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!