Why would two entrepreneurs in their early 20s choose to start a business that pits them against giant rivals with billions of dollars to burn and every reason to fight hard for new markets they believe are strategically important?
Online storage for digital files such as documents and photos is that kind of sector. From Apple’s MobileMe to Google’s (eventually aborted) GDrive and Microsoft’s SkDrive, most of the big technology companies have tried to get customers to shift their storage off computer hard drives and into the massive data centres that act as the central “brains” of cloud computing.
It sounds like a utility kind of business where differentiation is hard and the only edge comes from low unit costs made possible by massive scale. But that has not stopped Drew Houston and Arash Ferdowsi, the founders of Dropbox, launching a service less than four years ago that is emerging as one of the hottest start-ups in “ consumer cloud”.
Like many consumer internet companies, Dropbox sprang out of a personal need that was not met by existing services. “Dropbox started because I had personal frustrations – I had a couple of computers I needed to work on, and it was really frustrating to e-mail myself,” says Mr Houston in the company’s San Francisco office where all the hallmarks of a tech start-up – a ping-pong table alongside the developers’ desks, and a massive arcade-style dance machine – are prominently on display. Mr Houston speaks with quiet intensity and focus, while the shier Mr Ferdowsi limits himself to backing up his partner’s more expansive statements.
Dropbox, with barely $7m behind it and fewer than 50 employees, is one of the most popular productivity apps on the iPad and has seen users soar from 5m to 25m during the past year.
Those customers save 200m pieces of information a day to the Dropbox cloud. “That’s more than there are tweets,” muses Mr Houston, who founded the company with Mr Ferdowsi, chief technology officer, after they met through a mutual friend. “There are 2bn people out there who are connected to the internet, and anyone with a computer or phone could be a happy Dropbox user.”
The trick, Mr Houston adds, is to get inside the mind of customers – something the big technology companies, whose starting point is an overriding need to defend their existing technology bases, often fail to do. With the right approach, what initially sounds like a online utility can become a premium service. “What users want is not [only] so many gigabytes a month,” he says. “It’s an experience, it’s seamless. [Dropbox] frees them from having to worry about stuff.”
Disarmingly simple statements like these trip easily off the tongue of the young chief executive, but they get to the heart of how start-ups can take on much bigger, better-financed rivals. Starting with a narrow focus on solving a common problem affecting nearly all computer users, the open distribution of the internet and the power of social referral can turn a smart idea into a mass market.
“They were surprisingly clear in their thinking, for a 23-year-old and a 20-year-old,” says Sameer Gandhi, partner at Accel Partners, one of Dropbox’s backers.
Mr Houston and Mr Ferdowsi came up with a blend of PC and online software. Users download the Dropbox app to any device from which they want to access their data, creating a new desktop folder in which they can save files. Information saved to this folder on one device appears on the others without the need to visit a website or launch a special application.
Luck has certainly played a part. The service was meant for people who use several computers, but it was launched just as the touchscreen smartphone and tablet revolution was about to take off. “Anything with an ‘on’ switch ought to be able to plug into Dropbox,” says Mr Houston.
Dropbox has also benefited from the bigger strategic war between the leviathans of the internet business. These companies have all tried to use services such as online storage to reinforce their market positions, making life hard for consumers who use technology from several companies or want to share files with people using different applications or working on different platforms.
With their service not tied to any particular application or device, the Dropbox founders imagine its blue box logo spreading across the many screens that make up modern life, the “Intel Inside” of a new generation of technology. “You can imagine a world where every device, every web service that needs access to your data has a little blue box,” says Mr Ferdowsi.
Bryan Schreier, partner at Sequoia Capital, the company’s other venture capital backer, says: “The difference is that our sole reason for existence is to guarantee the inter-operability of these platforms for our users.
An idea does not make a company on its own, but the Dropbox founders displayed enough acumen to convince the money men they should have a shot at building their technologically challenging service. After that, it was a case of learning fast. After the pair moved to Silicon Valley, Mr Gandhi says Mr Houston had the humility to defer to others while he “built a network of advisers and coaches”.
Dropbox has become a textbook case of viral marketing online. Rather than the usual one-off impact that comes from “taking the covers off” a new company, Dropbox opted for a slower, word-of-mouth approach. Although the service was designed from the outset for a huge, non-technical audience, it used social networking and other tools to get a core audience of tech-savvy early adopters to use it and act as the first cheerleaders. “You have to have a community that’s passionate about it,” Mr Gandhi says. In addition, users can earn free online storage capacity if they introduce new customers.
Dropbox may be positioned as a premium service, but its business model draws on familiar, utility-style pricing: charging by the gigabyte. Copying the “freemium” approach of a range of consumer services, the first 2GB of storage is free, with two other levels of service for $9.99 and $19.99 a month.
The company declines to discuss its finances, but similar freemium services often aim for a 5 per cent ratio of paying users. That Dropbox has grown fast without raising fresh capital for 18 months suggests it is already cashflow-positive.
So far, so good. But Mr Houston and Mr Ferdowsi now face one of the trickiest stages for any start-up, as they try to expand rapidly to capitalise on early success – especially as Silicon Valley is again in the middle of a start-up boom, with a fierce war for talent and attention.
“As you go from 50 people to 100 and beyond, you have to balance growth with your identity and the quality of the people you bring in,” says Mr Gandhi. “A fair challenge will be to continue to hire at the level they have been.”
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