5 Interesting Learnings From DropBox at $2.5 Billion in ARR

Let's talk about Dropbox. It is both a tale of one of the most successful startups of all times and a cautionary tale of not really planning your second act. Two very different stories, in fact. Dropbox today is at 2. 5 billion in ARR, which is epic. But it is a tale of two stories. Two companies. Dropbox back in the day was utterly disruptive and utterly viral. Utterly viral. People were sharing their files everywhere in a way that no one had really done before. And as a result, it rocketed to a billion in ARR faster than any other startup had up until that point. And it did. It burned at almost, burning almost nothing. Dropbox was incredibly efficient and it grew to a billion dollars an ARR faster than anyone else had up until that point. But then it got hard. Then it got hard. And what happened? A number of things, competition and all that. But really, it didn't have a second act. It didn't have a second act. It made small expansions, it bought Docsend and added other functionality. But it's basically the same Dropbox and as a result, it's very mature. It's very mature. It was the fastest growing SaaS startup of all time to get to a billion, and now it's one of the slowest. Growing at 2.4 billion ARR, it's only growing 6%. And in fact, last quarter, its paid customer count dropped slightly. Dropped. It started losing customers. Super mature. Now it's raining cash. Operating margins are over 30%, 33%. So it's very profitable at scale. It is very profitable. But here's the mistake so many founders and executives and others make. Profitability is demanded by Wall street today. They're demanding efficiency. Everyone's so much more efficient than they used to be. Everyone's more efficient, but it's not enough. You have to grow too. So even though Dropbox is profitable and wildly efficient, it's trading at just 3 times revenue, at 7.8 billion. But it's actually not even that high because it has a billion and a half in cash. So actually, it's really only trading at 2x revenue, folks. None of us want to trade at 2x revenue. And almost none of us will ever build a better product or company than Dropbox. So it is a cautionary tale of your second act. Of your second act and a rough rule. And then let's talk about five interesting learnings. Five plus a few extras. Five interesting learnings from Dropbox. But you've got to plan your second act. It took us a while to figure this out in SaaS, but now we know it. Some rough rules are 10,000, 1,000, 100. And what do I those are rough rules for SMB Mid Market Enterprise. When you need to start thinking about your second product, when you start crossing 10,000 SMB customers, a thousand mid market, or a hundred big enterprise customers, you've never saturated your market. The markets are big and SaaS. But you may have begun to saturate your core ICP, your core market, your core buyer. When you've got a hundred enterprise, a thousand mid market or 10,000 small businesses. And so as you get to those 10,000 or 1,000 or 100 number of customers, it's hard enough. Start planning your second act. Start planning your second act. What's your next big product going to be? And probably the biggest lesson I ever learned on this was from Peter Gassner, CEO Vivo, when he came to Saster Annual in 2017. I asked him about their second act. Viva had just gotten its second product vault going. I said, what's the number one most important thing in your second product? And what he said I didn't get at the time. But now it's obvious when you think about it. He said, the most important thing is that your second product is bigger than your first. It's bigger because the problem is if you get to the point, you're doing 10 million, 50 million, a hundred million, a billion, like Dropbox, and your second product is smaller than your first. No matter how synergistic it may be, no matter how much people may want to build it, no matter how much your customers may want it, great, if it's a feature. But if the tam, if the market, if it can't be bigger than your first one, it's not going to be worth it and it's not going to create enough growth because that core is going to grow so quickly. This is something that HubSpot got. It worked, leaned very early into CRM. And when HubSpot launched CRM, at first people didn't get it. It's a different buyer, sales versus marketing. It was free for a long time. It was feature port, but they kept at it. HubSpot doesn't break out its products anymore, but of its two and a half billion in revenue, it looks like maybe 700 million is from CRM. It will soon pass marketing the original product and it is growing faster. That's what you need. That fuels growth. And interestingly, in terms of convergent evolution, Dropbox and HubSpot today are almost the same place. They're basically at 2.5 billion in ARR. But HubSpot's second and third acts were much better planned. HubSpot is growing 20 some odd percentage, both revenue and new customers. Dropbox without a second act is at the same amount of revenue, but it's growing revenue barely at all 6%. And it's not growing new customers even 1% anymore. So you've got to plan that next act, especially if the growth is wildly successful in the early days. Okay, so let's talk about the five plus interesting learnings from Dropbox at 2.5 billion. Number one is that paying users have stalled out. And look, we talked about the 10,000, 1,100. Actually, much of Dropbox usage is really consumer. It's at the edge of consumer like Canva and some other leaders. So they don't just have 200,000 customers like HubSpot, they have almost 20 million. They have a hundred times more customers than HubSpot. 18 million paying customers, but they only pay 140 bucks a year. They barely pay more than $10 a month. So it's basically a consumer app. They've gone enterprise, they've gone big business. They've had some limited success there, but their real existential problem is they have exhausted their long tail. They have exhausted it. They have gotten 18 million customers. How many can you get for Dropbox? That's they're approaching the answer. They have fully saturated their market. Two price increases have only sort of worked at this scale. Their ARPU is up 4%. Their ARPU is up 4% over last year and it was flat the year before. So they weren't able to increase pricing at all from 2021 to 2022. And then last year they were able to increase it a smidge, 4%. They have tried to increase prices, they have increased prices, but not everything magically works. A lot of vendors dramatically increased their pricing the last two years and the customers had no choice. They were forced to pay it. But customers in some cases will leave. And we'll talk in a minute about how team packs and suites didn't really work for Dropbox, even though it's worked for some. And they have not been able to drive their ARPU up much. Had they been able to drive pricing up more, ultimately by adding dramatically more value, they'd be growing faster. But notwithstanding trying lots of things on pricing and more, it hasn't quite worked. Number three, one thing they are facing, like many others, is seat contraction. Seat contraction. People are managing their budgets and we think a lot about how it's big enterprises that are trying to manage their budgets today even as they're spending more in SaaS. In many cases they're freeing up budget for AI and efficiency, but they're seeing, even at the low end, price sensitivity. They're seeing folk take a look and saying listen, we've got 10 licenses of Dropbox. Are we really using 10 or we're only using eight? Or maybe Jason doesn't really need one. So they're even at the very low end of the market they're seeing that and they're also seeing elevated Churn, especially from their product extensions docs and Inform Swift, which are great products but are not big enough to be a second act. So they are seeing C contraction and churn. Fourth Just an interesting note and this is what folks do when things get mature. This is what I've seen a lot of startups with slowing growth do and it's it works, but it's a waste of time. They are ending unlimited storage. They're ending it and a lot of vendors have done this to some extent. But why are they doing it? They're doing it because they're trying to get the last dollar out of folks. There are some folks who abuse the model who use way too much storage on Dropbox and sure look that they abuse the system and they use more storage. But Dropbox gross margins are in the 80s. So these abusers are they're they're not destroying the system and they're not free users. They're paying folks. They're just using lots and lots of the product. They're taking advantage of unlimited. So nothing wrong with getting rid of your worst customers at some level. But the energy it takes to do this, is it really worth it? Maybe they get.0.1% more growth.0.2 just don't. The learning is don't spend all of your time trying to get every nickel and dime out of your customers. Invest that energy in growth, in product, in happiness. There's always going to be some abusers. There's always going to be folks that overuse their account. There's always going to be in certain products, folks that share an account, let it go and focus on the bigger prize. 5 and this one's super interesting. We chatted about it a little bit a minute ago, but they tried multi product bundles and while this worked really well for Box and HubSpot and others, it hasn't worked for them. Folks don't yet want to pay more for a bundled set of products for Dropbox, but their goal was to get folks to pay even more by buying multiple products together. I'm pretty sure though the reason is these extra Dropbox products, while nice, the Docsends and the others, they're nice products. They're not mission critical. They're not so important that I'm going to triple or quintuple the amount I pay for Dropbox to get this magical suite. Dropbox is not a suite. HubSpot is clearly a suite. Most HubSpot products buy more than one product today. Box has become a suite. Datadog is clearly a suite and Dropbox has tried it. But the other products are not valuable enough. And the customers bought. They didn't want to pay more. They didn't want to pay more. Okay, two other, two other small just interesting learnings, distributed workforce. They are actually paying $79 million to get out of their SF office, but they think it'll pay 220 million back over the rest of the term. This is what you do when you have a lot of cash like Dropbox but don't know how to grow. You do financial engineering and yeah, they're writing over a period of time, they're writing a $79 million check to their landlord to get rid of that. Their big offices and SF, but it'll save them 220 million over the full term. So they're all in. They're all in on hybrid and point 7. Just a reminder, there's good and bad here. Dropbox is on track to generate almost a billion dollars in free cash flow this year. From that two and a half billion in revenue, they will create almost a billion dollars of cash. On the one hand, it's epic. On the one hand, with Salesforce IPO'd, even in SAS in general, when Box IPO'd and HubSpot and other folks of that generation, a lot of folks didn't believe SaaS could be profit. A lot of folks didn't believe there was this state where eventually they would get efficient. Now we all know now all the leaders, almost all the leaders are profitable today. And free cash flow positive, at least profitable on a non GAAP basis. Everyone's generating tons of cash. But on the other hand, it's not enough. It's not enough. Dropbox, as epic as the product is, it's too mature and net of cash. It's only trading at 2x ARR. So let's take this as a reminder folks, that the stuff is hard and that one, no matter what you think you see on social media, on X, on LinkedIn, yes, yes, this is the era of efficiency and profitability. But not on its own. No matter whose data you look at, growth is still valued at least twice as much as efficiency in 2021 was valued zero. It was the age of a thousand unicorns. And no one cared in the venture markets. And actually no one cared too much in the public markets, mainly because growth was epic. The top leaders in 2021 in SaaS were growing 70%. Even the top ones, even the datadogs and others. And snowflakes are growing at half or less the rate today than at the peak in 2021. The average public SaaS company today is growing less than 20% a year. It is growing half as fast as it was. And that's not enough. Stock prices and multiples are about the future and you need both. You need growth and efficiency today. You need the full package. So don't hide inefficiency. Don't hide in the fact that you're cash flow positive. If growth isn't there. That's the trap. Dropbox is in. And they're well aware of it. They've talked about it. They said they've been late to AI and expanding their suite. They're all over it. They have a strategy and it's easy to be critic. Listen, they've done literally a hundred times better than I ever did and I'm so impressed. But they're honest about it. We were late to our second product. We were late to the second act. Don't let that be you. And don't overly focus on efficiency. Without growth, that alone is not enough. Okay, we'll check in again at Dropbox at 5 billion.