Dropbox was founded by Drew Houston, at the age of 24. As everyone knows, it is a downloadable application that allows users to sync their local files to the cloud and other devices in a relaxed and straightforward manner.
Dropbox overall had an excellent track record, and one of the typical Silicon Valley stories. Therefore studying it should give insights about most successful startups.
Houston started coding at a very early age; he even ended up scoring professional software work as early as 14 years old as a security tester for an online game. During his study at MIT, he co-founded a profitable startup called Accolade, which was an online SAT prep service.
Upon graduation, after spending some time in an enterprise company, he came up with the idea for Dropbox in December 2006.
According to Houston, one of the main motivations of starting to develop Dropbox was his frustration with the way existing products tried to solve the problem of backing up data and sharing it with multiple devices.
Although that story sounds heartwarming, one should note that his desire to build Dropbox coincides with the hype that got built around backup and storage services in 2007. Most successful companies always have a “romantic” story behind like Houston’s. But such stories might not always be accurate.
In any case, to develop the product, he recruited Arash Ferdowsi, who dropped out of MIT to work on Dropbox and later became the co-founder and CTO of the company.
Product Development and Early-Stage Financing
It took them four months to come up with an MVP. Their vision was to keep everything simple, and instead of having a lot of features, doing one thing correctly. The product they come up with was tracking changes in real-time to any file that has been placed at the user’s local Dropbox folder. And thanks to a binary diff technique, was syncing those files over the cloud and to local Dropbox folders in other devices, within milliseconds.
As a typical path forward, they showcased this prototype at HackerNews, hoping that would give them leverage to get into Y-Combinator. Since HackerNews founder Paul Graham, was also the founder of Y-Combinator, the most prestigious (still to date) incubator in Silicon Valley.
That approach paid out, and they got accepted into the April 2007 cohort of Y-Combinator, eventually raising $1.2M upon graduation from the group (in convertible debt).
Although Houston is a fan of “launch early and often” methodology by Paul Graham, he believed the nature of sensitivity of the information they are handling required them to be more cautious. So they ended up waiting a long while (18 months to be exact) before opening up a public beta.
In the meantime, they used sites like Digg, where other techies were frequent to acquire private beta testers/users and even developed a Mac client to appeal to the said crowd. Using this approach, they were able to collect close to 75,000 early adopters.
Building the Company
This rapid early adoption response from the consumer base was a signal that the Dropbox’s “it just works” mantra resonated with everyone. In September 2008, they opened up the beta to the public in the TechCrunch50 event, which is an annual competition showcasing high-potential startups.
Even this early on, Dropbox was keen to use a freemium model, with free accounts up to 2GB, and paid accounts like at $9.99 for 50GB a month, among other storage/pricing options.
Before this big launch, the first six employees of Dropbox were all from MIT’s computer science program. From the start, they decided to focus more on product development. So the board members tasked Houston to hire a PM. But unfortunately, the first PM they hired was not a good fit, which caused them to fire him within six months. Board members can sometimes be pushy.
Early Marketing Efforts
The next step for the company was to come up with a marketing plan. As most startups do, they decided to hire a marketing consultant (which, in my opinion, is a mistake). With this consultant’s direction, they tried to acquire customers through paid ads. But the cost of acquisition for a single user was as high as $300, whereas the annual plan sold for $99. It was unsustainable.
They tried a bunch of different tweaks to get paid ads. But even after an additional $6M Series A funding, it was evident that paid ads won’t work long-term, so they eventually dropped it altogether.
Growth Through Analytics
Since Dropbox was using a freemium model, optimizing the marketing messages sent to free users and figuring out the correct pricing was essential to its success. To achieve such optimizations, they started tracking % of users that signed up as free users upon landing, % of active registrant after X months, and % of free users that eventually ended up paying within Y months (I am guessing three months). These metrics are not arbitrary; they tried to track what is known as the AARRR framework: acquisition, activation, retention, referral, revenue.
With the help of such strong analytics metrics, they were able to tweak their pricing and feature set further. For example, Dropbox dropped the unlimited historical file support from freemium, realizing it would be unsustainable unless people pay extra for it.
Growth Through Partnerships
Similar to paid ads and product management efforts, trying growth through partnerships proved to be fruitless. After spending months talking with big companies and running circles around middle management people that have no authority, Houston realized large companies are taking a tremendous amount to make any partnership deals. When they do, they often ask a lot of customizations. It is interesting to hear he was not aware of this from the get-go.
Organic growth is where Dropbox’s growth tactics shine. The focus on making everything “just work” paid itself off in the form of a robust and loyal customer base that drives new users by word of mouth. Within about two years, Dropbox was able to register 2M users, mostly through this channel.
To keep such loyal customers happy, they utilized support forums where users can directly interact with the support people and with each other. They also rolled out a side project called “VoteBox” that let users vote for new features they want (which I guess was a slippery slope. They killed VoteBox a couple of years later).
Their most successful referral campaign was to let both the referrer and the referred to get 250MB (I am pretty sure it is 500MB) upon signup. Just as an example, I recruited 19 new users, and am proudly using a 20.85GB of Dropbox for free to this day.
Once they figure out the tech problems, the product, and marketing strategies, it was time to accelerate the growth, aka feed the fire with more fuel. The rapid decrease in both cloud storage costs and data delivery cost was also doing the company’s bottom line a great favor.
To ride this wave, they considered whether they should start creating different products based on different user cohorts. Eventually, they decided that it would be against their grand vision for the product. They wanted Dropbox to be like Microsoft Word, in the sense that whether you’re a professional or just a hobbyist, you end up using the same product and able to get your job done.
Staying the Course
Although listening to customer feedback is always a good idea, it is also essential to stay the course and not bloat the product with a lot of features and get distracted. Dropbox was quite successful in doing that. They resist the temptation to implement prevalent feature requests like the ability to sync folders outside the local Dropbox folder to keep their product nimble.
During this time, they also started entertaining new partnership ideas. This time, instead of going to the large companies, they took charge in their own hands and created APIs that other developers can adopt. There were several other startups like QuickOffice, FuzeMeeting, and GoodReader, that leveraged the said APIs to implement tight integrations with Dropbox.
That level of control probably kept their product still relatively simple, yet enabled Dropbox to gain new user acquisition channels.
Dropbox offered a distinct syncing capability for its users, even let them share these files publicly and privately. Dropbox was also unique in the fact that they did not offer a different product for their “business” users. Instead, they relied on individuals to adopt the Dropbox and use that as a Trojan-horse to get the larger business clients eventually.
Overall, Dropbox has a fairly typical story, with its ups and downs. That is not to diss their immense success over the years. Today, they are still one of the more influential players, if not the strongest, in their field of business. They do have fierce competition though: Google Drive by Google, OneDrive by Microsoft, iCloud by Apple are all becoming more and more ubiquitous, making it a tough ocean to sail for Dropbox.
Eisenmann, Thomas R., Michael Pao, and Lauren Barley. “Dropbox: ‘It Just Works.’” Harvard Business School Case 811–065, January 2011. (Revised October 2014.)