Would you invest in Dropbox? - Week 12

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5 Things to Know About the Bumpy Start of Dropbox

  • Dropbox can be included in the "anti-portfolios" of many investors. "Dropbox impressed investors in Boston. It just didn’t impress them enough to write a check. Boston investors had an entire week before any Silicon Valley investors saw Dropbox, and not one of them made a move." Jessica Livingstone, partner @ Y Combinator, first investor in Dropbox
  • In the application to Y Combinator batch in 2007, when asked about the lowest offer he'd take to sell Dropbox three months from then, its co-founder Drew Houston wrote, "I'd probably have a hard time turning down $1m after taxes for 6 months of work."
  • See the first Dropbox investment deck that served its purpose to receive another check from Sequoia Capital, and anything but a smooth public product launch on stage at TechCrunch’s TC50 startup event in 2008. 
  • In his keynote in 2009, Steve Jobs vowed to kill Dropbox with iCloud. Read the full story.
  • Y Combinator sold half their Dropbox shares and used the money to fund YC operations approximately 7 years ago. That was the only time they’ve done something like that, but YC would’ve made more money if they hadn't.

Why We Like This Story

Dropbox IPO is a good example of venture capital math. While we all know that most of the risk falls on early investors' shoulders, this case illustrates how later stage investors can also lose. We dedicate our One VC Lesson a Week to later rounds valuations. Subscribe now to get it or reply to this e-mail for a special discount.  

So. Dropbox Inc. raised money from venture capitalists at a $10 billion valuation in 2014. It filed for an IPO last week at a humble valuation range of about $6.3 billion to $7.1 billion, which is a down round for investors who participated in the latest rounds. However, the demand was better than expected, and Dropbox ended up going public at a valuation of ~$12 billion as of yesterday.

If its last round C lead investor BlackRock were lucky to sell all their shares for the current $29.90 price per share, their profit would amount to only ~4.5% of their initial investment -- a return much lower than 2016 S&P 500 (roughly 12.25%) or 2016 NASDAQ (11.28% return with dividends reinvested). Why bother?

Big winners, on the other hand, are Sequoia Capital and Accel Partners, who invested in the company very early at less than $1 per share. 

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See full infographics

Clearly, the company was overvalued for quite some time: experienced investors such as BlackRock bet poorly. The bankers who underwrote the IPO were also mistaken by filing the papers for a valuation lower than the market expressed in the first days of trading.

The latter, however, isn’t a reason to buy Dropbox shares today. First, the company's revenue growth is slowing down. Dropbox valuation is now worth 10 times its current sales, while the average cloud software company currently trades at only 4.7 times revenue, according to Bessemer Venture Partners. It's also unclear whether Dropbox CEO Drew Houston will be effective at managing Wall Street expectations. 

That said, Dropbox has a larger size, stronger cash flow and attractive growth rate. See for yourself:

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In other news:

  • More than $687 million was invested in nearly 160 companies in 2017, both decade-high marks, according to a report on Pittsburgh technology investment. These numbers echo the recent (and ongoing) notion that “Silicon Valley is Over” and “Everyone Hates Silicon Valley”. Well, not really. 
  • First, most of the technologies first appear in California. Even though it creates a bubble distancing Silicon Valley from rest-of-the-world market realities, think about it as tech's first focus group.
  • Second, a myth has been spreading for a couple of decades that Silicon Valley monopolizes venture capital. A study shows that it actually doesn't, therefore, there isn’t much to be “over”. As the costs of starting technology companies have lowered, the time required to bring products and services to market has also shortened. This makes Silicon Valley totally unnecessary for launching a startup. Following this trend, different regions started offering  lower costs of living, lower operating costs, access to talent pools comparable to East and West Coast universities, as well as alternative funding sources. All these trends forced venture capital firms to innovate their own business models.
  • It's not other US states that threaten the kingdom of Silicon Valley (although they attempt to do so). It’s other countries and global regions.
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P.S. We actually wanted to run more stories from this week news. Will follow up in the next newsletter. Subscribe now

Recent Industry Reports And Studies (free instant access):

2018 The Top 20 Reasons Startups Fail by CB-Insights
WeWork Teardown by CBInsights
2018 The Venture Capital and Private Equity Country Attractiveness Index by IESE Business School

Reroute

You might need one literally if the rumors are true: Attorney General Jeff Sessions declared war on the State of California