The Dropbox IPO

Acquired is live on the scene following Dropbox’s public market debut. From playing a central role in the early days of Y Combinator, to having Steve Jobs famously label the company a “feature not a product”, to pivoting from consumers to enterprise to developers and back again, the silicon valley history runs deep with this one. What twists and turns lie ahead for Dropbox as a public company? We speculate! Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Links: Dropbox’s Y Combinator application http://www.businessinsider.com/dropbox-y-combinator-application-from-2007-by-drew-houston-2013-9Original Dropbox demo video https://www.youtube.com/watch?v=7QmCUDHpNzE&feature=youtu.beCarve Outs: Ben: Raytracing comes to DirectX https://arstechnica.com/gadgets/2018/03/microsoft-announces-the-next-step-in-gaming-graphics-directx-raytracing/David: Lazy Game Reviews https://www.youtube.com/watch?v=CR-IuEAJpWc&feature=youtu.be

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Rosenthal?

  It's roughly the same. And then they raised 350 at a $10 billion post money. So they sold 3% of the company. God, that's crazy.

• 0:20Ben Gilbert?

  Welcome to episode two, season five of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert.

• 0:28David Rosenthal?

  I'm David Rosenthal.

• 0:29Ben Gilbert?

  And we are your hosts. We are coming at you 24 hours after the trading began for the initial public offering of Dropbox. David, what do you think?

• 0:39David Rosenthal?

  It was a big day here in, here in San Francisco yesterday.

• 0:43Ben Gilbert?

  Is the window open? Are we, are we about to see a whole bunch of these? Are we, are we about to see the stampede of unicorns?

• 0:51David Rosenthal?

  I wish. I think we're, well, I think the window's open. I don't think it's going to be a stampede, but maybe it'll be a slow procession, which would be a good thing for everybody.

• 1:01Ben Gilbert?

  Listeners, as you know, on, on the show, we generally like to do most of our episodes, taking a good amount of time since either the acquisition or the IPO happened. So we can analyze, you know, was it a good decision for an IPO? Was it a good idea to hit the public markets and raise that money? And what did they end up doing with it? Or with an acquisition, what did the acquirer end up doing with the acquiree? But sometimes the current narratives and the story is, 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. And so we are, you know, we're here in real time after Dropbox IPO'd and did one day of very successful trading to, to talk about Dropbox, the company.

• 1:43David Rosenthal?

  Yeah.

• 1:44Ben Gilbert?

  So if you're new to the show, you can check out our Slack at acquired.fm. It's easy to either join the Slack there or get email updates about when we have new episodes. And if you have listened to the show and you're thinking, hey, I like this. How can I help these guys out? Would love to contribute to the show in some way. We've got a great, great answer for you. You can review us on Apple Podcasts. So if you open up the podcast app, you can, you can review us from there. And we appreciate any time you could take to, to leave a nice note that'll help other people find the show. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that

• 2:25Ben Gilbert?

  you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 2:34David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature, or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 2:55Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 3:17David Rosenthal?

  In half! Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 3:35Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you.

• 4:03David Rosenthal?

  Well, David, there's no shortage of...

• 4:07Ben Gilbert?

  Of fun history on the founding of Dropbox and how the whole thing came together. You ready to dig in?

• 4:13David Rosenthal?

  I am for sure ready to dig in. It's funny, you know, I was thinking, leading up to this, we recorded our last episode on SoftBank and Fortress and the Vision Fund exactly a week ago, right? Or maybe, or was it Sunday? Was it less than a week ago?

• 4:27Ben Gilbert?

  A little less than a week.

• 4:28David Rosenthal?

  A little less than a week ago. And I thought, you know, Dropbox, like, it's a pretty straightforward story. So, you know, of course, we do lots of research here and, you know, it's the hallmark of the show. We love doing it. This is what we love. And I'm like, okay, this is great because we don't have a lot of time for this episode. You know, I'll be able to knock this out pretty quickly. Well, per usual, proved wrong. Once again, there is a lot to this story.

• 4:53Ben Gilbert?

  Nothing is ever straightforward, right? Like every formation of every company and every growth and every fundraise and every, it's always messy. Like, there's no, there, there's some phrase, there is no deal, deal without a little bit of hair. Like, there is no company without a, you know, tumultuous and twisty and often thrilling backstory.

• 5:11David Rosenthal?

  Yeah, and their own, you know, each company has its own unique history. And, you know, I think that's what makes, makes this show so fun to do. And so with that, should we dive in?

• 5:23Ben Gilbert?

  Let's do it.

• 5:24David Rosenthal?

  All right. Well, to really, truly do justice to the history of Dropbox, you kind of also have to talk about the history of another organization that, sort of surprisingly, we haven't talked that much yet about on this show, but it's pretty important. I'm sure most, most of our listeners are familiar with it, and that is Y Combinator, the seed fund slash incubator that was started in 2005. And really, the history of Dropbox and the history of Y Combinator, or YC as it's known these days, pretty intertwined. So, let's start with YC. So, back in the really early days, I think a lot of people know about Paul Graham, who

• 6:07David Rosenthal?

  is one of the founders of Y Combinator. He goes by PG, he's very prolific, writes lots of essays. He's sort of like-

• 6:14Ben Gilbert?

  Decent, decent Lisp programmer.

• 6:16David Rosenthal?

  Decent Lisp programmer, right.

• 6:21David Rosenthal?

  So back in 2005, Paul was, PG, was living in Cambridge, Massachusetts, not Cambridge, England, although he is English and by birth. And actually, today, he and Jessica live in England, back in there, his native country. So it's 2005. He starts Y C with Jessica Livingston, who then was his girlfriend and now is his wife, and two other folks, Trevor Blackwell and Robert Morris. And so who are these people? Well, it turns out, so Paul had been the founder of a company back in the dot com days called ViaWeb. And ViaWeb was sort of like, I don't know, it was like an early Shopify.

• 7:05David Rosenthal?

  You know, it was like a

• 7:07Ben Gilbert?

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

• 7:09David Rosenthal?

  Yeah, exactly. It was like a commerce software solution for selling things online. And one of the first, and they ended up huge. So I think that was the mid 90s when he started that. And his co-founder was Robert, Robert Morris. And so they started it in Boston and ends up getting acquired by Yahoo in 1998 for about $50 million. And then Trevor, Trevor Blackwell, had worked for them at ViaWeb. And so when Yahoo acquired the company, Trevor moves out to Silicon Valley, goes to work for Yahoo. Robert, well, PG bounces around a bunch. Robert is actually a professor at MIT, professor of computer science.

• 7:50David Rosenthal?

  In addition to being a co-founder of multiple companies, he stays in Cambridge. Paul eventually comes back to Cambridge. He's living in Cambridge. And he starts dating Jessica. And Jessica is working in marketing at an investment bank in Boston. And she's not super happy with banking. I know how that goes and the culture there. And so she starts interviewing at VC firms about coming on and being, one VC firm in particular, about being the director of marketing at the VC firm. And one night, Paul and Jessica are out at dinner and, you know, they're talking about Jessica.

• 8:29David Rosenthal?

  Because interview process and the VC firm in typical VC firm fashion is like taking forever to get back to her, totally dragging their feet, the process is super opaque. And one thing about PG that anybody who certainly has read any of his essays or knows of his reputation, he's kind of nothing if not opinionated. So they're walking back from dinner and he just like goes off on VC firms in general and their practices and how they operate. Remember, this is 2005. So like the concept of quote unquote founder friendly is still years away at this point on the VC side. And he says, you know what?

• 9:10David Rosenthal?

  Screw it. Let's start our own VC firm. And he's been thinking about this for a while. 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, well, start our own VC firm and you can work for that. Don't go work for these guys. So the next day, he calls up Robert, who's still a professor at MIT, and Trevor. And I believe Trevor, I don't know if he was back in Boston at this point, or if he was still out in Silicon Valley, and says, hey, I had this, Jessica and I have this idea. We want to do this. And concurrently

• 9:53David Rosenthal?

  with this, he had just given a talk at Harvard. So Paul has his PhD in computer science from Harvard. He'd gone back to Harvard and he'd given a talk at the Harvard Computer Society entitled How to Start a Startup. And he had talked to all these undergrads about like, his experience, his journey, starting a company and what it's like. And this is, Facebook's like a year old, I think, at this point. And they'd probably, they'd probably just moved from Boston out to Silicon Valley that summer.

• 10:21Ben Gilbert?

  Yeah, and if you think about sort of the hype train of startups since then, this is like, it's right before the wave crested. Like, Facebook is taking off, but the American dream sort of of the high school college student is not drop out and 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.

• 10:51David Rosenthal?

  Yeah.

• 10:51Ben Gilbert?

  So it's still a thing that you're sort of convincing people to do with you as if you're a total nut job if you're doing this.

• 10:57David Rosenthal?

  Totally. And 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. Maybe my life would have been different if I'd been up in Cambridge. But yeah, like, you know, even, you know, Google had just gone public and everybody was like, "Google, it's some crazy startup." You know, Eric Schmidt was a Princeton alum, he was CEO, so it was like, known, but it was like, it wasn't something people went and did. Even people in CS departments, you know, they all wanted to go work in finance.

• 11:25David Rosenthal?

  And so Paul has this idea, he says, you know, "I want to get into angel investing. Jessica and I are going to start our own VC firm. But what we're going to do is, we're going to start by, the way we're going to get our first deal flow is we're going to run a summer program this summer." So this is in the spring of 2005, when they have the idea. "We're going to run a summer program for all these undergrads. I just gave this talk at Harvard. And we're going to bring them in, we're going to have them start companies over the summer. It'll be summer projects for them. Probably most of them will go nowhere. And then they'll, you know, that's how we'll get into it. Maybe some of these companies will turn into something." So Paul and Jessica put in $100,000, and Robert and Trevor each put in $50,000.

• 12:07David Rosenthal?

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

• 12:11Ben Gilbert?

  And at this point, it is just marketed and called the Summer Founders Program. There's no Y Combinator yet.

• 12:17David Rosenthal?

  And no Y Combinator yet. They eventually, I actually don't know when they do, but it was fairly early on. They changed the name to Y Combinator, which is a math term for a function that generates other functions. I guess it was, I don't know if it was during the program or that they kind of realized that like, "Oh, no, this is going to be the long-term thing. It's not like, we're not going to bootstrap an angel firm by funding, you know, kids in college. Like, this is the thing. We're going to help start these companies." So they do the first batch that summer and then they decide it works so well. The companies are so impressive coming out of it more than they thought that they're going to keep it going year round and they're going to alternate do winter programs in California,

• 13:01David Rosenthal?

  out in Mountain View where Trevor was. I think the first Mountain View office was actually in like Trevor's office out in Mountain View. So he had separately, I forgot to mention this, he had started after ViaWeb, a company called AnyBots, which is the company that makes those telepresence video conferencing robots, you know, like the screen on the wheels that's in like Silicon Valley episodes and stuff. Oh, yeah. Yeah. So I think, I think the initial YC office was in their office out in Mountain View. So they come out, that's early winter 2006. They do the winter batch in Mountain View and then they come back to, they come back

• 13:44David Rosenthal?

  to Boston the next summer of 2006 for their third batch. And a company, a fateful company, applies to them from MIT in that, in that third batch in the summer of '06. And it was an engineer from MIT who left school early to come start this company, but it was not Drew Halston. We're getting to that in a minute. It was Adam- One year later. One year later, yes. It was Adam Smith and he had an idea for a company that we've, we've actually talked about in the past on this show to sort of like bring social elements and personal information to email inboxes, starting with Outlook. And he started a company called Zobni, which is inbox backwards and applies to YC with

• 14:29David Rosenthal?

  it, ends up getting in. And then immediately after the program, he moves out to San Francisco, raises a bunch of money and they're kind of like the new hot startup. And so what does all this have to do with Dropbox? So it turns out that Adam was the, in the same fraternity and actually the little brother of Drew Halston at MIT. And so Drew is back at MIT. He sees all this and he's like, man, my little brother in my fraternity just raised five million bucks out in California. I gotta get in on this. I need to start a company. He's super inspired. You know, he sees Adam's kind of path through YC, says he has to do it too.

• 15:09David Rosenthal?

  Well, it turns out that Drew had a company on the side at MIT called Accolade, which was doing SAT tutoring. And so he applies to Y Combinator, I believe it was that winter, with this SAT prep company. And you know,

• 15:26Ben Gilbert?

  Oh, I didn't realize he, he had applied with the, he had applied once before Dropbox?

• 15:31David Rosenthal?

  He had applied before Dropbox.

• 15:32Ben Gilbert?

  Oh, wow.

• 15:32David Rosenthal?

  With Accolade, which actually is a pretty good name for a company. Just turns out it was not a good business. So he applies and Paul and Jessica are like, oh, this guy seems like, you know, this kid seems pretty talented, but like it's an SAT prep company. We're not gonna, we're not gonna fund this. So they reject him. 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. He'd always, who'd now moved out to, moved out to Palo Alto and, and started Facebook out and, you know, moved Facebook from Boston out to California. He continues with Accolade. He's still working on it.

• 16:14David Rosenthal?

  And then this is where now the canonical founding story of Dropbox comes into play. So one day while he's at MIT, working on Accolade on the side, Drew decides he's gonna go take a weekend trip down to New York and he gets on the Chinatown bus. The Chinatown bus, I don't think it exists anymore, but it was super cool. I used to take this, you know, live in East Coast back in New York. 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. Drew gets on it in, in Boston. He's intending to do a bunch of work on, on Accolade on the bus. He opens up his laptop and he realizes he's forgotten his thumb drive.

• 16:54David Rosenthal?

  So all of his files that he has, that he was gonna work on for Accolade, aren't with him on the bus, literally not on the bus.

• 17:04David Rosenthal?

  And so as Legend has it, he's so frustrated, he says, you know what? I'm going to fix this. I'm an engineer at MIT. He starts coding a solution for file sync on the bus. And that was how Dropbox was born.

• 17:19Ben Gilbert?

  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. Like, it's just a weird, like, mental leap that you have to go back. And that was only 11 years ago, you know?

• 17:34David Rosenthal?

  Yeah.

• 17:34Ben Gilbert?

  Now, everything is always either actually downloaded in with you or easily available to you. And in all likelihood, sort of, you, that's abstracted away from you and the user experience so that it feels like it's with you, but it actually ends up getting downloaded from the cloud on demand. And most of these things, we've come a long way in 11 years.

• 17:52David Rosenthal?

  We certainly have. Now, he was not the only person that saw this, saw this vision at the time. I mean, famously, another team of young kids in college out in California had the same idea. Actually, they are from Seattle, from, I think from Mercer Island High School at USC. And basically had the same thing happen and they started Box.

• 18:18Ben Gilbert?

  Which, which also, as was, was going after the same opportunity as them at the time, was also a consumer company.

• 18:26David Rosenthal?

  Yep. Also started as a consumer company before they then obviously pivoted into enterprise. But Drew knows nothing of this. He's, he's just, he's looking for a great business opportunity. Wants to be a founder. He's got this company. He sees this and he realizes as he's coding this up and it starts to work over the next couple of days, he's like, this is it. I'm going to get into YC with this company. So he incorporates it. He's super pumped. He's got like the best name he can imagine for it. Not Dropbox, but Evenflow, because he's a huge Pearl Jam fan. It also comes up, anything you watch, interviews you read with Drew, or watch of him giving. He's a huge music fan, he's in a band, loves Pearl Jam, so he calls the product Evenflow.

• 19:11David Rosenthal?

  And actually, the company was still named Evenflow.

• 19:14Ben Gilbert?

  Evenflow Inc.

• 19:16David Rosenthal?

  Yeah. So read the S1.

• 19:18Ben Gilbert?

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

• 19:23David Rosenthal?

  Yep, yep. So, you know, Eddie Vedder, Pearl Jam. But, but pretty quickly, I actually, I wasn't able to find the story of how or why they changed the product name from Evenflow to Dropbox, because it happens by the time he applies to YC, which is in like, within like, a month or two of this timeframe. Maybe it was trademark issues with the name or something like that. But so he submits his, he applies to the summer, now it's now summer 2007, application cycle for Y Combinator. He submits his application, it's, it's out there, online, publicly available, we'll link to it in the show notes.

• 20:08Ben Gilbert?

  And actually, so it used to be, a little note on this, so it was a text file that lived in Drew's Dropbox and was public. And you, it was, I always thought it was the coolest thing that like, you could go to Dropbox and look at the application for Dropbox, the .txt. And first of all, it's cool, because the YC application really hasn't changed much. But unfortunately, it's, it's no longer available there. Drew must have moved some files around in his Dropbox, getting ready for the IPO or something. But it is available in a, in a Business Insider article that we will link to. And it remains, you know, I, I read this, I think I end up reading it probably every other year or so, but it is absolutely the canonical example of how to clearly articulate the problem you're going after, how you know that you are solving it, why you feel your solution is the best.

• 20:52Ben Gilbert?

  Like, if you ever want to benchmark one of your ideas, and particularly the clarity you have around the opportunity in front of you against one of the best, you gotta check out the Dropbox YC application.

• 21:02David Rosenthal?

  Very, very worth reading. It's like the initial startup phase or seed funding, you know, version of an S1.

• 21:10Ben Gilbert?

  Yeah.

• 21:11David Rosenthal?

  And it's, it's really, really worth reading. It's, it's, it's, it's great. But there's just-

• 21:17Ben Gilbert?

  Let me take a quick aside. So, so at this point, so early on in the YC process, Drew posts the Dropbox 2 Hacker News and says, hey, here's my, here's my YC.

• 21:29David Rosenthal?

  No, no, this comes, this comes a little bit later.

• 21:31Ben Gilbert?

  All right, I'll hold.

• 21:32David Rosenthal?

  Okay, it's coming up, but we'll, it'll be fun. You'll have a lot to say. So he, so he applies with the text file and I think he mentions in the text file that he's gonna do a video. So Paul emails him, emails him back and he's like, hey, you know, like this looks pretty good, but it's just you. You kind of need a co-founder, but there's a problem, which is like the deadline. They're gonna make their decisions and the batch is gonna start in like two weeks at this point. So Drew is undeterred. He starts scrambling. He's like, all right, I need a co-founder. I need somebody, you know, I'm at MIT. I should be able to find somebody. He, he emails, I don't know if he emails or calls or talks to Kyle Voep,

• 22:14David Rosenthal?

  who then ends up, would end up being in the same batches as them as Dropbox that summer with Justin TV, which of course would become Twitch.

• 22:23Ben Gilbert?

  Is like mind blowing thinking about the fact that they're in the same batch.

• 22:26David Rosenthal?

  Totally mind blowing.

• 22:27Ben Gilbert?

  Trying to help each other find co-founders.

• 22:29David Rosenthal?

  So Kyle was also at MIT and then Kyle would then after, long after Justin TV and Twitch, he would go on to found Cruise, which Cruise Automation, which was self-driving car technology that got acquired by, for, by GM for a billion dollars a couple of years ago. So it's really quite the mafia here. So Drew and Kyle were in the MIT Entrepreneurs Club together. Drew's just talking to anybody, trying to find like good leads on a co-founder. And Kyle, Kyle says, hey, you know, I'm busy. I got my own thing I'm working on, obviously. But I know this guy who lives on my floor in my dorm, who's a pretty good coder. And his name's Arash and why don't you guys get together?

• 23:12David Rosenthal?

  So Drew's like, sure, done. They get together the next day in the student center. Apparently they jam for a couple of hours, as legend has it. By the end of this couple hour meeting- They have decided, this is by the way, not how you're, is not the best way to find a co-founder. They've decided to work together. They've decided to drop out of school. They've decided that they're gonna go for it.

• 23:34Ben Gilbert?

  David, so when you're chatting with entrepreneurs and you say like, oh, how do you guys know each other? You look for like, we worked together for five years at this previous company, or we've been best friends since high school. Or like, we know each other, we finish each other's sentences. And you, I just like laughing thinking about like, my friend told me about this guy and I met him for two hours. And like, you know, Arash is the CTO today, like at IPO.

• 23:59David Rosenthal?

  Amazing, amazing. I mean, basically like, you know, when you ask the question about how do you, you know, how do you know each other when you're talking to co-founders? The one answer you don't want is, we don't.

• 24:13David Rosenthal?

  And that was their answer.

• 24:16David Rosenthal?

  But hey, you know, YC takes a chance on them. So they accept their application. They start. And sometime, I don't know if it was after they started in YC or before, they decide that they're gonna make a video. Kind of an explainer video of how Dropbox works. And at this point, Drew, mostly Drew, maybe Arash worked on it a little bit. Have gotten a kind of an MVP prototype up and running. And we'll link to this video in the show notes too. We'll try to link to it. But it's pretty amazing when you watch this. Well, it's funny for two reasons, but, but one, it's basically Dropbox today. Like, within weeks, everything that Dropbox is today and still, like, the core of the product is there.

• 25:01David Rosenthal?

  All the little images on the file, the checkmarks and then the syncing, you know, the circle, circular arrows when it's syncing and all that. All the low level operating system hooks. It's all done. I mean, basically, very little has changed.

• 25:17Ben Gilbert?

  But David, it sounds like a feature to me.

• 25:21David Rosenthal?

  Yeah, you know, how could this be big? So they they make this video and then they really also, this is the other core of the product on the distribution and marketing business side. They decide that they're going to throw in some like allusions to, you know, popular culture memes in the video. So like a bunch of the files that they're syncing are like, you know, they've got some Tom Cruise images, they've got Steve Ballmer with his tongue out, like all this stuff. It's funny watching it now, like, I don't even remember what half these things are referring to. And and so then they they make the video and then they post the video on Hacker News,

• 26:01David Rosenthal?

  on Reddit, which Reddit had been in the first batch of Y Combinator, I think the first batch. And and Dig, which was Dig was huge at the time. The video goes viral and then that's how they get their waitlist for for their first users.

• 26:19Ben Gilbert?

  It was just such a clear, clear video. 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 Exponent. But it really is like, you look at it and you go, oh, yeah, no, I understand exactly how that works and I definitely want it.

• 26:39David Rosenthal?

  Yep. I mean, it's really, you know, even watching it now and, you know, you also go watch it, watch it too. It is Dropbox today and like it was, it was magical at the time, still is in a lot of ways.

• 26:52Ben Gilbert?

  And like the feature that came out three weeks after they founded the company, which is you put stuff in a folder and it syncs, is like the feature that David and I use to produce this show. Like, we upload our audio to Dropbox, it syncs, and then we edit it. It's, you know, it.

• 27:11Ben Gilbert?

  They just nailed it so hard out of the gate.

• 27:13David Rosenthal?

  Totally. I mean, like, we, you know, are, we'll get more into this later in the show, but, um, you know, we hired, we, we had a great, great designer for us at Wave who did our, uh, did our logo, did our website, like, you know, did an amazing job. This guy's awesome. He worked at Facebook, like, you know, great. It all just runs on Dropbox, you know, like, it just has a Dropbox account, and that's how we collaborated on all this stuff. Um, and so then, Ben, what you were referring to, when they post this on Hacker News, uh,

• 27:43Ben Gilbert?

  This is amazing.

• 27:44David Rosenthal?

  This is, this is like, somebody replies to the comment, comments on the post.

• 27:49Ben Gilbert?

  From Brandon M. on April 5th, 2007, "I have a few qualms with this app." And the first one is about being a Linux user. So already, you know, let's, let's narrow the market. "For a Linux user, you can already build such a system yourself, quite trivially, by getting an FTP account, mounting it locally with, uh, curl FTPFS, and then using SVN or CVS on the mounted file system. For Windows or Mac, this FTP account could be accessed through built-in software." And David, you know, I don't know why we don't do this for, for acquired to, to produce. I mean, it just, it's so obvious.

• 28:23David Rosenthal?

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

• 28:30Ben Gilbert?

  Two, it doesn't actually replace a USB drive, and there's more about that. It doesn't actually solve the connectivity issue. Three, it does not seem very viral or income generating. So, you know, David, I, uh, I think you, I think you should rethink if this is going to be big or not.

• 28:47David Rosenthal?

  Yeah, well.

• 28:49Ben Gilbert?

  And this, this surfaced this week, because Sam Altman, who's now the CEO of Y Combinator, tweeted, "Don't, uh, um, I think, don't let the haters get you down," and linked to it. And it is just so, uh, it's, it's always, always good to see something like this and remember it. And when you're going through the tougher times as a founder, and you need to put your head down and barrel through it.

• 29:08David Rosenthal?

  Yeah. On the other hand, though, it's a great parable, but if you read the rest of the thread, I forget the user who, who had replied to, to the link with these arguments. So Drew gets in and responds to him right away, and he has really great arguments in response. And then the, and then the, the guy who was criticizing him was like, "Hey, actually, you have really good arguments. Like, great, best of luck to you." Like, so it actually is a really nice ending.

• 29:32Ben Gilbert?

  It's true. Hacker News was such a nice place.

• 29:34David Rosenthal?

  I know. And then the internet all, you know, went to hell.

• 29:40David Rosenthal?

  This was pre Cambridge Analytica and Russian trolls and all that.

• 29:45Ben Gilbert?

  It is actually kind of interesting to look at, um, look at these objections with the lens on the company today. Like the concept, it doesn't seem very income generating. It's, it's kind of not like if, if, 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. People, will consumers pay for this? So there, you know, you're, there's another parable in there that's your earliest objections are often the demons that stay with you your entire time as a company, even through tremendous success.

• 30:18David Rosenthal?

  Yep, totally. Well, and, and at the time too, you know, we mentioned this earlier, but there are like a thousand other companies out there trying to do the same thing. There's Mosey, there's Carbonite, there's, I don't know, Sugar Sync, um, there's what, uh, high tech company. Well, I forget the company that maybe it was Sugar Sync that became High-Tail that, anyway, there, there's Box, of course. Which was Box.net at the time. But then also there's the whole, there's the like, the looming specter of Google.

• 30:50Ben Gilbert?

  Sure feels like this is something the platforms should provide. I don't know.

• 30:53David Rosenthal?

  Yeah, right. You would think so. And for years, I mean, I remember even back, like, maybe even when I was in high school, like, definitely, either in high school or in college, but definitely in college. There were rumors, like, everybody was talking about

• 31:08Ben Gilbert?

  That Google is working on the G-Drive.

• 31:11David Rosenthal?

  And it's like, gonna be, you know, the most amazing thing you've ever seen.

• 31:15Ben Gilbert?

  Oh, we were, we were in, in PM meetings deciding on, 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, it's competitive with SkyDrive, which then became OneDrive. 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 changed it again into two different things that are much less consumable and digestible and understandable. But it all speaks to like Dropbox just nailed the crap out of the user experience. And the small competitors and the large competitors just couldn't touch it.

• 32:00David Rosenthal?

  Well, even to this day, I mean, at Wave, we run, we use Google Apps. And so we store all of our, you know, all of our documents and files on G Drive. Google made a change to the sync client, a major change to sync client like two months ago, and it completely nerfed all of our stuff like, you know, and it's like Dropbox, since day one, it just works, you know?

• 32:24Ben Gilbert?

  Yeah, yeah. And it's funny looking at how much didn't change. I was, I was getting ready for the show and looking back at all the things in my Dropbox to try and like, it's almost actually nostalgic to look back at all the stuff in there because like every project and company I've worked on for the last decade has in some way had its hooks into Dropbox. And for better or for worse, like it's all still there. And, you know, there's a little bit of like, I've got some complaints about the fact that like, do I need, you know, 50 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,

• 33:08Ben Gilbert?

  it's a folder that you put stuff in that syncs. And every time they try and stray away from that, they get in the danger of doing what Google did and being confusing. But it does, it does leave you with this nice history of everything you've ever been a part of.

• 33:19David Rosenthal?

  It totally does. And it's funny, I mean, I was trying to figure out when I actually joined, signed up for Dropbox, I couldn't, there's no way to figure out, as best as I can tell, when your account was created. But what I did find was an email from when the App Store, when the iOS App Store launched, and it used to be because it was all done through iTunes, you would get receipts when you would download, email receipts when you would download apps, even though they were free, like, because it was like structured as if you paid for them. The very first set of apps I downloaded, like Dropbox is on there, you know? Like, it's just so core. It's so important for what you do.

• 33:59Ben Gilbert?

  Yeah, he's funny. Now you've got me like wanting to search back. What's the first email I had that that had Dropbox in it? 9708. I've been invited to the Dropbox beta by Paul. September 7th, 2008. Love for you to try it out. Your beta signup code is this. What is Dropbox? Share the love. Thank you. Getdropbox.com.

• 34:22David Rosenthal?

  That's awesome. Yeah, for some reason I couldn't find my, I think I signed up directly, but I didn't get any like email confirmation. So I don't know when it was. Anyway, so suffice to say there was a big market for what they were doing. So they get accepted into YC. Everybody's excited. They do YC that summer of '07 and then later that fall, they move out to San Francisco, which kind of is what Drew had always wanted to do. He wanted to follow Zobdi and Adam out there. So they move out to San Francisco. And they just finished YC and they need to raise funding, need to raise a seed round. So they end up meeting Sequoia Capital.

• 35:04David Rosenthal?

  And this is where where things get interesting. So there's a famous, supposedly a famous meeting where where Mike Moritz, the legendary investor, 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. And and then Sequoia decides to invest and then they sign the term sheet and get it done the following Monday. All of which may be true, but what doesn't get talked about a bunch, and there was actually a big Recode article about this this week on the eve of the IPO. It was actually another partner at Sequoia, Sameer Gandhi, who was an MIT alum and was part of the MIT network

• 35:45David Rosenthal?

  that made the inroads with with with Drew and Arash, got excited about them and then ended up leading the investment for Sequoia. So that was in the fall of 2007. Sameer and Sequoia do a $1.2 million seed round in the company as convertible debt, as we alluded to earlier. And then the following year, the company is doing really well after they launch. You know, traction is great. They do an inside round. They do a $6 million Series A in October 2008. But in the interim, though, Samir actually leaves the company, leaves Sequoia in the summer of 2008, and he moves over to Excel where he's still a partner to this day. So, so that was before the Series A got done.

• 36:31David Rosenthal?

  And then that's how Excel ends up coming in and doing a little bit of the Series A, because they really, the founders have the relationship with Samir. And so while Sequoia owns, I believe, 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.

• 36:54Ben Gilbert?

  Which is amazing. I mean, we'll definitely get into it later, but like, people put north of $500 million into this company and owned less of a person, less, less of the company than, than Excel does, having never led around.

• 37:08David Rosenthal?

  Yeah, totally. It's a, well, it's a testament to unlike, you know, what people thought at the time, the, the quality of the business model behind it, or the scalability of it. So the board seat, the Sequoia board seat ends up transitioning to Brian Schreier, who joins Sequoia in April 2008 from Google. And then Brian's been on the board ever since. And he is actually the only venture investor on the board of Dropbox, which again is crazy.

• 37:37Ben Gilbert?

  Wow. Wow. Condoleezza Rice is not a venture capitalist?

• 37:42David Rosenthal?

  Not last time I checked, but there's some fun other side of history here. So really, when Sequoia does this investment in, in Dropbox, that really cements the Sequoia Y Combinator relationship. 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 McAdoo leads that investment. And then fun side fact that, of course, the most important Thing of this whole episode, pretty much directly leads to Wave to my, to my venture firm and what we're, what I'm doing now with my partners Riley and Sarah, because Greg,

• 38:24David Rosenthal?

  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. My partner Riley joined the company shortly thereafter. And then Greg really helped us a couple of years later get Wave off the ground. And then our partner Sarah was at Dropbox at the time. So all of this is all coming back home here. It is a new mafia. The new mafia.

• 38:50Ben Gilbert?

  All right, listeners, now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

• 39:04David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 39:18Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI control tower.

• 39:28David Rosenthal?

  Yep, AI control tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent visible and secure in one place.

• 39:45Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise, the workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 40:02David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 40:18Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 40:27David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. Anyway, back on track. This is really like the start of the go-go years for Dropbox. So we talked a little bit earlier about, you know, it's got this product that just works when nothing else on the market does. It also has this amazing viral distribution and freemium mechanics that they put in place where both you use Dropbox to collaborate, like we're doing on this podcast, and so it naturally virally spreads the product. But they also put in place this kind of gamified incentive to do so, so that everybody that you share

• 41:10David Rosenthal?

  Dropbox with, who signs up for the product, you get more free storage.

• 41:14Ben Gilbert?

  This worked so hard on me. Like, I was a referral maniac to get more space. And I think it was 250 meg per person who signed up for an account that you invited.

• 41:24David Rosenthal?

  Which back in the day was a lot of storage.

• 41:27Ben Gilbert?

  Yeah, because I think you got 2 gig for free. I have no idea what it is now, but you had 2 gig for free. And I think I was up north of like 11 gigs from inviting friends. And at some point, there was some educational multiplier where for everyone you invited, you got double or something because they knew that their growth was in students.

• 41:45David Rosenthal?

  Yeah, it was, it was crazy. And it works so well. Most of it, still to this day, the vast majority of Dropbox users don't pay them anything, are just free users. But the small percentage who do, just that the number of users are so big, they make so much money. All throughout this, Dropbox is just raking in cash. They're massively cash flow positive, even as a young startup.

• 42:06Ben Gilbert?

  To give you guys a sense, today, we'll get to these numbers, but today, half a billion people have, have accounts. And 2.2% of them are paying. So it really is that, that, you know, tried and true freemium model.

• 42:19David Rosenthal?

  Yep. And even with that very small percentage, last year Dropbox made 300 million in free cash flow. That's, you know, cash flow profits, not, not revenue, which is incredible. So all through this, the company is super lean. It's like, it's like an engineer's, like, you know, dream. There are only about 20 companies, 20, 20 employees at the company through like 2011, 2012, the first few years. They're all engineers. There's nobody, you know, no business folks there. It's just this, this viral and referral dynamic that's like...

• 42:52Ben Gilbert?

  That's also the nice thing about having the operating system be your user interface. I mean, shy of like a very... Basic web interface, they basically don't have to do any product design other than really like system design and then engineering that system.

• 43:08David Rosenthal?

  Yep. And this leads to one of, if not, if not the probably biggest error of Steve Jobs's career, of which there weren't that many of them, where he sees this and, you know, like many people saw this and thought, well, okay, this is like a feature. This isn't a product, let alone a company. The company had gotten so big, though, the product had gotten so big. In 2011, Steve Jobs invites Drew to come down to Cupertino to visit him. And it was really clear that Apple was very interested in acquiring the company. And this is sort of a famous meeting that happens where, you know, they talk for a little bit and Steve, unclear how much he implied this or not, it kind of comes out

• 43:50David Rosenthal?

  later, sort of in the rough order of magnitude of about a billion dollars that Apple was kind of interested in paying for to acquire Dropbox at the time. Drew says no, essentially, or implies no. And Steve kind of goes off and is like, you know, you're a feature, you're not a product, you're not a company, like, we're gonna crush you. We're gonna do, you know, just like the mythical G drive, you know, we're launching iCloud.

• 44:16Ben Gilbert?

  Mobile me will destroy you.

• 44:20David Rosenthal?

  Oh, man. Incredible. Obviously, he was wrong. But apparently, the rest of the meeting went really well. Drew talks about it and says, you know, that part was over in about 20 minutes. And then the rest of the time, Drew just talked to Steve about like being a founder and then all the lessons learned along the way. And supposedly, he was really magnanimous. So, you know, even when making mistakes, he's still Steve Jobs.

• 44:46David Rosenthal?

  But so after that, the company basically, Dropbox says, well,

• 44:51David Rosenthal?

  Man, we just turned down a billion dollar plus acquisition offer from Apple. Maybe we should raise some more money. What could we raise money at? And so they go out, they basically get every venture firm out there to participate in this round. Index Ventures leads their Series B, but Benchmark is participating, Greylock's participating, IVP, Goldman Sachs, like this is party round of party rounds from people who usually don't do party rounds.

• 45:17Ben Gilbert?

  Right, $250 million. You're really rounding up the troops to pile it up to that number.

• 45:21David Rosenthal?

  Yeah, so I mean, most companies would be ecstatic if they could raise a Series B at a valuation of $250 million. Dropbox raises cash of $250 million at a $4 billion valuation. So they only sell like 6% of the company in this Series B.

• 45:41Ben Gilbert?

  Yeah, and to give, to give folks a sense, I mean, typically at each one of these rounds, you, you sell 20 to 30% of your company to the next venture investor. And so their seed round that was a 1.2 on a post-money of five, 24%. That Series A also from Sequoia where they raised 6 million, 24%. And then you get to this round, which it was from 2008 to 2011. So that, you know, there was a decent gap in there where they didn't raise money, only 6%. I mean, if you think about the dilution that the founders are typically taking, you know, 20 to 30% each time, just didn't happen.

• 46:15David Rosenthal?

  Yep. It's really.

• 46:17Ben Gilbert?

  And the early venture firms.

• 46:19David Rosenthal?

  I mean, obviously they were very lucky to be blessed with a business model that just printed cash. But this is like a clinic in, you know, if you're a founder or an early investor, you're aligned with this, like, you know, if you can raise fewer rounds and take less dilution in each of them. Fast forward today, when the, today when the company went public, you know, Drew still owns 25% of the company. That's incredible.

• 46:44Ben Gilbert?

  Yeah. Yeah, I mean, it helps. It helps that the next round that they raised was only a 4% dilution and they raised even more money.

• 46:51David Rosenthal?

  Yeah. So the next round, a couple of years later, they raised $350 million at a $10 billion valuation. This is in 2014, led by BlackRock, but Morgan Stanley comes in, T. Rowe Price, Salesforce comes into it. Crazy. But then-

• 47:07Ben Gilbert?

  Also worth noting, just a few number of rounds. I mean, they IPO'd after their Series C.

• 47:12David Rosenthal?

  Yeah, yeah, absolutely. I mean, we talked about this in the Stitch Fix episode. Stitch Fix obviously didn't raise the valuations that Dropbox did, but if you can raise fewer rounds and take less dilution, it works out better for everybody.

• 47:26Ben Gilbert?

  And it's funny, like, thinking if, let's rewind 10, 15 years, like, 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 $100 billion in it to deploy, like, companies tend not to IPO after their Series C.

• 47:45David Rosenthal?

  Yeah. Yeah. Well, it's a, it's a different world these days. But then, there is this kind of, we've talked about, we talked about it a little bit on the SoftBank episode, there's this sort of law of gravity with fundraising for startups, that if you raise the money, you're gonna spend the money.

• 48:05Ben Gilbert?

  Yeah, the lean mean years of Dropbox are over.

• 48:08David Rosenthal?

  They come to an end, as this is happening. And that turns out to be not so great for Dropbox. So they have all of this money, these grand ambitions, they said no to Steve Jobs. Everybody thinks Dropbox is gonna be the next, like, Google, or Facebook, or what have you. And in fact, a lot of people were coming from Facebook to Dropbox at this time.

• 48:32Ben Gilbert?

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

• 48:43David Rosenthal?

  Viral distribution.

• 48:44Ben Gilbert?

  Viral distribution, check. Tons of cash in the bank, check. Cohesive, brilliant business strategy, question mark.

• 48:55David Rosenthal?

  Well, check, but then uncheck, unfortunately.

• 49:01Ben Gilbert?

  I know, I know. We should go into photo sharing and we should be highly acquisitive and go into email clients.

• 49:07David Rosenthal?

  And we should definitely email clients.

• 49:09Ben Gilbert?

  We're gonna go into the enterprise, but not really. But now we're gonna go into the enterprise. Actually, whoops, we're gonna go into the enterprise this way and specifically this type of enterprise. Also, we think that we're gonna monetize our consumers better. Oh, back to the enterprise.

• 49:22David Rosenthal?

  Yep. Well, and my favorite of all, 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.

• 49:45Ben Gilbert?

  Of course, during this period, they become free cash flow positive.

• 49:50Ben Gilbert?

  They're printing cash while they're lost in the woods. So I think, you know, it's hard to knock them too hard.

• 49:55David Rosenthal?

  Hard to knock them too hard, but they deserve some knocks for this. The craziest, most cockamamie thing ever, which is now completely buried in history. But of course, that's why we existed, acquired, to unearth these things. They, of course, everybody has to be, if you're gonna be a Google, a Facebook, whatever, you have to be a platform. Everybody's got to be a platform. They build and launch the Dropbox platform. They launched this in 2013 and they do a big developers conference. They call it DBX, Dropbox for Developers. The vision of the Dropbox platform. Ben, you're a computer scientist. You studied CS in undergrad. I mean, I did too. I did major in it, but I know a little bit about it. So tell me, tell me how this sounds to you. They want to, you know, Dropbox is files, right?

• 50:39David Rosenthal?

  But not just files. Dropbox is going to be the, the storage infrastructure and solution for all of computing across distributed mobile devices. So, you know, you're writing apps and you need, you need storage. You need, you know, you need, your code needs to live somewhere. You need assets that you need to execute. You need databases. Don't do that locally on your device or in the cloud. Do it in Dropbox. Does this make sense to you, Ben?

• 51:05Ben Gilbert?

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

• 51:11David Rosenthal?

  Yeah.

• 51:12Ben Gilbert?

  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.

• 51:21David Rosenthal?

  Yeah, yeah. 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 like.

• 51:41Ben Gilbert?

  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, your computer that syncs and it syncs everywhere just nailed it so hard that, you know, you get, you get bold and you decide that, you know, even though these platform providers have all these things for developers and, and, you know, we can do better and we can build the tool chain they want. And it's, it's much, much harder competing with the platform itself when you're down at the developer level. And, and really in, in most cases, like if you look at anybody that's trying to be a better voice assistant, you lose unless you're the home button on iOS.

• 52:26Ben Gilbert?

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

• 52:35David Rosenthal?

  Well, and I think it's to pull forward a tech theme here as we so often do on this show. I think it's that like, they just kind of lost sight of what it was that was so brilliant about Dropbox in the first place, which was, which was, you know, two things. One, they solved a real problem that a lot of people had. And two, they made it just work, you know, and all this stuff that they were doing during 2013 to 2016, A, it's unclear if they were even solving real problems, attacking real problems, but B, it didn't just work. Like I could use the native, you know, stuff within, within iOS and Android, or I could use this kludier Dropbox thing like.

• 53:15Ben Gilbert?

  Yeah, it was.

• 53:16David Rosenthal?

  That's orthogonal to what.

• 53:17Ben Gilbert?

  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. And you just couldn't, you couldn't figure out like how much access you were supposed to give it and what it was supposed to replace for you. And it was, it was duplicative and confusing. It just wasn't, wasn't, it was the opposite of all the magic that the original Dropbox product provided.

• 53:43David Rosenthal?

  It was the opposite of the, the initial YC application, really.

• 53:46Ben Gilbert?

  Yeah.

• 53:47David Rosenthal?

  So that was kinda till 2016. And then, and Drew talks about this, supposedly he, he read this great book that I've never read, but was, because I think it's out of print. I've been trying to find it, but was talked about a lot in business school. Great book by Andy Grove, the former CEO of Intel called Only the Paranoid Survive. And in this book, Andy talks about when Intel got out of the memory business and into the CPU business and basically completely shifted the company.

• 54:17Ben Gilbert?

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

• 54:20David Rosenthal?

  Totally, totally. That would be a great episode someday. We'll have to find a way to do an acquired episode on that.

• 54:25Ben Gilbert?

  Yeah.

• 54:26David Rosenthal?

  But the point of the, that Andy makes in this book is that when companies, you know, they're sort of like, Ben Horowitz paraphrases it as like wartime and peacetime, you know, that like in peacetime, which Dropbox was in during all of this, like they could go do lots of things and try lots of things and invest a lot of money and stuff. But now like the company's kind of going sideways. They're stuck at this massive valuation. People are starting to question what's going on. They're bleeding talent. Now it's wartime. And in wartime, you have to, you can't do lots of things. You gotta do one thing and it's gotta be the right thing and you gotta do it better than anyone. So overnight, and I think a lot of this was helped by the Dropbox hired a guy named Dennis Woodside from Google.

• 55:08David Rosenthal?

  And Dennis is the COO at Dropbox now. He had previously, he'd been at Google a long time. He ran Motorola within Google. He was like kind of a turnaround guy, taking like stuff that was struggling or stuff that Google brought in, like Motorola for other reasons, turning it around, making it work. They cut all this stuff. They kill mailbox, they kill Carousel, they killed the developer platform, they way scale back the the sort of enterprise aspect of Dropbox for business and they refocus on the core customer base. So this was 2016. And once they do that, things really turn around. They get they become, they've always been cash flow positive, but during those years, they actually dipped

• 55:53David Rosenthal?

  down into cash flow negative, they become back to hugely cash flow positive. As we, as we mentioned, last year in 2017, they go, they generate over $300 million of free cash flow. A big part of that, and part of the doubling down, is over the last couple of years, they've transitioned off of AWS. So for most of Dropbox's life, it was all running on S3 in AWS. They decide to build their own data centers and bring it all in-house, and their cost of goods sold goes way down. So even though revenue basically doubles over the last couple of years, the cost of goods sold actually goes down from where it was at the lower revenue base. And this massively improves the company.

• 56:34Ben Gilbert?

  Yeah, and that was, that was in sort of the first half of 2016 is when Dropbox really actually waned off of AWS. In that year before, you know, they were, they're actually duplicating their data. So their costs were way high while they were doing that, that transition and making sure that everything was working as expected. And it's interesting to look at this because you start to see the company shift to this mindset of, 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 gonna make this big investment upfront, where we're going to use two, three years of engineering resources and take on all these capital leases to create our own data centers and build our own technology to actually store

• 57:18Ben Gilbert?

  stuff and not give that margin away to, 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. We need to have the cheapest possible way to hold their files.

• 57:37David Rosenthal?

  Yep, yep.

• 57:39David Rosenthal?

  And it makes a big, you know, huge, huge impact on the company. 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. You don't want to optimize for efficiency. You want to optimize for growth. 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. Now they're back to they've really professionalized. Really, it's an efficiently run company. And you can see that in the financials. So

• 58:16Ben Gilbert?

  So let's, I want to make a statement here and then we'll revisit it later. So the the success of Dropbox and the box, the Dropbox that you want to bet on is the one that is lean, mean focused, building this very consumer oriented, easy to understand file sharing product, or let's even say file collaboration product that that may permeate into or does permeate into monetizing small business and teams users.

• 58:46David Rosenthal?

  Yeah, well, I think it's, you know, if you take, 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. Then the $4 billion, you know, valuation, series B, and certainly 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 were had any hope of coming true. So like, maybe they would, maybe they wouldn't, but nobody knew. I think

• 59:30David Rosenthal?

  that's the difference here. And so back where you are with Dropbox today and at the IPO is you know what this company is, and you know what the market is. Now, the question is how big is the market for collaborative file sharing and people paying for it, especially in a SMB type use case, which is really, you know, as a personal user, I don't pay for Dropbox, but as a, you know, acquired user, I do.

• 59:56Ben Gilbert?

  Yeah.

• 59:57David Rosenthal?

  It's how big is that market?

• 59:58Ben Gilbert?

  Are we both paying for Dropbox?

• 1:00:01David Rosenthal?

  Well, no, no, only one of us is.

• 1:00:03Ben Gilbert?

  All right. I was gonna say, we should look into that.

• 1:00:05David Rosenthal?

  Yeah, exactly. So it's not as as large of a market as the consumer market, but it's still it's still pretty impressive.

• 1:00:16David Rosenthal?

  So anyway, February 2018.

• 1:00:18Ben Gilbert?

  And to and to and to capture that, the way that Dropbox reports this in their S1, and I know I'm fast forwarding ahead a little bit, but I want to make this this point, is that they say of our 11 million paying users, and that's out of their 500 million, approximately 30% use Dropbox for work on a Dropbox business team plan, and we estimate that an additional 50% use Dropbox for work on an individual plan, which is what we do, collectively totaling about 80% of our users. So 80% of that 2.2%, so 80% of people who pay are using it for business purposes.

• 1:00:51David Rosenthal?

  Yep.

• 1:00:52Ben Gilbert?

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

• 1:01:03David Rosenthal?

  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, like you could identify that those are enterprises. The other 50% that they estimate are SMBs using Dropbox, there's no way really to tell that they're businesses. Like, you can't tell that we're businesses. Like, you signed up for Dropbox with your Gmail account, not with the acquired account, right?

• 1:01:33Ben Gilbert?

  Yep. And that is a thing, too, that like, you know, everyone who's used Dropbox personally for a long time and then enters an organization, like, you know that there's this weird tension between you kind of have your one Dropbox, and are you going to invite that personal Dropbox to the organization? Are you going to try and create a new Dropbox and have multiple Dropboxes thinking and now a selective? So like, that's where it actually gets a little bit hairy. And so the best Dropbox, like the Dropbox in their their absolute best shining light, is the Dropbox where I'm just using my personal Dropbox and I'm sharing stuff out of that with other people and not where I'm officially raising my hand and saying, I'm a business.

• 1:02:12David Rosenthal?

  Yep. Yep. 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.

• 1:02:22Ben Gilbert?

  Yep.

• 1:02:25David Rosenthal?

  So as we were alluding to with all this, finally, February 2018, the company files to go public. They set the initial pricing range for the IPO at $16 to $18 a share, which equates to a valuation much lower than the $10 billion valuation that they did in their last private round, 2014. There's a lot of hand wringing. We're going to get into narratives in a sec here. Then they raised the range to $18 to $20 a share before they priced. They ultimately priced at $21 a share, which is equivalent to, and this was Thursday night, equivalent to an $8.1 billion market cap, still below 10.

• 1:03:06Ben Gilbert?

  And I should say, it's important to note that that 8.1 is their non-diluted market cap. So that did not include options that were issued, but not granted for future employees. And if you roll that in and you have a fully diluted market cap, it was 9.2 billion.

• 1:03:23David Rosenthal?

  Right, right, right. Good point. 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. So important to remember. Then when they finally finished trading, yesterday, on their first day of trading, they end at $28.48 a share, which, no matter how you count it, is above the $10 billion watermark. So

• 1:03:50Ben Gilbert?

  And that's a pop.

• 1:03:52David Rosenthal?

  Yeah, major pop. It's about 40% on the first day of trading.

• 1:03:55Ben Gilbert?

  Yep. So every single shareholder who bought in at a private company valuation made money.

• 1:04:04David Rosenthal?

  Indeed. Maybe not a lot of money, but Sequoia Capital made a lot of money.

• 1:04:10Ben Gilbert?

  Yeah. So it's actually, do you want to, it's going to be one of my sort of investment themes later, investment slash tech themes, but do you want to dig into that before we get into narratives?

• 1:04:21David Rosenthal?

  No, I mean, we can get into narratives later. I actually haven't done the calculation, but Sequoia owns about a quarter, 23% ish of the company, and they finished trading at roughly a $12 billion valuation. So what's Sequoia make? About a $2.5 billion on the IPO?

• 1:04:38Ben Gilbert?

  Yep. Yep. Sounds about right.

• 1:04:41David Rosenthal?

  Not, not bad. Not bad in a day's work, or a decade's work, in that case.

• 1:04:47Ben Gilbert?

  No. And when you, when you look at the dilution per round, it's 24% for the first two, 6%, then 4%. So really, I mean, the way that they raised money, if you had gotten in early, you made a ridiculous amount of money. If you got in later, you just didn't own that much of the company, even if you paid a ton for it. And if you look at YC and assume that they, a new story came out that Y Combinator sold about half of their shares in the Series B when index led. They typically take 7% as part of the accelerator program, would have gotten diluted down to 4%. So their, their value of their shares would have been about 150 million at that point and would have been able to clear about 75 million for YC's

• 1:05:31Ben Gilbert?

  operations by selling as a part of that round.

• 1:05:34David Rosenthal?

  Yeah, that's when they sold it, the Series B.

• 1:05:36Ben Gilbert?

  Interesting.

• 1:05:37David Rosenthal?

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

• 1:05:49Ben Gilbert?

  Let's see. So in the Series C, their remaining stake would have been about 170 million. So maybe about 200?

• 1:05:58David Rosenthal?

  Oh, okay. So probably about the same, maybe a little more.

• 1:06:01Ben Gilbert?

  Yeah. Yeah. But I think this is probably the first of, 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.

• 1:06:14David Rosenthal?

  Yeah. Well, that's a, to pull another theme forward, and then we'll jump into narratives real quick. It takes a long time. And this is actually a core, you know, Sequoia ethos that, you know, the, the lemons ripen quickly in venture, but the apples take a long time to bear fruit. But when they do, they bear a lot of fruit.

• 1:06:37Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:06:50David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:07:07Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:07:22David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 1:07:46Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 1:08:05David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:08:35Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com/acquired and just tell them that Ben and David sent you.

• 1:09:00David Rosenthal?

  Narratives. I think we've kind of covered this, basically.

• 1:09:04Ben Gilbert?

  Yeah. But what I want to do is, I think when we've had the most fun with the narrative section, it's been we were able to tease out what is the company saying and what are the skeptics saying. And so I've got a few here. So Dropbox went from it's a folder that you put stuff in that syncs to looking at the first page of their S1 now with these crazy graphics and completely new brand as of just a few months ago, is unleash the world's creative energy by designing a more enlightened way of working. Which, here's where my bias is about to come out. That scares the crap out of me. Like, the company made an amazing product by a folder that you put stuff in that syncs and like generated

• 1:09:45Ben Gilbert?

  a ton of cash on that. 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?

• 1:09:58David Rosenthal?

  I'd argue the other side. Because what are we doing on Dropbox right now with acquired? We are, you know, being creative.

• 1:10:08Ben Gilbert?

  Is it enlightened? I mean, like, maybe I'm just getting caught up a little bit in the semantics. But anyway, so this is, this is the company's positioning. They say, "Our market opportunity has grown as we've expanded from keeping files in sync to keeping teams in sync. Today, Dropbox is well positioned to reimagine the way that work gets done. We're focused on reducing the inordinate amount of time and energy the world wastes on work about work. Tedious tasks like searching for content, switching between applications, and managing workflows." So what, what their big positioning here is, is that, that our market opportunity is not just syncing files, it's this reimagining of the way work gets done. Which is, again, and I'll play the skeptic here, similar to 2013, 2014, a bet

• 1:10:52Ben Gilbert?

  that you're making, I think with very little data. I mean, the bet here is on Dropbox Paper and a lot of the collaboration features and a lot of the, it's asking you to dream with them a little bit, which I'm very familiar with and operating in the seed stage. But it continues to strike me the amount that, you know, public company investors at big banks are also asked to dream with someone at the time of IPO.

• 1:11:17David Rosenthal?

  Yeah.

• 1:11:18Ben Gilbert?

  It feels a little snappy to me.

• 1:11:23Ben Gilbert?

  I think they're gonna, I don't think that's gonna happen to them financially, but like the high-flying mission statements that are starting to happen here are a little much.

• 1:11:36David Rosenthal?

  Well, I think the question is, by reimagining 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.

• 1:11:57Ben Gilbert?

  I've actually heard really amazing things.

• 1:12:00David Rosenthal?

  Well, okay, fair enough. But I'm not like looking desperate for a solution to whatever it is. So do they mean that? Or did they mean by reimagining how the world works, a magic folder that you put stuff in and it syncs? If they mean that, and I think if you look at the financials, that's what they mean. I mean, that's what people pay Dropbox for, who pay them. Like, that's, that's pretty great. And like, they made a billion dollars in revenue last year on that.

• 1:12:26Ben Gilbert?

  Yep. That's very true. And so they, this is apparently a thing now. The content collaboration platforms has a magic quadrant with Gartner, and Dropbox has been in it as a leader for the last two years. And so part of what they're selling in the in the prospectus here is, you know, we will continue to be a leader in this emerging category. The category itself is growing. The opportunity is to expand from syncing files being this collaboration platform. So think Dropbox Paper, they specifically call out a bunch of features, search, preview, smart sync, version history, and showcase. So there's all these sort of, and this is where I think it's a lot smarter than the way that they

• 1:13:08Ben Gilbert?

  were trying to expand before. It's, it's focused. Like, all of these things are sort of no-brainer ways to make the existing workflows better, rather than betting on completely new workflows, except for Dropbox Paper.

• 1:13:22David Rosenthal?

  Yeah. So wait, what is Dropbox Paper?

• 1:13:25Ben Gilbert?

  It's a, and I'm gonna mess this up because I've looked at it like very briefly, but heard great things. It's effectively Google Docs compete, but with.

• 1:13:35Ben Gilbert?

  Subjectively more intuitive way of laying it out, of putting in the features and where all the controls are. It's tightly coupled with Dropbox instead of being outside of their ecosystem. Yeah, better collaboration features. Let's use sort of, and it's amazing to say better collaboration features than Google Docs because that's been their thing forever. But that is the promise.

• 1:14:00David Rosenthal?

  Interesting. I don't know. I'm, I'd love to be proven wrong, but I'm skeptical. Like, to me, that sounds like Dropbox Carousel and Photos. Like Carousel may well have been a better product, but like, Google and Apple own the phones and devices, and so that's where the Photos should leave, should live. And at this point, you know, if I'm a organization, now, maybe, maybe the market is, is just like for storage collaboration for such small enterprises that don't have Google Apps built in. But, you know, I'm way, if I'm a small organization, I run on Google Apps, I'm going to use Google Drive, use Google Docs and Google Drive for that type of paper-like product, just because that's where my organization lives.

• 1:14:44Ben Gilbert?

  So here, this is, I just opened up the Dropbox Paper landing page, and I was hoping to see some maybe like features or like illustrations of here's the killer features that are better than the word processing that you're used to. And it just says, Bring Ideas to Life. Dropbox Paper is a new type of doc where teams can bring ideas to life in a single place. There's a video, and then it says, there's testimonials. So there's companies that have used it, and then a signup button. See how paper can make your ideas better and brighter. So they're very much not positioning as, as like, here's the, they're not selling on features here. And it's, I don't know, I'm very curious what the strategy is to convert people to using this who are already Dropbox customers over what they're

• 1:15:29Ben Gilbert?

  already using.

• 1:15:33Ben Gilbert?

  So to sum up the narratives around Dropbox, from their position, it's really, we're set apart by simple and intuitive design and open ecosystem, viral bottom-up adoption, performance and security, and we're moving out of just a folder that sinks into broader team collaboration and workflow. Great. Okay. There's a lot of reasons to be skeptical. So, as we saw, which didn't 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

• 1:16:15Ben Gilbert?

  trading on the first day, but the bankers that took them public were, lots of individual shareholders, all the employees that have their stock locked up, everyone benefits from that. And of course, we've had one day of trading, so we'll see what continues to happen, but tons and tons of demand for Dropbox. So that skeptic narrative that we've been seeing in the news over the last few weeks really didn't play out. The other things that people have pointed out is that, as David and I said, they're quite erratic. If you look at the last 10 years of headlines, every six months, there's a new way to push into business, and they sort of continue to have trouble exactly figuring out, how do they go to bigger businesses?

• 1:16:59Ben Gilbert?

  And maybe the market is just SMBs, and that's actually a huge market and will continue to grow, but that is a major concern. And Aaron Levy gave a great Aaron Levy-style interview in Axios. And if you don't follow Aaron Levy on Twitter, you should, because he's probably the most entertaining person, I mean, definitely the most entertaining CEO, but a very entertaining person to follow. And he just gives very great, straightforward, compelling answers. But in this one, he talks about how, he says, there's never been a B2B that looks like this, because the Axios was looking for sort of comps. Does it look like Atlassian? Does it look like Box? How should we think about this? So he says, there's never been a B2B company that looks like this, which is part

• 1:17:41Ben Gilbert?

  Especially because consumerization of the enterprise is brand new. I think that it's more like Skype if Skype had been taken public. And there's probably two comps within the structure of Dropbox. One is a consumer business like a Spotify or Netflix or Pandora, albeit with extremely low conversion rates to paid. And I just put that in and he says, and the other is a sort of SMB type company, maybe like HubSpot. I think that's the right way to think about it. Like, I think that's the, I like that way of thinking about it. And it probably can be a huge company just thinking about it like that.

• 1:18:14David Rosenthal?

  I totally agree. Yeah, I think it's like Skype is probably the closest, closest analogy here. Cause I don't, you know, I don't, maybe they can figure something out in the future. I don't have a lot of faith that they can crack into big enterprise because Box is already there, frankly, as are Microsoft and Google. And, you know, on the consumer side,

• 1:18:40David Rosenthal?

  it's just really hard to get people, consumers to pay for storage. So, but on the other hand, like there, I just keep coming back to, there are a lot of, you know, organizations that look like acquired out there for which Dropbox is a magical solution.

• 1:18:56Ben Gilbert?

  That's true. There's three other sort of,

• 1:19:02Ben Gilbert?

  I won't say skeptical, but narratives that the company wouldn't, wouldn't put forth that Ben Thompson called out this week, either on Exponent or when the S1 came out, he did in the Strategery Daily Update. And all three of them are really great points. One is that the S1 is confusing and lacks data and specifically monthly active users. There's this big chart that doesn't actually have numbers associated with it. That is, signups is the axis instead of monthly active users. And they recently just deleted the data of 100 million inactive accounts last year. And so if you're going to talk about sort of active versus inactive, but then all you're going to show us is the user build for signups. It's a, you know, David, if I were to pitch you a company and I were to show you a graph of signups,

• 1:19:47Ben Gilbert?

  you would probably ask me like, how many of these are active users? That's kind of the first question that any venture investor would, would ask in the, a private company's round. So it's probably great, but it's, it's concerning that that's not part of the S1 at all.

• 1:20:03David Rosenthal?

  Although, I don't know, given the nature of the Dropbox product. I totally hear the criticism. I don't know, though, that active users are the right way to think about it because the product, it's like there is no UI to the product, you know, it just lives within the operating system. So if you're using, if you have installed Dropbox, you're an active user.

• 1:20:22Ben Gilbert?

  Yeah. So your point would be that like you can go a long time without intentionally using Dropbox and they still sort of retain you as a user?

• 1:20:33David Rosenthal?

  Yeah, I think a better, two better metrics would be one, some way to capture like percentage of storage quota that users are using, right? Because as you get higher up towards the top, you're going to become more likely to convert to paid. And then the most important thing is the rate of conversion from free to paid and the velocity of that and cohorts of that.

• 1:20:58Ben Gilbert?

  It's true. In knowing that, we know sort of the most important thing. A couple of other narratives. One is, is they can't decide if they want to focus on top line or bottom line. They're massively cost cutting by spending years shifting to cheaper infrastructure, but they're still also trying to expand into, into new markets and build things like paper and sort of, you know, risk being, we've seen the company be a little lost in the woods before. So it's always concerning to see, to see that a little bit. I don't know if that's totally a fair criticism. I could see why you would do both things. The last is that it's difficult for us to calculate the cost of customer acquisition because as you dig into this, they do report what they spend on sales and marketing that is

• 1:21:40Ben Gilbert?

  broken out, but that doesn't, but Dropbox doesn't include their infrastructure, particularly for all the free accounts in sales and marketing. I think that's in cost of revenue. So it's, it's difficult to understand sort of, when, when we think about acquiring a customer for Dropbox, a customer, 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, before there's an upsell opportunity? 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

• 1:22:24Ben Gilbert?

  analytics, I would want to dig into that more. And as a public company investor who only has access to the S1, it makes me a little uncomfortable.

• 1:22:32David Rosenthal?

  Yep, I agree.

• 1:22:34Ben Gilbert?

  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. Everyone made money. They're continuing to have great free cash flow and they're on a really great path toward profitability, like not just free cash flow, but like complete and total profitability. In 2015, they, they lost 330 million. In 2016, they lost 210 million. Last year, they lost 11, or I'm sorry, 111 million. And like they're well on track this year, maybe next year to cross that finish line and become a true profitable company. So

• 1:23:12David Rosenthal?

  Yeah, net income positive.

• 1:23:14Ben Gilbert?

  Yep. I think it's been a while since we saw an IPO go out like this. That was a big name tech one that was so close to being profitable and would look more like a traditional business.

• 1:23:30David Rosenthal?

  Yep. And I think really, you know, the last few years, as we talked about, they have really executed very well on this. The crowning achievement being, you know, the, the building of their own data centers and moving off of AWS.

• 1:23:45Ben Gilbert?

  Yep. Yep.

• 1:23:48David Rosenthal?

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

• 1:23:51Ben Gilbert?

  Yeah, let's do it.

• 1:23:52David Rosenthal?

  And I guess, I guess what that is in this case is they didn't need to go public. They certainly don't need the cash. They're generating cash. They could have stayed private forever. They didn't need to raise more money. I think in this case that

• 1:24:06Ben Gilbert?

  Cash they had on their balance sheet when they IPO'd?

• 1:24:10David Rosenthal?

  I don't know.

• 1:24:12Ben Gilbert?

  I'll see if I can find it in the S1 while you're

• 1:24:14David Rosenthal?

  You look while I pontificate.

• 1:24:19David Rosenthal?

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

• 1:24:29David Rosenthal?

  Both investors and then also, but even more so, employees need liquidity. You know, you, you can't, and there are going to be so many other of these companies, whether it's Airbnb or Uber or Lyft or what have you over the next year or two. You have to go public because, because your investors 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. But even more so, especially in San Francisco and the Bay Area, you can't pay your rent with illiquid Dropbox shares. And so many employees at this point, you know, they need, they need liquidity.

• 1:25:11David Rosenthal?

  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.

• 1:25:21Ben Gilbert?

  Yeah, so they, here it is. They had 430 million in cash and cash equivalents on their balance sheet at the end of 2017. So they probably could have gotten to net income positive, you know, full profitability, just based on the amount of cash they had left in the bank to kind of turn that corner and start, start shooting up. So I think the main reason to IPO here really is, really is for liquidity.

• 1:25:49David Rosenthal?

  Yeah, totally. Should do themes.

• 1:25:51Ben Gilbert?

  Yeah, but I mean, what, here's, I mean, here's, we just did SoftBank. Like, what if they just go raise, I mean, they only raised $750 million in their IPO. Like, if you're SoftBank, would you consider making a bet that Dropbox will be a $40 billion company, you know, many years from now?

• 1:26:12David Rosenthal?

  Given their track record?

• 1:26:13Ben Gilbert?

  Yeah, and it's actually worth floating a billion dollars their way to give them a few more years and then take them public.

• 1:26:22David Rosenthal?

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

• 1:26:25Ben Gilbert?

  All right, all right, sounds good.

• 1:26:29Ben Gilbert?

  So tech themes?

• 1:26:31David Rosenthal?

  Tech themes, let's do it.

• 1:26:33Ben Gilbert?

  All right.

• 1:26:36Ben Gilbert?

  Well, one of my, one of my tech themes is definitely, we saw this bring your own device thing that the iPhone started and then Dropbox is really the first example and maybe Skype, but let's call it Dropbox of bring your own software as a service. So whatever, whatever you're using at home, that's your really phenomenal software user experience, you're going to do that in the workplace too. And their sales model really reflects that where the vast, vast majority, I think 90% of revenue is generated from self-service channels. So people who, who purchase a subscription through the website or app instead of dealing with a salesperson, like a traditional enterprise software. And so you see this work in Slack, Atlassian, lots of other companies that sort of did the same thing, but Dropbox is certainly a pioneer of the model.

• 1:27:23David Rosenthal?

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

• 1:27:34David Rosenthal?

  This, you know, like you say, broadly, broadly consummation of IT, bring your own device enabled, but, but really it's, it's enterprise companies and SMB companies, companies serving B2B who don't sell to CIOs who are adopted by the users and then purchased via credit cards. I think we have covered all of my tech themes throughout this very long episode. Thank you, listeners for bearing with us. But, and then they were, you know, this idea of round skipping when you're raising venture, like that is how you win. Whether you're a founder or whether you're, you know, an early investor, the way you

• 1:28:17David Rosenthal?

  don't get diluted down to de minimis ownership is, is by, by not raising, you know, by, by being able to, when you raise money, minimize dilution and minimize the number of times you raise money. You know, we talked about building on AWS and, and, you know, at first had that enables quick, you know, going to market through that, but then eventually, you know, if you get to a certain scale, you need to move off of it. That's been, you know, well, we didn't talk as much on this episode, but lots of people have talked about that. But I think the thing that my main theme for this episode that I 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.

• 1:28:57David Rosenthal?

  Is is, you know, sort of the what each of them have is their mantras, which is, you know, Y Combinator is solve a real problem. You know, that's what they say to the advice that

• 1:29:08Ben Gilbert?

  Make something people want.

• 1:29:10David Rosenthal?

  Make something people want. Yeah, exactly. Make something people want is how they phrase it. But when you're starting a company, when you're building a product, you have to solve a real problem, make something people want. And then on the Dropbox side, their moral of the story is, is make it just work. You know, make something people you want, make something people want, but it has to just work. Like, it has to be productized. You can't be mucking around in the, you know, in the registry settings for, you know, or in, you know,

• 1:29:37Ben Gilbert?

  David, if I move this C L over here, then.

• 1:29:40David Rosenthal?

  Totally. Like, you know, that is not going to be a mass market product. And I think when you pair those two things is like, make something people want, solving a real problem, and then make it just work. Like, that's when the magic happens. But I think the other thing, you know, in sort of the second half of the story, certainly for Dropbox, and you could argue in a lot of ways for Y Combinator these days, too. As the organizations have success and get bigger, then there's this temptation to go beyond that, you know, and then you start building products and doing things where it's like unclear, does anybody want them? And do they just work, you know? And, and I think like, that's the, that's

• 1:30:23David Rosenthal?

  the trade off, you know, that both in startups and then as they grow, that you have to, you have to manage.

• 1:30:32Ben Gilbert?

  I have one tech theme that's one that I've been wondering about, and I think I have examples and counter examples, but I want to phrase it to you. So Drew got to own 25% at IPO of this company. That's pretty unusual for a founder to have a $10 billion IPO and still own, own a quarter of the company.

• 1:30:51Ben Gilbert?

  This was largely because of this explosive growth that they were experiencing while still monetizing, mind you. So the fact that they were monetizing meant like they weren't burning cash into a hole to grow as fast as they were. But it exhibited these characteristics of a consumer company. And when you have consumer company growth metrics, you're able to minimize dilution that you take through your subsequent rounds. 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 looked consumery?

• 1:31:30Ben Gilbert?

  Or better phrased, do consumer companies allow founders to preserve more founders equity?

• 1:31:37David Rosenthal?

  I don't think necessarily. I mean, there certainly are plenty of consumer companies that where founders have been incredibly diluted. I think it's more though that Dropbox and Atlassian even more so in the episode we did on them is the cash flow dynamics of the business. Like they, Atlassian is the extreme of this. They never raised a dollar of primary capital. They could fund all of the growth of the company just from cash flow from operations. Dropbox very well could have done the same thing if they wanted. And when you have that as your BATNA, you know, it puts you in a very, very advantageous position for fundraising.

• 1:32:17Ben Gilbert?

  Yeah. Yeah, that's a great point. You want to agree it?

• 1:32:21David Rosenthal?

  Let's do it. I think I, we've talked about the good, the bad, the ugly of Dropbox in this episode. The good and the magic of the company is the product market fit of the core product. And, you know, Ben Thompson wrote about this in his updates and talked about it with James on Exponent when they talked about the IPO. And yet the frustrating thing about the company is like they haven't been able to expand beyond that. And, you know, Ben and James were very frustrated by that.

• 1:32:52David Rosenthal?

  But here's, I ultimately think, having survived that and being where they are now, this is actually a really attractive company. And the decision to IPO now, yes, if they hadn't gone off and walked in the woods for a couple of years, they could have done this a couple of years ago. But ultimately, the question in front of us, as you were saying in narratives, is like, what's the future? I think this market is both bigger than people think it is of the small businesses. But even more importantly, I think the rate of creation of new organizations that are going to be in the Dropbox customer sweet spot over the next decade is going to massively

• 1:33:31David Rosenthal?

  accelerate. It's the same thesis for Y Square has a big opportunity. There are lots and lots of people that are going to be starting small businesses, going to be being entrepreneurs of various types, or like acquired, doing this as a side project. And Dropbox is the perfect, one of the suite of tools that is going to be, they're going to need to run their businesses. So, you know, I think, look, is this, is this an Instagram? Is this a, on the M&A side? Or I forget what our highest graded IPOs are. No, certainly not. But I'm going to give this a B+ in that even with all the execution challenges over the last few years, like the opportunity

• 1:34:13David Rosenthal?

  set ahead of Dropbox, because of, I think, this, this growth in the market is going to be attractive.

• 1:34:23Ben Gilbert?

  Yeah, it's funny, in thinking about this, I realize we have, there's sort of a little bit, not a flaw, but sort of a, I don't love the way that we do IPO grading as much as acquisition grading, because the way that we say we evaluate this is, was, how good of a decision was it for the company to take the cash in this way to do something with it? And the question is, is that compared? And the way we do this is, we compare it on an absolute basis, because we always go, well, the future growth ahead of it wasn't as big as Instagram. And like,

• 1:34:56Ben Gilbert?

  What we probably should do is, is look at the company like Dropbox, amazing job, super successful company, great at so many things, created a $10 billion market cap that's publicly traded, real liquid shares. If we compare it on a relative basis to what were their options, like this is, this is totally an A+. 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 and public company governance. They, they issued a good number of shares, so lots of people are incentivized for the success of the company, but you know, it's still, less than 10% of the company's shares are actually publicly traded, based

• 1:35:37Ben Gilbert?

  on what they, they raised. I think that cash will enable them to do interesting, but not that interesting things. So like, do I think that they're going to 3 or 4x the company over the next decade? Or maybe, let's say the next five years? I think it's kind of unlikely. Like, do we think that they're gonna get into the ranks of, of a $50 billion company, a $100 billion company? Probably not. Like, I think this was the best thing that they could do. They're a great company. But, you know, they're not, they're not, they're never going to be a huge company. And I don't know that our grading should penalize them for that.

• 1:36:17Ben Gilbert?

  So I think the A+ job on doing what they should have done, when they should have done it, relative to what Amazon did with their capital by IPO-ing, like, like D, I don't, you know, that it's, it's hard to C. It's, it's hard to penalize them for that, though.

• 1:36:34David Rosenthal?

  Yeah. Well, yeah, the Amazon comparison is interesting, right? Or SoftBank, right? Like, you know, you're, you were, your company was something, and then you were successfully able to make it much, much more than that. That takes truly, truly visionary founders.

• 1:36:52David Rosenthal?

  And Dropbox tried to do that and failed once. And who knows if they'll be successful in the future. But the IPO was probably a really great thing for them. You know, even if they won't be a multi hundred billion dollar market cap company.

• 1:37:06Ben Gilbert?

  And of course, the counter argument for that is they'll be profitable next year. Revenue has has almost doubled is from 2015 to 2017. So like they're still growing at a ridiculous clip. So then you if you're doubling as a as a near public company every two years. You know, the question does become where's where's your ceiling?

• 1:37:26David Rosenthal?

  Yep, yep. Well, and that's that was the argument that I was making in grading, which is I think the ceiling just for Dropbox as it is today is going to keep.

• 1:37:35Ben Gilbert?

  Still pretty high. Yeah.

• 1:37:37David Rosenthal?

  High and going to keep rising.

• 1:37:40Ben Gilbert?

  All right, well, I'll go with B plus then too.

• 1:37:47David Rosenthal?

  This was fun. Listeners, let us know. We're fully aware that our episodes have been getting longer.

• 1:37:54David Rosenthal?

  It's because we've just loved doing all the work diving into these companies. And it's probably also why we're releasing episodes a little less frequently. But let us know your feedback. Let us know what you think. If this is way too long, you want shorter, hit us up in the Slack. If you love it, let us know that, too.

• 1:38:10Ben Gilbert?

  Yep. Carvats?

• 1:38:14David Rosenthal?

  Let's do it.

• 1:38:17David Rosenthal?

  I'll go first. Mine real quick is a good friend, my college roommate, sent this to me the other day.

• 1:38:25David Rosenthal?

  YouTube channel called Lazy Game Reviews or LGR. Super fun. It's this guy, I don't know where the lazy comes from because it's definitely not lazy. But it's like retro game and technology reviews. And so like one of the most recent episodes is games on TI 83 calculators. And it's like 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. Very fun to watch.

• 1:38:55Ben Gilbert?

  Cool. Mine is an article that friend of the show Mark sent in. It is on Ars Technica, "Direct X Ray Tracing Is The First Step Toward A Graphics Revolution." Did you see anything about this in the last week?

• 1:39:09David Rosenthal?

  No.

• 1:39:09Ben Gilbert?

  So 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. So as a quick primer, the way that, let's say you're watching a movie or you're seeing a cutscene in a video game, it looks way better than the things that are rendered in real-time for the video game because they use a completely different process to render them. They render them in, you know, like two to three seconds a day on render farms where there's tons of machines that can work in parallel and can do all kinds of really crazy, cool, smooth stuff.

• 1:39:43David Rosenthal?

  And this is what Pixar does, right?

• 1:39:45Ben Gilbert?

  Yep, exactly. And you look at a video game and like you can kind of see all the rough edges and you can, you know, 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? 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. And what they do is they build it up from the furthest Z position to the closest Z position, the same way that your eye sort of perceives things as like, okay, build this layer, build that layer, build that layer. And that way, it's kind of like a stack where the last thing rendered is the thing that you see.

• 1:40:26Ben Gilbert?

  And so obviously, 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. So it does miss out on some reflections. It misses out on the ability to do things in a very fine-grained way. And if you are in graphics programming, I'm certainly messing this up, so I apologize. But ray tracing solves a lot of these problems and is a very, it is like a total leap forward, but it's extremely computationally expensive. So you can't typically do it in real-time. Well, this new DirectX API and a lot of the new hardware, a lot of the new advances in

• 1:41:08Ben Gilbert?

  GPUs are starting to allow real-time ray tracing. So we can start to move toward movie-quality graphics in real-time environments. So I'm very excited to see what the, where the future of that will take us.

• 1:41:21David Rosenthal?

  Well, especially for VR and AR.

• 1:41:24Ben Gilbert?

  Oh, yeah.

• 1:41:24David Rosenthal?

  That's gonna be huge.

• 1:41:26Ben Gilbert?

  Oh, yeah. So again, my my apologies to people who who study and work on this and actually know it. But my from reading a couple of articles, think it sounds very cool.

• 1:41:38David Rosenthal?

  Yeah, that sounds awesome. All right, listeners, now is a great time to talk about one of our favorite companies, Statsig.

• 1:41:46Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 1:41:57David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 1:42:17Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 1:42:30David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 1:42:41Ben Gilbert?

  All right, well, listeners, that is all we've got. If you aren't subscribed and you want to hear more, you can subscribe from your favorite podcast client. And if you feel so inclined, we would love a review on Apple Podcasts. Have a great day.