Dropbox (YC S07) Raises $7.25M, Crosses 3M Users
gigaom.com
gigaom.com
Congrats guys!
In the end I just signed up for a $9.99 a year hosting plan with 20 gig of storage and WebDAV. Cheaper, faster, and no funky software to crash my boxen.
Honestly I'm not even really sure how Dropbox ever became so popular.
- San Francisco-based Dropbox has just 20 employees.
I wonder why they need so much money. If the Freemium model is working, shouldn't they at least be breaking even?
Pretend I have a machine where you insert a quarter and, a year later, a dollar pops out. Do you a) insert the quarter you have in your pocket, wait a year, and then put all four quarters back in or b) go to the bank, borrow as much money as they'll give you, get it changed into quarters, and start stuffing the machine?
A freemium startup which has a good idea of what customer lifetime value is and what customer acquisition costs are is, essentially, a quarter-into-dollar machine.
This factor becomes particularly acute when the ultimate goal of the startup is to sell their quarter-into-dollar machine for some multiple of the number of dollars it has produced in the most recent year.
[Edited in response to the above post going grey: Please do not downvote the post above me. He isn't being malicious. The big picture strategic view is non-obvious and many smart people need to have it explained a few times for it to sink in. If you wish to correct the misconception, either explain it or upvote an explanation.]
[Edited to add: P.S. The expert on "(LTV > COCA) + source of capital => blow the doors off" is Dharmesh Shah. He has been banging the drum for a few years now. Example: http://tinyurl.com/doors-blown-clean-off ]
That aside, you are assuming growth is constrained in some way that money relieves. IE they need money to promote or they need money to support their free users until they mature into premium users. Either one of those is a sufficient answer.
At some point the law of big numbers becomes a limiting factor, but probably not at any point that would make it unwise to take $7m.
The "data keeper" role is like an octopus, big in the middle, tentacles everywhere. I could imagine a world where that role becomes as important if not more than the OS / services.
one option A common way this works is putting that money to work acquiring more customers. This can mean sales staff. It might mean advertising. It might mean outlets. etc. It works if you have some way of converting money in to customers in a reliable way. Since dropbox appears to be growing virally through referrals, I don't see how this can be the case here. You cannot easily turn cash in to referrals. If it is a case of putting money to work acquiring customers, there is something I don't understand going one.
The other option I can see is funding the free accounts while you wait for premium accounts to open. If you are in a fast growth period, you might have a higher ratio of free/paid customers then what you expect the long term average to be. If you are growing very fast or your profit margins are relatively narrow, you might need some funding. IE, you might dip under profitable temporarily while you wait for the many new customers to convert. This kind of a need is short term & marginal. $7.25m is not marginal.
I think your assumptions are likely to be contrary to material fact. In particular, I think that the embedded assumption of "constant conversion rates" is false. For example, I think that inducing a customer to give a referral is a conversion like any other, and that one could spend a non-trivial amount of engineering resources to instrument one's site and then spend engineering/marketing resources to A/B test the "#$#$& out of it, and this process would predictably result in increased conversion rate. (Test the call to action. Test the design of the form. Test integration directly with Facebook. Test how much free space you offer for a signup.)
Do I have to mention that A/B testing in the context of a viral loop is hypereffective because of compounding? You get exponential returns to linear improvements. This is on top of A/B testing tending to give exponential improvements to linear work, because today's improvements compound on yesterday's.
The combination of these two factors means... wow. That's like a repeatable recipe to... wow. Crimety. I think I have to spend some more time thinking about this later, but my snap impression is that you could have Zynga-esque growth in an arbitrary niche (i.e. selling to people who pay money for things) without scamming anyone.
BTW, my original comment was not 'what idiots' it was, 'I wonder what they need all that money for?' If they are going to spend it all on split testing their 'refer a friend' system, well that is something of a wonder.
- adwords
- Advertising experiments
- a/b teting ($7m in split testing. Wow!)
- Engineering. Go past just file syncing (uuilly)
- corporate sales
Each one of these is interesting in a way. I honestly don't think that the first three are likely. The last 2 are a strategic change of direction.
It's not like you can pay to have your customers refer more friends.
Anecdotally, I've heard Amazon shoots for $23. Thus they'll put basically unlimited money into any system bringing in customers for < $23.
You can run into a problem of volume though, i.e., you overfish the pond. Then you'll need to find new sources of customers (e.g., Facebook ads if you've only done SEM).
Unhappily for me, I'm capable of saturating all of Google's advertising inventory conveniently available at $15 per customer. (Its sort of like oil: the more you are willing to spend, the more exists in the world. I guess if I were an environmentalist I would describe my current state of affairs as Peak Bingo, but with some sustained effort into AdWords I could probably locate more sources of customers between $15 and $30, or alternatively in different mini-verticals.)
BTW, still chuckling at Peak Bingo. Well put.
This is a long way of saying that, while I'm happy with my volume, I'd be more happy with, oh, enough volume to hit the limits on my credit cards. In fact, I'd avail myself of pretty much every source of credit less odious than juice loans from yakuza or opening an account with CapitalOne.
I have paid for advertising elsewhere. The main issue is that a) Google has a de-facto monopoly on it in no small part due to the fact that b) their competitors s<%= "u" * (10 10) %>ck. Microsoft, for example, takes every bit as much work to get right as AdWords does, but you have to do it within their application, and they have less than one tenth the inventory Google does. To add insult to injury, it is at higher prices. I got a note in the email from them that my credit card had expired and could not bring myself to logging in to give them the updated credit card number, that is how useless they are to me.
I'm surprised prices @ Bing are higher, I'd assumed lower volume would mean lower competition and thus lower prices. But I definitely understand how the volume they can deliver isn't worth the time spent optimizing their system.
Thanks for elaborating.
Even more interesting, you can see which actions are predictive of referring friends (e.g., leaving a comment on the suggested features list). You can use the same strategy to predict the conversion rate from free to paid.
http://20bits.com/articles/almost-viral-a-hybrid-acquisition...
Cool thing if the guys who make the software are reading this - started a new job earlier this year at a mostly non-software company managing a few development projects. I doubt most of my colleagues are aware of this startup culture or have heard of .NET much less Y Combinator.
First week "You've got to see this program we have the sales team using, called Dropbox... its tremendous there's about a thousand things we can use it for". Not only are they using it its their "we're showing this off to the new guy" thing.
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Any Dropbox folks here who could comment on what those tools might be?
http://www.techcrunch.com/2009/11/24/dropbox-sequoia-funding...
"Dropbox did close a Series A funding round, but it was for $6 million, and it was back in October 2008. And it was led by Sequoia, not Accel (though Accel did participate in the round)."