How They Started Page 21

  Drew says he knew then, in high school, that he wanted to run a computer company. But inspired by Daniel Goleman’s book Emotional Intelligence, he knew that just being smart wasn’t enough to make a company succeed, and so he spent the summer before his freshman year at MIT reading business books.

  “No one is born a CEO, but no one tells you that,” Drew has said of that time. “The magazine stories make it sound like [Facebook founder Mark] Zuckerberg woke up one day and wanted to redefine how the world communicates with a billion-dollar company. He didn’t.”

  Drew’s first hands-on education in managing people came when he rushed the Phi Delta Theta fraternity, and took on a leadership position as treasurer for the sole purpose of gaining that experience. But when fellow fraternity brothers left to go pursue their own entrepreneurial visions, Drew was left frustrated. He had the desire and was building his skill set, but he was waiting for that moment of divine inspiration. He needed an idea. And then he got one.

  “No one is born a CEO, but no one tells you that.”

  In January 2007, Drew boarded a bus going from Boston to New York City. He’d brought his laptop and planned to do some work during the four-hour trip. But as the bus pulled away he realized he had forgotten his USB memory stick, and without those files he wouldn’t be able to get anything done. It was actually a frequent problem of his, but this time, on the bus, he had a moment of clarity. There must be a way to sync your important files to devices over the Web. Immediately Drew began doing what he did best: writing code.

  Driven by frustration

  Driven by the frustration of working from multiple computers, Drew sought to create a service that would let people bring all their files anywhere, with no need to email attachments. Drew coded a demo of his idea. Four months later, in June 2007, Drew left Boston for good and flew to San Francisco, where he pitched the idea to Paul Graham of the highly regarded startup incubator Y Combinator. Graham had seen a demo of Dropbox that Drew posted online and was keen to learn more.

  The model Drew pitched was simple: Dropbox makes all of your important files available to you wherever you may be in the world. Using cloud technology, files are synced and accessed from any computer or phone. Working late at the office? Just add the file you’ve been working on to your Dropbox folder and pick it up later at home. What Dropbox was selling was never again having to remember a USB stick or think about where your files are.

  Drew wrote software that users could download and install for free, creating a special folder on the user’s computer. Anything added to this Dropbox folder would automatically save to all of that user’s computers, as well as to the Dropbox website. The true innovation, however, was its social nature, with users able to invite people to share any folder in their Dropbox, making it essential for a wide range of users, such as teenagers who want to share music, or businesses sharing information and designs with colleagues and clients.

  What Dropbox was selling was never again having to remember a USB stick or think about where your files are.

  Ultimately, everything hinged around a business model called freemium. Users would pay nothing to sign up for Dropbox, and just by signing up they would get 2GB worth of space. Drew knew this would lure people in. But Drew also knew the nature of the Internet and that users would blow through 2GB. At that point, the Dropbox model would offer users upgrades to 50GB and 100GB with monthly fees of $10 and $20, respectively.

  The potential was huge. And Paul Graham was impressed. On behalf of Y Combinator, a seed-stage start-up funding firm, Graham agreed to give $15,000 in seed funding to develop the business further and take it to the next stage. The amount was modest, but Y Combinator as a rule provides very little seed money, reflecting Graham’s theory that with the Web and free software available, the cost of starting an IT firm has greatly decreased. In addition to the seed money, Graham’s firm offered advice and the opportunity to build connections. But there was a catch—Graham insisted that for the idea to work, Drew needed a co-founder.

  Drew didn’t have long to search for the right person. Things were moving quickly. He polished his demo of Dropbox and ultimately decided to show it to his friend and fellow MIT student Arash Ferdowsi. So impressed was Arash that he dropped out of MIT—with only one semester left before graduating—so that he could help Drew make Dropbox a reality.

  With Arash on board and Graham’s funding in the bank, Drew had the tools he needed to move forward. With the $15,000, he rented an apartment and bought a Mac, which he spent 20 hours a day reverse engineering in his attempt to make his Dropbox application work on every computer and on the growing number of “smart” devices such as phones and tablets. Then, three months later, Drew and Arash were invited to a meeting that would accelerate the business even further and change their lives forever.

  So impressed was Arash that he dropped out of MIT—with only one semester left before graduating—so that he could help Drew make Dropbox a reality.

  After a Y Combinator event, Arash, the son of Iranian refugees, was approached by a man who started speaking to him in Farsi. The man was Pejman Nozad, a famous dot-com-era investor, notable for funding startups such as PayPal.

  Nozad got to know the young entrepreneurs and believed in their plan. He persuaded them that they needed to think bigger and started representing the pair, telling investors that they were already fielding a number of offers from venture capital firms. “Basically, he was our pimp,” Drew has joked.

  It worked. In September 2007, the pair got a meeting with Sequoia Capital, the firm that famously funded Internet giants Google and Yahoo. Drew and Arash were seeking only a few hundred thousand dollars, and they admit they were quietly nervous when it became apparent at the meeting that they would be talking about much larger sums.

  “On a Friday afternoon, we walked into the Sequoia offices, and on the walls were the original stock certificates of Apple and Cisco. It was daunting,” Drew writes. “I was thinking, ‘Holy shit, I’m just some kid. What the hell am I doing here?’”

  Pitch of a lifetime

  Keeping their nerves at bay, the pair made their pitch, and the next day they were visited at home by legendary investor Michael Moritz, who heard the same presentation. Another meeting followed—this time, dinner with fellow investor Sameer Gandhi—and for the first time they began to talk specific numbers. Moritz had told his partners to go forward with the deal, and Gandhi revealed that they would be investing $1.2 million in Dropbox.

  “We got an email a few days later from Sequoia requesting instructions for a wire transfer,” Drew continues. “Arash and I just looked at each other. We thought, ‘It’d be really embarrassing if we started—or quickly ended—this relationship by not even knowing how to get the million dollars into our bank account.’”

  Drew recounts the humorous episode of the two of them venturing into their bank and asking if there was a limit to how much one can deposit into a bank account.

  “It’s hard to describe the feeling of looking at your checking account online and continuously hitting Refresh, watching the balance increase from $60 to $1.2 million,” Drew writes. “You really have $1.2 million. And now it’s up to you to figure out how to use it.”

  “We got an email a few days later from Sequoia requesting instructions for a wire transfer. … We thought, ‘It’d be really embarrassing if we started—or quickly ended—this relationship by not even knowing how to get the million dollars into our bank account.’”

  Soon they had more. In total, Drew and Arash raised $7.2 million from a combination of Sequoia Capital, Paul Graham at Y Combinator, Accel Partners and a host of other prominent investors, such as Amidzad (Nozad’s firm), and brothers Ali and Hadi Partovi who sold their startup iLike to MySpace in 2009.

  Every other file storage service at the time suffered problems with Internet latency, large files or bugs, Drew had told them, and Dropbox was the first to conquer them all. Perhaps crucially, the service supports revision history, so a user’
s files deleted from the Dropbox folder may be recovered from any of a user’s synced computers. Past versions are saved for 30 days; however, users can purchase a “Pack Rat” option of unlimited version history. Finally, the version history uses an encoding technology that helps conserve bandwidth and time. If a user makes changes to a file, Dropbox, when syncing, uploads only the elements of the file that have been changed, not the whole file.

  “I’ve seen a variety of companies attacking parts of his problem,” Moritz later told Forbes magazine. “Big companies would go after this, I knew. I was betting they had the intellect and stamina to beat everyone else.”

  Fine-tuning the model

  The next step for the pair was fine-tuning their model, which they eventually presented in a private beta launch video on the popular social news website Digg in March 2008. Hoping to get around 15,000 user requests from the video, Drew and Arash were stunned to find 75,000 people wanting to test their service.

  A screenshot of Dropbox online.

  Not wanting to risk the bad press that could ensue from 75,000 people trying still-uncertain software, Drew hand-picked a number of people to test Dropbox through a series of private invites. The invite-only strategy was successful in bringing in tens of thousands of new users, and the company added to that figure by drawing some 300,000 new users alone from its newly launched iPhone app.

  Using social media sites such as Twitter and Facebook, the Dropbox team netted another 50,000 users almost immediately. Drew and Arash also used Google AdWord placements to help spread the word in a more targeted manner and build viral momentum among an audience it knew was paying attention.

  In short, Drew has said, the early growth strategy was simple: go where your first followers hang out and make yourself visible. Dropbox did this with their private beta launch and saw their users jump from 5,000 to the previously stated 75,000 in just one day, and they continued with a strategy of winning over their niche users first and riding that momentum.

  The pair were also quite media savvy. Knowing journalists are busy people, they’ve said that part of cultivating Dropbox’s momentum was helping reporters find the angle when reporting on their growth. To this end they met journalists in person, and Dropbox has always included a thorough media resources page on its site.

  Significantly, Drew and Arash resolved that Dropbox should focus on doing a couple of things really well rather than many things poorly. They poured their time into making their service as easy as possible for its users, not asking them to think too much when using it, but openly inviting feedback. This ease of use, and a referral program that increased sign-ups by some 60 percent in the first year eventually helped Dropbox surge past the all-important benchmark of a million users.

  The early growth strategy was simple: go where your first followers hang out and make yourself visible.

  Using a video on a social news site like Digg to introduce themselves was a bit unconventional and is something Drew concedes they couldn’t do now. But at the time, the people they were trying to sign up for their service were Web 2.0 geeks who resided on sites like Digg and Reddit—Reddit itself being a fellow Y Combinator startup.

  The buzz to go global

  On advice from its investors, Dropbox finally officially launched later in 2008 at the TechCrunch50 technology conference, a global competition for start-up companies. Fifty entrepreneurs are invited to present at the event, and the winner receives $50,000. The event is supported by Sequoia Capital, one of Dropbox’s key investors, who thought the young company could make a name for itself.

  Dropbox didn’t win the competition, but the event provided enough exposure to create buzz. The company counted just nine employees when it formally debuted—eight engineers to monitor the servers and deal with customer queries, and one designer—despite boasting a number of registered users soaring well past the million mark.

  For the remainder of 2008, Drew, Arash and their small team pulled all-nighters, working out bugs and perfecting the small details, even down to the shades of color on its icons. Registered user numbers continued to grow tenfold that year, as the company weathered the sharp economic downturn that fall thanks to their small number of staff, limited overhead, and a service that was essentially free. By April 2009 they could claim 10 million members, while in their modest offices investors Hadi and Ali Partovi were showing Drew and Arash how to recruit talented staff and more effectively market themselves.

  Looking back, Drew says their main challenge that first year was marketing. “We sucked at it,” Drew recalls. He’s said that they knew they had a great product, but the company’s biggest obstacle was selling a product that solved a problem most people didn’t know they had.

  But Drew and Arash didn’t want to rely on a marketing firm. Nothing can kill momentum like an overly slick marketing message. Instead, they turned to their customers. Research showed Dropbox users were very loyal to the firm, and so Drew and Arash offered 250 megabytes of extra storage free to each customer who gave them a referral.

  “Most of our growth is word of mouth/viral, so free users are still valuable: we grow faster, and they refer people who might pay,” Drew has said of their strategy. The move, in fact, was so successful that 25 percent of all new registered users still come to Dropbox this way.

  Privacy issues and public problems

  The company experienced a few more contentious challenges, however. Dropbox drew criticism for harboring those who infringe on others’ copyright, and as a result it had to adjust its terms to comply with the Digital Millennium Copyright Act, which establishes a notification-and-takedown system for addressing claims of copyright infringement. To comply, Dropbox has reserved the right to delete or remove any file from users’ accounts in response to claims from copyright owners.

  The company was also forced to fend off claims its staff could access its users’ files at any time. Questions over its privacy and security policy reached a fever pitch when a complaint was filed with the Federal Trade Commission concerning Dropbox’s system of checking whether a file has been uploaded before by another user and alleging that linking to the existing copy exposed users’ files to intruders. In response, Dropbox tightened its security measures and clarified its terms of service.

  These were only minor blips, however. Dropbox’s rapid growth saw the firm expand its team to 20 people to cope with all of the queries and requests coming from its paying customers in 175 countries. By 2010, its team grew to 60, and Dropbox began launching new services targeted toward businesses, such as Dropbox for Teams, and a new one terabyte storage option.

  As Dropbox expanded, Drew’s time began to shift away from coding to more traditional CEO fare: people management. Uninspired by stereotypical cubicle life, Drew wanted to create a new corporate structure and has broken Dropbox’s staff engineers into small teams, while just three managers handle the company’s thousands of servers.

  With the company reportedly looking to expand from 70 to upwards of 400 staff, Drew has said that the biggest challenge Dropbox faced is internal communication, since messages from the top have typically been shouted across the room. Times have certainly changed for Drew and Arash, who just a few years ago were coding in their small shared apartment in North Beach, San Francisco. Perhaps the defining moment for Drew, when it became apparent just how far he’d really come, arrived in December 2009 when he received an invitation to meet his hero, Steve Jobs.

  Dropbox pokes fun at its foolproof system.

  The meeting was at Apple’s Cupertino offices, and Jobs was interested in buying the plucky startup. After pleasantries, Jobs made his pitch. But Drew told him to stop. He was well and truly flattered, but he wasn’t selling. He wanted to grow the company. And as Dropbox surged past the 25-million-user mark in the months following and has today breached 50 million, Drew is well on course to achieving his dream.

  Where are they now?

  After reaching the 25-million-user threshold, Dropbox signed deals with mobile car
rier Softbank and handset maker Sony Ericsson in a bid to attract more customers in Asia and Europe. As the company cruised past 50 million users in 2011, Drew and Arash announced even bolder plans.

  In August 2011, the pair invited seven top venture capital firms with a history in Silicon Valley to visit their offices and make an offer for further investment by the following Tuesday. According to interviews with insiders, just before midnight on Monday, Dropbox’s head of business development expressed his concern that only one offer had arrived and suggested that Drew and Arash pull the funding round.

  But Drew declined. He would see it through. And as he expected, every firm came back with an offer in the morning. They eventually closed a mammoth deal in September with Index Ventures, Sequoia, Greylock, Goldman Sachs, Benchmark Capital, RIT Capital Partners and Accel Partners that netted the company $250 million on a $4 billion valuation. According to Forbes, Drew’s own estimated 15 percent stake is worth some $600 million dollars.

  Dropbox’s rapid growth has seen it ranked as the world’s fifth most valuable Web start-up company, falling in line after luminaries like Facebook, Twitter, Zynga and Groupon. And industry observers have noted that people save more files on Dropbox than there are Tweets on Twitter.

  Drew, who remains CEO, has said he envisions a day not too far off when Dropbox does more than just store, for instance, people’s photos. He sees his system taking it a step further and reading the metadata and embedded location information on these photos, which can then be indexed to allow users to arrange all the pictures taken within a 20-mile radius. Named the best young tech entrepreneur by Business Week, there seems to be little doubt he will achieve this and much more.