The Lesson of Dropbox: Usage = Value

Word on the street is that Dropbox is about to raise a major round of financing at a $5 billion+ valuation. While some will cry “Bubble!”, I think there’s a different lesson we can learn: Usage = Value.

Let’s face it–Dropbox isn’t the most complicated business or technology. It’s a relatively simple storage app that keeps your files in the cloud and synchronizes them across your various devices. It still uses Amazon S3 for storage, for goodness sake! If it were just being valued on the product, Dropbox would be hard-pressed to raise a Series A, let alone a $5 billion+ expansion/liquidity round.

But Dropbox isn’t being valued on the product, it’s being valued on the massive levels of usage. Dropbox reported in April that it has a stunning 25 million users–not bad for a company that’s a nifty front end to Amazon S3, and was started in 2007.

Dropbox is being valued more on usage than on revenues; even prominent booster Marc Benioff only estimated revenues of $100 million for 2011. In contrast, take a look at two enterprise storage companies that were recently acquired. 3PAR had revenues of over $200 million in 2010, and was acquired by HP for $2.35 billion (a price many analysts thought was exorbitant at 10X revenues). Rival Compellent had revenues of $125 million in 2009, and was acquired by Dell for $960 million, or about 8X revenues.

Dropbox’s reported round checks in at nearly 60X revenues, and that doesn’t even account for the fact that A) it is an estimate from an investor, and B) that represents forward revenues, not trailing revenues.

Again, not bad for a simple “backup” company.

In a world in which Apple is the most valuable corporation, and companies like Dropbox earn super-premium multiples, my conclusion is that the most powerful way to build economic value is by developing products that a) deliver an outstanding user experience, b) convince people to pay a premium, and c) generate massive usage.

Hmmm, when I put it that way, maybe Dropbox’s value isn’t so surprising!

15 thoughts on “The Lesson of Dropbox: Usage = Value

  1. I see as simply as, "less friction -> value"

    In the past, tech companies in SV were too busy building products that allowed people do new things. They would have been dumb to spend time optimizing on friction. This led to a mindset in which good interface design was not important.

    At some point in the last few years friction became very important. The companies that 'get it', the companies that are taking the friction out of our digital interactions.. these are the companies creating the most value.

    The most important innovation in tech in the last 5 years was realizing the true cost of a click (or tap). Incidentally this is the main reason Apps beat mobile web. That extra tap or two.

  2. I couldn't disagree more.

    Usage doesn't necessarily mean value at all, because many usage cases are very hard to monetize (e.g. IM, Twitter, etc.) Having a lot of users doesn't mean you can ever get them to pay you anything.

    If Dropbox is generating $100m in revenues, that's a very respectable job at monetization. And it's a fine basis for investment. But 60x revenues is way beyond investing — it's speculation.

    I don't think there's a lesson here at all, other than: sometimes investments get hyped up and valuations get crazy.

    (BTW, Dropbox has a great product; the team has done a brilliant job).

  3. Anonymous

    Dropbox is convenient but by no means indispensable and addictive. Comparisons to Apple or others who've created unique and differentiated value seem like 'inventive' analogies.

  4. Anonymous

    I see it like this:
    1. Easy usage
    2. Simple UI for everyone
    3. There is a need for such a service

    You have a winner.
    Dropbox is a winner.

  5. AC,

    I think you've hit the nail on the head. People pay Dropbox for convenience.

    I think friction became important as the Internet went from novelty to tool to background noise. When something becomes background noise, you get irritated whenever you get the runaround.

  6. payne,

    I think that the Dropbox valuation is arguable. I probably wouldn't invest at $5 billion myself, but I think that the direct customer relationship, the way it's woven into people's lives, and the viral growth mean that it's possible Dropbox will live up to that valuation.

    My point is mainly that dismissing Dropbox as a fancy front end to S3 misses the point; the customer interface is a way to build massive value.

  7. What is the possibility that this is merely a "feint" valuation, to get Amazon to negotiate a purchase Dropbox, in much the same way as the PopCap valuation was done to push EA to the altar several weeks ago?

  8. Chris,
    Dropbox is very simple from a user perspective, but actually pretty difficult from a tech perspective.

    There's a TON of ways that data can get lost or shifted slightly as it gets copied across different OS versions. Dropbox wystematically worked to eliminate these, and that's the key benefit they have from a tech perspective… cloning 100% of the functionality is easy, but cloning 100% of the reliability is far harder. There's nothing like losing someone's data to ignite a firestorm of negative word-of-mouth buzz.

  9. Anonymous

    "Dropbox isn't the most complicated business or technology."

    You have no idea what you're talking about. The simplicity of Dropbox is the result of years of engineering to make it "just work"

  10. I think you are overlooking the true value of dropbox, in that it is platform agnostic. It is the one tool that is pretty much universal in allowing people to upload/sync unlimited file sizes across technologies. If you only use Apple, that would be hard to notice, but if you have an Apple PC, iOS tablet, Windows Phone, Windows laptop (work), Android Tablet then you can easily see why there is more value here than with most other cloud offerings which are compatible with 1 or 2 platforms. I agree with other posts, the UI and customer facing aspects may be simple, but the engineering to do this is not.

  11. Thom,

    I think it's always possible that the valuation is a feint, but given the history of the company, I suspect it's mainly for founder liquidity.

  12. KnoWirelessGuy,

    You're probably right that I exaggerated the simplicity of the Dropbox problem. But I was reacting mainly to the legion of HackerNews contributors who have at some point commented something like, "I could have done that!"

  13. The best buy of the year? Myspace at $35MM.

    Ditch the social network, move back into the storage space …

    (they won't, but they should)

  14. It's a pretty good investment in my opinion. While more usage doesn't necessarily translate to revenue, the potential for revenue is there. I guess this is wnat those investors are buying.

    In a way, I kind of see this like buying a bet.

  15. Anonymous

    You're also assuming that valuations are rational, and hence your soul searching the magic reason of what must be at play here. And you'd be right if all past monster valuations in young internet startups turned out to be justified in later exits. Also unless someone puts their chips in at $5b valuation, then their justification of valuation is without punch.

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