unclear if they were even solving real problems attacking real problems um but b it didn't just work like i could use the native you know stuff within within ios and android or i could use this clugier dropbox thing like yeah it was it was always it was always frustrating to me as a user too because like you had that then Dropbox Carousel app that came out that was asking for photos access in my system and the Dropbox app wanted to get it hooks into it too.

[634] 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.

[635] And it was it was duplicative and confusing.

[636] It just wasn't wasn't it was the opposite of all the magic that the original Dropbox product provided.

[637] It was the opposite of the initial YC application.

[638] Really.

[639] Yeah.

[640] So that was kind of till 2016.

[641] Uh, And then, and Drew talks about this, supposedly he read this great book that I've never read, but was, because I think it's out of print.

[642] I've been trying to find it, but was talked about a lot in business school.

[643] Great book by Andy Grove, the former CEO of Intel called Only the Paranoid Survive.

[644] 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.

[645] It's like the most bold business decision of all time.

[646] totally totally that would be a great episode someday we'll have to find a way to do an acquired episode on that yeah but the point of the 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 peace time 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 going on.

[647] They're bleeding talent.

[648] Now it's wartime.

[649] And in war time, you have to, you can't do lots of things.

[650] You've got to do one thing and it's got to be the right thing and you got to do it better than anyone.

[651] So overnight, and I think a lot of this was helped by the Dropbox hired a guy named Dennis Woodside from Google.

[652] And Dennis is the CEO at Dropbox now.

[653] He had previously, he'd been in Google a long time.

[654] He ran Motorola within Google.

[655] He was like kind of a turnaround guy taking like stuff that was struggling or stuff that Google brought in like Motorola for other reasons turning it around making it work they cut all this stuff they kill mailbox they kill carousel they kill the developer platform they way scale back the um the sort of enterprise aspect of drop box for business and they refocus on the core customer base so this was 2016 um and once they do that things really turn around uh They become, they've always been cash flow positive, but during those years, they actually dip down into cash flow negative.

[656] They become back to hugely cash flow positive.

[657] As we mentioned last year in 2017, they generate over $300 million of free cash flow.

[658] A big part of that, and part of the doubling down is over the last couple of years, they've transitioned off of AWS.

[659] So for most of Dropbox's life, it was all running on S3 in AWS.

[660] they decide to build their own data centers and bring it all in -house, and their cost -of -good sold goes way down.

[661] So even though revenue basically doubles over the last couple of years, the cost of good sold actually goes down from where it was at the lower revenue base.

[662] And this massively improves the company.

[663] Yeah, and that was in sort of the first half of 2016 is when Dropbox really actually waned off of AWS.

[664] In that year before, you know, they were actually duplicating their data.

[665] So their costs were way high while they were doing that transition and making sure that everything was working as expected.

[666] And it's interesting to look at this because you start to see the company shift to this mindset of lean operations, not only in cutting all these product lines in a very Steve Jobsian way, but also changing their cost structure where they're saying, look, we're going to make this big investment up front where we're going to use two, three years of engineering resources and take on all these capital.

[667] 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 be lower and we're supporting, you know, 97 .8 % of our users don't pay us anything and we're holding other files.

[668] We need to have the cheapest possible way to hold their files.

[669] Yep.

[670] Yep.

[671] And it makes a big, you know, huge, huge impact on the company.

[672] It was basically like all of the stuff that they could get away with during the first period of Dropbox when they were just growing of not, you know, sort of efficiently managing the company, which makes sense when you're a growing startup.

[673] You don't want to optimize for efficiency.

[674] You want to optimize for growth.

[675] But then those years in the middle where they just got way too fat and lazy, well, not lazy, but way too overly ambitious without good rationale for it.

[676] Now they're back to they've really professionalized.

[677] Really, it's an efficiently run company.

[678] And you can see, that in the financials.

[679] So, so, so let's, um, I want to make a statement here and then we'll revisit it later.

[680] So the, the, the success of Dropbox and the box, the drop box that you want to bet on is the one that is lean, mean, focused, uh, building this very consumer oriented, easy to understand file sharing product or, or let's even say file collaboration, um, product that, that may permeate into, or does permeate into, um, monetizing small business and teams users.

[681] Yeah.

[682] Well, I think it's, you know, if you tell you, if I, if I look at this from a venture investing perspective, when Sequoia led the seed round and then did the inside round for the A, they were investing on the promise of the future, but there was very strong data and signal that like the market was there, that the market fit was, the product market fit was there, that there was a ton of growth ahead of the company.

[683] Then the $4 billion, you know, valuation series B, and certainly.

[684] the $10 billion series C, those were people coming in and investing on the promise of the future, but the promise of the future, there was actually no data that, like, those promises had any hope of coming true.

[685] So, like, maybe they would, maybe they wouldn't, but nobody knew.

[686] I think that's the difference here.

[687] 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.

[688] 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.

[689] Yeah.

[690] It's happening as that market.

[691] Are we both paying for Dropbox?

[692] Well, no, no, only one of us is.

[693] All right.

[694] I was going to say, we should look into that.

[695] Yeah, exactly.

[696] So it's not as large of a market as.

[697] the consumer market, but it's still pretty impressive.

[698] So anyway, February 2018, they file.

[699] And to capture that, the way that Dropbox reports this in their S -1, I know I'm fast -forwarding ahead a little bit, but I want to make this point, is that they say, of our 11 million paying users, and that's out of their 500 million, approximately 30 % use Dropbox for work on a Dropbox business team plan, and we estimate that an additional 50 % use Dropbox for work on an individual plan, which is what we do, collectively totaling about 80 % of our users.

[700] So 80 % of that 2 .2%.

[701] So 80 % of people who pay are using it for business purposes.

[702] Yep.

[703] And so even though the growth of the company and the use case and the vast majority of their users looks like individuals, the place where they make 80 % of their revenue is people using it for work.

[704] 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 business is relatively constant.

[705] Like, you could identify that those are enterprises.

[706] The other 50 % that they estimate are SMBs using Dropbox.

[707] There's no way really to tell that they're businesses.

[708] Like, you can't tell that we're businesses.

[709] Like, you signed up for Dropbox with your Gmail account, not with the acquired account, right?

[710] Yep.

[711] 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 you know that there's this weird tension between you kind of have your one drop box and are you going to invite that personal drop box to the organization?

[712] Are you going to try and create a new drop box and have multiple dropboxes syncing and now with selectives?

[713] That's where it actually gets a little bit hairy.

[714] And so the best drop box, like the drop box in their absolute best shining light is the drop box where I'm just using my personal drop box and I'm sharing stuff out of that with other people and not where I'm officially raising my hand and saying, I'm a business.

[715] Yep.

[716] Yep.

[717] Well, there are a lot fewer businesses that are going to do that there, and there are a lot more, you know, acquireds out there.

[718] Yep.

[719] So, as we were alluding to with all this, finally, February 2018, the company files to go public.

[720] They set the initial pricing range for the IPO at $16 to $18 a share, which, which equates to a valuation much lower than the $10 billion valuation that they did in the last private round.

[721] But, you know, there's a lot of hand -wringing.

[722] We're going to get into narratives in a sec here.

[723] Then they raise the range to $18 to $20 a share before they price.

[724] They ultimately price at $21 to share, which is equivalent to, and this was Thursday night, equivalent to an $8 .1 billion market cap, still below 10.

[725] And I should say it's important to note that that 8 .1 is their non -deluded market cap.

[726] So that did not include options that were issued but not granted for future employees.

[727] And if you roll that in and you have a fully diluted market cap, it was $9 .2 billion.

[728] Right, right, right.

[729] Good point.

[730] Which is common in startup when you're funding startups that the ungranted option pool is counted as part of the company less clear when it comes to public companies.

[731] so important to remember.

[732] Then when they finally finished trading yesterday on their first day of trading, they end at $28 .48 and $48 a share, which no matter how you count it, is above the $10 billion watermark.

[733] And that's a pop.

[734] Yeah, major pop.

[735] It's about 40 % on the first day of trading.

[736] Yep.

[737] So every single shareholder who bought in at a private company valuation made money.

[738] Indeed.

[739] maybe not a lot of money, but Sequoia Capital made a lot of money.

[740] Yeah.

[741] 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?

[742] No, I mean, we can get into narratives later.

[743] I actually haven't done the calculation, but Sequo owns about a quarter, well, 23 % -ish of the company, and they finished trading at roughly a $12 billion evaluation.

[744] So what's going to make about a two and a half billion on the on the IPO?

[745] Yep.

[746] Yep.

[747] Sounds about right.

[748] Not not bad.

[749] Not bad in a day's work or a decade's work in that case.

[750] No. No. And when you when you look at the dilution per round, it's 24 % for the first two, six percent, then four percent.

[751] So really, I mean, the way that they raised money, if you had gotten in early, you made a ridiculous amount of money.

[752] If you got in later, you just didn't own that much of the company, even if you paid a ton of for it.

[753] And if you look at YC and assume that they, a new story came out that Y Combinators sold about half of their shares in the Series B when index led.

[754] They typically take 7 % as part of the accelerator program would have gotten diluted down to 4%.

[755] 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, quote, YC's operations by selling as a part of that round.

[756] Yeah, that's when they sold it, the Series B. Interesting stuff.

[757] But today, at the market cap that the company closed at yesterday, even YC's remaining stake is, what, about half a billion dollars?

[758] Let's see.

[759] So in the Series C, their remaining stake would have been about $170 million, so maybe about 200.

[760] oh okay so probably about the same maybe a little more yeah yeah yeah but i think this is probably the first of uh of many yc 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 and that's a to pull another theme forward uh and then we'll jump in the narratives uh real quick um it takes a long time and this is actually a core you know sequoia ethos that uh um you know the uh the uh the uh the uh The lemons ripen quickly in venture, but the apples take a long time to bear fruit.

[761] But when they do, they bear a lot of fruit.

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[782] Narratives.

[783] I think we've kind of covered this, basically.

[784] Yeah, but what I want to do is, I think when we've had the most fun with the narrative section, it's been what we were able to tease out what is the company saying and what are the skeptics saying.

[785] And so I've got a few here.

[786] 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, um, is unleashed the world's creative energy by designing a more enlightened way of working, which I, here's where my bias is about to come out.

[787] That scares the crap out of me. Like the company made an amazing product by a folder that you put stuff in that sinks and like generated a ton of cash on that.

[788] And this is where I start to get out on my ledge a little bit and starting to feel like, uh -oh, are we in a 2014 -2015 situation again?

[789] I'd argue the other side.

[790] Because what are we doing on Dropbox right now with Acquired?

[791] We are, you know, being creative.

[792] Is it enlightened?

[793] I mean, like, maybe I'm just getting caught up a little bit in the semantics.

[794] But anyway, so this is the company's positioning.

[795] They say our market opportunity has grown as we've expanded from keeping files in sync to keeping teams in sync.

[796] Today, Dropbox is well positioned to reimagine the way that work gets done.

[797] We're focused on reducing the inordinate amount of time and energy the world wastes on work about work, tedious tasks like searching for content, switching between applications and managing workflows.

[798] So what their big positioning here is, is that our market opportunity is not just syncing files, it's this reimagining of the way work gets done, which is, again, and I'll play the skeptic here, similar to 2013, 2014, a bet that you're making, I think, with very little data.

[799] 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.

[800] someone at the time of IPO.

[801] Yeah.

[802] It feels a little snappy to me. I think they're going to, I don't think they're going to, it's going to happen to them, I don't think it's going to happen to them financially, but like, it, the, the high flying mission statements that are starting to happen here are a little, a little much.

[803] Well, I think the question is, um, by reimagining it, whatever flowery language they used, do they mean you need to make a big bet on us because of paper which I don't even know what Dropbox paper does I'm very likely to ever even try it let alone use it caveat I don't know what it is but I've actually heard really amazing things well okay fair enough but I'm not like looking desperate for a solution to whatever it is so do they mean that or do they mean by reimagining how the world works a magic folder that you put stuff in and it sinks If they mean that, and I think if you look at the financials, that's what they mean.

[804] I mean, that's what people pay Dropbox for who paid them.

[805] Like, that's pretty great.

[806] And, like, they made a billion dollars in revenue last year on that.

[807] Yep.

[808] That's very true.

[809] And so they, this is apparently a thing now.

[810] The content collaboration platforms has a magic quadrant with Gartner.

[811] And Dropbox has been in it as a leader for the last two years.

[812] And so part of what they're selling in the prospectus here is, you know, we will continue to be a leader in this emerging category.

[813] The category itself is growing.

[814] The opportunity is to expand from syncing files being this collaboration platform.

[815] So think Dropbox paper, they specifically call out a bunch of features, search, preview, smart sync, version history, and showcase.

[816] 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.

[817] 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 drop box paper it's a and i'm going to mess this up because i've looked at it like very briefly but heard great things it's effectively google docs compete but with um a subjectively more intuitive way of of uh of laying it out of putting in the features and where all the controls are.

[818] It's tightly coupled with Dropbox instead of being outside of their ecosystem.

[819] Yeah, better collaboration features.

[820] Let's use sort of, and it's amazing to say better collaboration features than Google Docs, because that's been their thing forever.

[821] But that is the promise.

[822] Interesting.

[823] I don't know.

[824] I'd love to be proven wrong, but I'm skeptical.

[825] Like, to me, that sounds like Dropbox Carousel and photos.

[826] Like, Carousel may well have been a better product, but, like, Google and Apple own the phones and devices.

[827] And so that's where the photos should live, should live.

[828] And at this point, you know, if I'm a organization, now maybe the market is, is just like for storage collaboration for such small enterprises that don't have Google apps built in.

[829] 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 I can use Google Docs and Google Drive for that type of page.

[830] like product, just because that's where my organization lives.

[831] So here, this is the, I just opened up the Dropbox paper landing page.

[832] And I was hoping to see some maybe like features or like, uh, illustrations of here's the killer features that are better than the word processing that you're used to.

[833] And it just says, bring ideas to life.

[834] Dropbox paper is a new type of doc where teams can bring ideas to life in a single place.

[835] There is a video.

[836] And then it says there's testimonials.

[837] So there's companies that have used it.

[838] 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 I don't know I'm very curious what the strategy is to convert people to using this who are already Dropbox customers over what they're already using so well the the so to sum up the narratives around Dropbox from their position, it's really, we're set apart by simple and intuitive design, an open ecosystem, viral bottom -up adoption, performance and security, and we're moving out of just a folder that sinks into broader team collaboration and workflow.

[839] Great.

[840] Okay.

[841] There's a lot of reasons to be skeptical.

[842] So as we saw, which 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.

[843] But the bankers that took them public were, lots of individual shareholders, all the employees that have their stock locked up.

[844] Everyone benefits from that.

[845] And of course, we've had one day of trading.

[846] So we'll see what continues to happen.

[847] But tons and tons of demand for Dropbox.

[848] So that skeptic narrative that we've been seeing in the news over the last few weeks really didn't play out.

[849] The other things that people have pointed out is that they're, as David and I said, they're quite erratic.

[850] 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.

[851] 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.

[852] And Aaron Levy gave a great Aaron Levy style interview in Axios.

[853] 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.

[854] And he just gives very great, straightforward, compelling answers.

[855] But in this one, he talks about how he says there's never been a B to B that looks like this, because the Axios was looking for sort of comps.

[856] Does it look like Atlassian?

[857] Does it look like Box?

[858] How should we think about this?

[859] 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.

[860] I think that it's more like Skype if Skype had been taken public.

[861] And there's probably two comps within the structure of Dropbox.

[862] One is a consumer business, like a Spotify or Netflix or Pandora, albeit with extremely low conversion rates to paid.

[863] And I just put that in.

[864] And he says, and the other is a sort of SMB type company.

[865] maybe like HubSpot.

[866] I think that's the right way to think about it.

[867] Like I think that's the, um, I like that way of thinking about it and it probably can be a huge company just thinking about it like that.

[868] I totally agree.

[869] I think it's like Skype is probably the closest, uh, closest analogy here.

[870] Um, because I don't, you know, I don't, maybe they can figure something out in the future.

[871] I don't have a lot of faith that they can crack into big enterprise because box is already there, frankly, as are Microsoft and, Google.

[872] And, you know, on the consumer side, it's just really hard to get people, consumers, to pay for storage.

[873] So, but on the other hand, like, there, I just keep coming back to.

[874] There are a lot of, you know, organizations that look like acquired out there for which Dropbox is a magical solution.

[875] That's true.

[876] There's three other sort of, I won't say skeptical, but.

[877] But narratives that the company 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 Stratory Daily Update.

[878] And all three of them are really great points.

[879] One is that the S1 is confusing and lacks data, and specifically monthly active users.

[880] There's this big chart that doesn't actually have numbers associated with it that is signups is the axis instead of monthly active users.

[881] And they recently just deleted the data of 100 million inactive accounts last year.

[882] 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?

[883] That's kind of the first question that any venture investor would ask in a private company's round.

[884] So it's probably great, but it's concerning that that's not part of.

[885] the S -1 at all.

[886] Although, I don't know, given the nature of the Dropbox product, I totally hear the criticism.

[887] 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.

[888] So if you're using, if you have installed Dropbox, you're an active user.

[889] Yeah.

[890] 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?

[891] 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?

[892] Because as you get higher up towards the top, you're going to become more likely to convert to paid.

[893] And then the most important thing is the rate of conversion from free to paid and the velocity of that and cohorts of that.

[894] It's true.

[895] In knowing that, we know.

[896] sort of the most important thing.

[897] A couple of other narratives.

[898] One is they can't decide if they want to focus on top line or bottom line.

[899] They're massively cost -cutting by spending years shifting to cheaper infrastructure, but they're still also trying to expand into new markets and build things like paper and sort of, you know, risk being.

[900] We've seen the company be a little lost in the woods before, so it's always concerning to see that a little bit.

[901] I don't know if that's totally a fair criticism.

[902] I could see why you would do both things.

[903] 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.

[904] I think that's in cost of revenue.

[905] So it's difficult to understand sort of when we think about acquiring a customer for Dropbox acquiring a paid user, like how much money does Dropbox have to spend on them as a free user for years storing gigabytes of their files before there's an upsell opportunity?

[906] So it's difficult if you really wanted to model it as like 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 S -1, it makes me a little uncomfortable.

[907] Yeah, I agree.

[908] So that said, none of those narratives make this a bad company, and they traded great on the first day, and they were massively oversubscribed and got to bump up the price a few times before they hit the street.

[909] Everyone made money.

[910] 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.

[911] In 2015, they lost $330 million.

[912] In 2016, they lost $210 million.

[913] Last year, they lost $11, or I'm sorry, $11 million.

[914] And like, they're well on track this year, maybe next year, to cross that finish line and become a true profitable company.

[915] Yeah, income positive.

[916] Yeah.

[917] 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.

[918] profitable and would look more like a traditional business.

[919] Yep.

[920] And I think really, you know, the last few years, as we talked about, they have really executed very well on this.

[921] The crowning achievement being, you know, the building of their own data centers and moving off of AWS.

[922] Yep.

[923] Yep.

[924] Well, should we quickly spin through what would have happened otherwise?

[925] Yeah, let's do it.

[926] And I guess, I guess what that is in this case is...

[927] They didn't need to go public.

[928] They certainly don't need the cash.

[929] They're generating cash.

[930] They could have stayed private forever.

[931] They didn't need to raise more money.

[932] Do you know what cash they had on their balance sheet when they IPOed?

[933] I don't know.

[934] I'll see if I can find that in the S -1 while you're...

[935] Well, you look while I pontificate.

[936] But I think in this case, they had to go public because even though they were very efficient with their fundraising.

[937] The both investors and then also, but even more so, employees need liquidity.

[938] You know, you can't, and there are going to be so many other of these companies, you know, whether it's Airbnb or Uber or a Lyft or, you know, what, what have you over the next year or two, you have to go public because because your investors, you know, can't, can't, you know, returns on paper aren't going to, aren't going to help them, you know, after a certain point, raise their next funds.

[939] But even more so, you know, especially in San Francisco and the Bay Area, you can't pay your rent with, you know, illiquid drop box shares.

[940] And so many employees at this point, you know, they need, they need liquidity.

[941] So I think they, I think they had to, you know, if not now in, you know, all of these companies are going to have to in the next one to two to maybe three years.

[942] Yeah.

[943] So they, I, here it is, they had 430 million in cash and cash equivalence on their balance sheet at the end of 2017.

[944] 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.

[945] So I think the main reason to IPO here really is, really is for liquidity.

[946] Yeah, totally.

[947] Should you do themes?

[948] Yeah, but I mean, here's, I mean, here's, we just did soft bank.

[949] Like, what if they just go raise?

[950] I mean, they only raise $750 million in their IPO.

[951] Like, if, if your soft bank, would you consider making a bet that Dropbox will be a $40 billion company, you know, many years from now?

[952] Given their track record.

[953] Yeah.

[954] And it's actually worth floating a billion dollars their way to give them a few more years and then take them public.

[955] Yeah, well, I'm going to save my thoughts on this for grading.

[956] All right.

[957] All right.

[958] Sounds good.

[959] So tech themes?

[960] Tech themes.

[961] Let's do it.

[962] All right.

[963] Well, one of my tech themes is definitely, we saw this bring your own device thing that the iPhone started.

[964] And then Dropbox is really the first example.

[965] And maybe Skype, but let's call it Dropbox of bring your own software as a service.

[966] So whatever you're using at home, that's your really phenomenal software user experience, you're going to do that in the workplace, too.

[967] And their sales model really reflects that, where the vast, vast majority, I think 90 % of revenue is generated from self -service channels.

[968] So people who purchase a subscription through the website or app instead of dealing with a salesperson, like a traditional enterprise software.

[969] And so you see this work in Slack, Atlassian, lots of other companies that sort of did the same thing.

[970] but Dropbox is certainly a pioneer of the model.

[971] Yep, yep, indeed.

[972] And it really is a new category of company that's been created over the last 10 years, 10 to 15 years.

[973] This, you know, like you say, broadly consummation of IT, bring your own device, enabled.

[974] 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.

[975] I think we have covered all of my tech themes throughout this very long episode.

[976] Thank you listeners for bearing with us.

[977] And then they were, you know, this idea of round skipping when you're raising venture.

[978] Like that is how you win, whether you're a founder or whether you're, you know, an early investor.

[979] the way you don't get diluted down to de minimis ownership is, 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.

[980] You know, we talked about building on AWS and, and, you know, at first, how 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.

[981] That's been, you know, well, we didn't talk as much on this episode, but lots of people have talked about that.

[982] But I think the thing that my main theme for this episode that I just want to highlight again is I think, you know, the two stories that we, the intertwined stories we told of Y Combinator and Dropbox, I think the moral here is, you know, sort of the, what each of them have as their mantras, which is, you know, Y Combinator is solve a real problem.

[983] You know, that's what they say to the advice that they make something people want.

[984] Make something people want, you know, exactly.

[985] Make something people want is how they phrase it.

[986] it.

[987] But when you're starting a company, when you're building a product, you have to solve a real problem, make something people want.

[988] And then on the Dropbox side, their moral the story is, is make it just work.

[989] You know, make something people you want, make something people want, but it has to just work.

[990] Like, it has to be productized.

[991] You can't be mucking around in, you know, in the registry settings for, you know, or in, you know, Linux.

[992] David, if I move the CLL over here, then.

[993] Totally.

[994] Like, you know, that is not going to be a mass market product.

[995] 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.

[996] Like that's when the magic happens.

[997] But I think the other thing, you know, in sort of the second half of the story, certainly for Dropbox.

[998] And you could argue in a lot of ways for a white combinator these days too.

[999] 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.

[1000] where it's like unclear does anybody want them and do they just work you know um and uh and i think like that's the that's the trade off you know that uh both in startups and then as they grow that you have to you have to manage mm -hmm i have one tech theme that's one 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.

[1001] So Drew got to own 25 % at IPO of this company.

[1002] That's pretty unusual for a founder to have a $10 billion IPO and still own a quarter of the company.

[1003] This was largely because of this explosive growth that they were experiencing while still monetizing, mind you.

[1004] So the fact that they were monetizing meant like they weren't, you know, burning cash into a hole to grow as fast as they were.

[1005] But it exhibited these characteristics of of a consumer company, and when you have consumer company growth metrics, you're able to minimize dilution that you take through your subsequent rounds.

[1006] And so do you think it's the right way to think about it, that his ownership percentage at IPO is because their growth model looks consumery?

[1007] Or better phrased, do consumer companies allow founders to preserve more founders' equity?

[1008] I don't think necessarily.

[1009] I mean, there certainly are plenty of consumer companies where founders have been incredibly diluted.

[1010] I think it's more, though, that Dropbox and Alassian, even more so in the episode we did on them, is the cash flow dynamics of the business.

[1011] Like, they, Alassian is the extreme of this.

[1012] They never raised a dollar of primary capital.

[1013] They could fund all of the growth of the company just from cash flow from operations.

[1014] Dropbox very well could have done.

[1015] the same thing if they wanted.

[1016] And when you have that as your Batna, you know, it puts you in a very, very advantageous position for fundraising.

[1017] Yeah.

[1018] Yeah, that's a great point.

[1019] You want to grade?

[1020] Let's do it.

[1021] I think I, we've talked about the good, the bad, the ugly of Dropbox in this episode.

[1022] The good and the magic of the company is the product market fit of the core product.

[1023] And, you know, Ben Thompson wrote about this in his updates and talked about it with James on Exponant when they talked about the IPO.

[1024] And yet the frustrating thing about the company is like they haven't been able to expand beyond that.

[1025] And, you know, Ben and James were very frustrated by that.

[1026] But here's, I ultimately think having survived that and being where they are now, this is actually a really attractive company.

[1027] 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.

[1028] But ultimately the question in front of us, as you were saying in narratives, is like, what's the future?

[1029] I think this market is both bigger than people think it is of the small businesses.

[1030] 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.

[1031] is going to massively accelerate.

[1032] It's the same thesis for YSquare has a big opportunity.

[1033] There are lots and lots of people that are going to be starting small businesses, going to be being entrepreneurs of various types or like acquired doing this as a side project.

[1034] And Dropbox is the perfect.

[1035] One of the suite of tools that is going to be, they are going to need to run their businesses.

[1036] So, you know, I think, look, is this an Instagram?

[1037] Is this a, on the M &A side?

[1038] I forget what our highest graded IPOs are.

[1039] No, certainly not.

[1040] 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 growth in the market is going to be attractive.

[1041] Yeah, it's funny.

[1042] In thinking about this, I realize there's sort of a little bit, not a flaw, but sort of 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.

[1043] 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.

[1044] And like, what we probably should do is look at the company like Dropbox amazing job super successful company great at so many things created a 10 billion dollar market cap that's publicly traded real liquid shares if we compare it on a relative basis to what were their options like this is this is totally an a plus this was great like they went out they are now publicly traded they got all their stuff in order to to have this sort of 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 it's still less than 10 % of the company's shares are actually publicly traded based on what they raised.

[1045] I think that cash will enable them to do interesting but not that interesting things.

[1046] So do I think that they're going to three or four X the company over the next decade, or let's say the next five years?

[1047] I think it's kind of unlikely.

[1048] Do we think that they're going to get into the ranks of of a 50 billion company, a hundred billion dollar company probably not.

[1049] Like I think this was the best thing that they could do.

[1050] They're a great company.

[1051] But, you know, they're not, they're never going to be a huge company.

[1052] And I don't know that our grading should penalize them for that.

[1053] So I think a plus job on doing what they should have done when they should have done it.

[1054] Relative to what Amazon did with their capital by IPOing.

[1055] Like, like, D. I don't, yeah, that it's, it's hard to penalize them for that, though.

[1056] Yeah.

[1057] Well, yeah, the Amazon comparison is interesting, right?

[1058] Or soft bank, right?

[1059] Like, you know, your, you were, your company was something, and then you were successfully able to make it much, much more than that.

[1060] That takes truly, truly visionary founders.

[1061] And Dropbox tried to do that and failed once.

[1062] And who knows if they'll be successful in the future.

[1063] But the IPO is probably a really great thing for them, you know, even if they won't be a multi -100 billion dollar market cap company.

[1064] And of course, the counter argument for that is they'll be profitable next year.

[1065] Revenue has almost doubled from 2015 to 2017.

[1066] So, like, they're still growing at a ridiculous clip.

[1067] So then if you're doubling as a near public company every two years, you know, the question does become where's your ceiling?

[1068] yep yep one that's that was the argument that I was making in grading which is um I think the ceiling just for Dropbox as it is today is going to still pretty high yeah high and going to keep rising all right well I'll go with B plus then too uh this is fun listeners let us know uh we're fully aware that our episodes have been getting longer um it's because we've just love doing all the work diving into these uh companies and it's probably also why we're releasing episodes a little less frequently um but let us know your feedback let us know what you think if this is way too long you want shorter hit us up in the slack yeah if you love it let us know that too yep carve outs let's do it um i'll go first mine uh real quick is a good friend my college roommate uh sent this to me the other day uh uh a youtube channel called Lazy Game Reviews or LGR.

[1069] Super fun.

[1070] It's this guy.

[1071] I don't know where the lazy comes from because it's definitely not lazy, but it's like retro game and technology reviews.

[1072] And so like one of the most recent episodes is games on TI83 calculators.

[1073] And it's like great nostalgia from back when I was in high school or early PC gaming like the Sims or the need for speed or that kind of stuff.

[1074] Very fun to watch.

[1075] Cool.

[1076] mine is an article that friend of the show Mark sent in it is on on Ars Technica DirectX ray tracing is the first step toward a graphics revolution did you see anything about this in the last week?

[1077] No, 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 things, do real -time rendering.

[1078] 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.

[1079] 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.

[1080] This is what Pixar does, right?

[1081] Yep, exactly.

[1082] And you look at a video game and, like, you can kind of see all the rough edges and you can, you know, sometimes there's like things missing, like you turn a corner and then suddenly, bam, you can see a reflection on someone's helmet that wasn't there a second ago, and you're like, why wasn't that available a second ago?

[1083] The traditional way that you render, do real -time rendering is by mapping polygons, effectively triangles, and then drawing the textures on top, and then drawing the light sources on top of that.

[1084] 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.

[1085] And that way, it's kind of like a stack where the last thing rendered is the thing that you see.

[1086] And so obviously that this gets expensive if you're using very tiny triangles or 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 place where you're looking.

[1087] So it does miss out on some reflections.

[1088] It misses out on the ability to do things in a very fine -grained way.

[1089] And if you are in graphics programming, I'm certainly messing this up.

[1090] So I apologize.

[1091] but ray tracing solves a lot of these problems and it 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 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.

[1092] Well, especially for VR and AR.

[1093] Oh, yeah.

[1094] That's going to be huge.

[1095] Oh, yeah.

[1096] So again, my, my apologize to people who study and work on this and actually know it, but my, from reading a couple of articles, think it sounds very cool.

[1097] Yeah, that sounds awesome.

[1098] Our sponsor for this episode is a brand new one for us.

[1099] Statsig.

[1100] So many of you reached out to them after hearing their CEO, VJ, on ACQ2, that we are partnering with them as a sponsor.

[1101] sponsor of Acquired.

[1102] Yeah, for those of you who haven't listened, VJ's story is amazing.

[1103] Before founding Statsig, Vijay spent 10 years at Facebook where he led the development of their mobile app ad product, which, as you all know, went on to become a huge part of their business.

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[1119] Yep.

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[1125] You can click the link in the show notes or go on over to stat sig .com to get started.

[1126] And when you do, just tell them that you heard about them from Ben and David here on Acquired.

[1127] All right.

[1128] Well, listeners, that is all we've got.

[1129] If you aren't subscribed and you want to hear more.

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[1131] Have a great day.