Dropbox's big funding round is further proof that it's following no one's timeline but its own

By Michael Carney , written on January 21, 2014

From The News Desk

Late last week, a WSJ report claimed that Dropbox would be the latest company to join the exclusive $10 billion valuation club, thanks to an expected $250 million Series C funding round. A later report from ReCode suggested that the round could swell to as large as $400 million. At the high end, this would bring Dropbox’s total funding to $650 million (as it stands, it’s at $507 million). The company now rises to the sixth-most heavily funded private technology company worldwide, and would jump to no. 3 if it fully fills out the rumored round.

But what does the company need all that cash for, and what does this round mean for its long anticipated IPO? The company isn't saying but we can come up with a few explanations.

One is to buy time and delay an unwanted IPO, which often means providing liquidity to early investors and employees. Another is to scale operations ahead of public market scrutiny, which for enterprise companies – something Dropbox keeps insisting it wants to be – typically means building out big sales teams. Put another way: All that private market enthusiasm is great, but Dropbox may need some time to grow into its steep price tag, just as Twitter did.

It could also help bulk up with some one-time deals. While private to private transactions used to be rare in the Valley, recent IPO prospects have been known to make splashy acquisitions prior to going public, either to address an obvious weakness – such as Facebook buying Instagram or Twitter buying MoPub – or just drive attention.

Finally, there’s the tried and true justification of raising capital “because you can." Sure, too much cash can create problems. But no well-performing startup ever went out of business from having too much money at a delicious valuation.  Money equals time, and that's something almost every startup could use more of.

There’s no indication that any Dropbox shareholders sold in the latest round, but it would be rare if a late stage, high-priced deal like this didn't include some secondary aspect. That could be the purpose of the additional $150 million chunk. After all Dropbox is seven years old. That's a reasonable time for early employees and investors to expect some liquidity. This was a strategy that Fab hoped to employ with its planned $300 million Series D round, until missed performance metrics put the second $150 million tranche on indefinite hold.

That's especially the case if this round is about putting that IPO off a bit. At the end of 2013, the median time from initial equity financing to IPO was 9.4 years, according to Ernst and Young, up from 6.4 years in 2011, so Dropbox is not too long in the tooth by Wall Street standards. But the company seems particularly disinterested in ringing the NASDAQ or NY(f)SE bell.

This is in direct contrast to the company’s closest competitor, Box, which recently selected investment banks ahead of an anticipated 2014 IPO. Box has raised $409 million to date, including a $100 million Series F round in December 2013 that valued the company at a reported $2 billion. CEO Aaron Levie called it a strategic round and noted that the newly added international investors would prove useful in the company’s global expansion efforts. It looks like Box’s final private round will come less than a year before its IPO.

While Box and Dropbox are both cloud storage vendors, they have focused on two different markets. Dropbox, which founder Drew Houston created to solve his own forgetfulness and portable storage problems, is a consumer-first company. Box, on the other hand, made its hay in the enterprise. The two love to insist they aren't competitors. But given they solve the same core problem and both have "box" in the name, you can forgive customers, analysts, and would-be investors for conflating them.

Their actions speak loudly too.

Houston has repeatedly insisted he's serious about enterprise, and has hired Kevin Egan and Ross Piper from Salesforce to lead the effort. We've heard he's worked on bringing more mentors and even potentially a board member with enterprise chops into the fold too. A deep education in the ways of enterprise has been core to Aaron Levie's ability to carve out a lucrative co-existence with Dropbox.

Meanwhile, Box keeps jabbing at the prosumer too. Earlier this week, Box threw down the gauntlet by offering both new and existing users 50 gigabytes of free storage, a promotion that's clearly not designed for the Fortune 500 IT buyer. Dropbox, by comparison, provides just 5 gigabytes of free storage, with the option to earn nominal increases through referrals and other actions. At least for the moment, Box offers the best value for consumers. That's not an accident on Levie's part.

Face it, you two: You compete. You know it. We all know it. And you both compete against Google Drive, Microsoft's SkyDrive, and Apple's iCloud. The difference is these companies view the cloud as little more than ecosystem lock-in, rather than a meaningful revenue line item. One could argue you also competes against pure storage players like Amazon and Rackspace. PandoDaily contributor Fritz Nelson surveyed this landscape and was left wondering, "Is Dropbox all boxed in?" More damning: Steve Jobs once dubbed Dropbox a mere "feature" – and our former contributor Farhad Manjoo said he was right

But that skepticism and big competitors aside, there's always room for the right scrappy new, pure-play entrant who redefines a stodgy but lucrative category. The ball is in Houston's court as the largest, most well known, and best funded of the two companies seeking that crown.

He's got the cash now to do whatever he wants, but what is that exactly? Houston will have to decide not only how to respond in the consumer market, but whether he’s willing to make the same sort of bold move to gain a foothold on Box’s enterprise home turf. If it's the latter, he needs to make a major investment in the company’s enterprise sales force, or for more immediate benefit, offer a screaming deal to enterprises willing to sign long-term contracts.

The size and timing of this latest funding round suggests that Dropbox is in no hurry to beat Box to the public markets. One explanation for Box’s willingness to IPO first, and for Dropbox’s simultaneous reluctance, may be Wall Street’s recent love affair with enterprise companies and its relative skittishness toward consumer technology plays. This “slow and steady” strategy could work to Dropbox’s benefit if it can make headway in the enterprise market under the shield of private market status, and follow Box into the public markets with more attractive numbers than its competitor.

It could also belie the difference in Box's hardcore enterprise focus and Dropbox's consumer bent. For an enterprise company, an IPO isn't something you have to grin and bear, it's an instant way to convey staying power to big companies. That helps sales. And that's the whole point with enterprise. With consumer, there's a sense that pleasing Wall Street comes at the expense of users.

With neither company publishing financials, it’s hard to handicap which has the healthier business. Judging solely by private market valuations, Dropbox may be significantly larger. It crossed the 200 million user mark in November 2013, while Box most recently reported 200,000 active business and 20 million users in December 2013. But those Box users are undoubtably more profitable and the bulk of Dropbox accounts are still on the free plan. With enterprise, you know what size business you are building. With consumer, it's winner-take-all. The spoils from the market leader can be far greater than those available an enterprise company; but that's if you win big. Higher risk; higher reward.

One final possible explanation for Dropbox’s big funding round is the prospect that the company may move away from relying on Amazon’s S3 storage infrastructure and build out its own data centers. Such an initiative would cost far more than $400 million, but presumably be financed mostly with debt, meaning the new capital may be earmarked for an equity contribution. This would be a long-term project that could take several years and plenty more cash. It’s worth noting that Box does not use Amazon or any other third-party storage platform, but relies on its own server infrastructure.

We sat down with Houston for a PandoMonthly fireside chat in February 2013, when he discussed, among other things his patient take on entering the public markets, dispelling rumors of ongoing meetings with bankers. Houston said at the time:

It’s something we will do at some point. We don’t have some road to IPO thing that we’re all excited about. There are other reasons to [go public] but we’re so much more focused on, “How do we get more people to use the service?”

Houston also addressed his enterprise aspirations, saying:

We could've been like “We don’t care about enterprise” or whatever. But if you take Dropbox away from 100 people [who use it for photos] that sucks. But if you take it away from people at work, you’ll get stabbed in the face. Business will suffer.

If you think about it, the way people work is really broken, and things are really time-consuming. But if you save someone ten minutes... times hundreds of millions of people this is lifetimes of pain. You save people every day... People don’t want to use worse things at home or worse things at work...

Now, we’re putting a lot of investment into helping this other audience, which is the IT administrator, getting back some of their control... It goes beyond ‘Can we be appropriate for the enterprise?’ Actually, if you talk about Dropbox in the enterprise we can be the answer to their prayers. Dropbox is on all these things that they need to control.

Because Dropbox hasn’t commented on recent funding reports, we still have more questions than answers. But the company has insisted for some time it's serious about enterprise. If that's the case, it's better off proving that while private and putting the IPO off just a bit longer. Let Box go first; Dropbox doesn't seem the type to be rushed.

[Image via Thinkstock]