By Matein Khalid: Chief Investment Officer & Partner at Asas Capital in the DIFC
Dropbox, founded by MIT students, venture financed by Sequoia Capital, is one of the world’s most valuable software startups. Even the Irish legend Bono of UB40 is an early stage investor. Its March 2018 IPO was a blowout. Dropbox broke syndicate at 21 and closed at up 50% on its first day. The shares peaked at 43 in June, but as Sophocles observed two millennia ago, after hubris comes nemesis. Dropbox shares were slammed to 19 in the NASDAQ bloodbath, where I recommended them in my software column. Now 24, I believe, this puppy can well double from my entry point at 20. Why?
Dropbox (symbol DBX) has so many of the characteristics that define a potential winner of the software Gorilla Game for me. One, it is a pure-play cloud-based content and collaboration platform that will be a global winner in the Digital Age.
Two, Dropbox has a unique file transfer/content sharing value proposition for highly networked communities that slash its new customer acquisition cost relative to their lifetime value creating as a client. This is a viral growth model, a self-licking ice cream cone style money machine since registered users are incentivized to act as recruiters for new users, a software Amway. The viral dimension of the self-service marketing model is irrefutable. Dropbox has attracted 500 million registered users and 11 million paying users worldwide. The company converts 500,000 new paying users every month. These user numbers will grow exponentially in the next decade and so can the value of the firm, as scale economies and network effects work their magic.
Three, the sheer volume of content traffic on the Dropbox platform blows my mind. With 500 million users, Dropbox happens to generate one exabyte of data. As a failed maths geek, even I know that an exabyte equates to one quintillion byte of data or multiplication by ten to the power of 18. This is one of history’s priceless, embryonic digital moats and I cannot resist its potential.
Four, Dropbox is the fastest SaaS (software subscription model) companies I know in the Valley to have reached the $1 billion revenue milestone. Its global mass market cloud platform can now be leveraged to design for the vast, lucrative enterprise software market. After all, 500 million Dropbox users are now ambassadors for the platform and millions happen to work in Fortune 500 in corporate America.
Five, I concede Microsoft and Google are obvious competitors for Dropbox in the area of content/collaboration software but its platform has intrinsic attractiveness as its users generate their own growth, leaving the firm free to R&D new product suites/solutions and business partnerships.
Six, as Godzilla would agree, size matters and Dropbox has acquired the scale where network effects and mass user experience make it a must-own asset for Big Tech. Google has $102 billion in cash, ambitions to pole vault the collaboration software league tables, and owns YouTube. This platform could be a natural takeover candidate for Google.
Seven, Dropbox boasts 25% free cash flow margins and 100% recurrent revenue stream makes its business model a beauty for growth software investors. How many businesses on earth boast this viral growth model?
Eight, the more content Dropbox’s 500 million registered accounts generate, the more the firm’s 4.8 billion sharing connections grow. This is the mother of network effects in the Age of Cloud.
Nine, this user base, content sharing connections and exabyte data traffic allows Dropbox to monetize its assets and create real-time, high-value collaborative software solutions that then drive further growth in users. This is a virtuous cycle that mimics an infinite money-making machine, a digital El Dorado.
Ten, the Dropbox story has only just begun. Dropbox will expand its collaboration software offering into business intelligence, search, chat, video, content creation tools, and productivity hubs. A business when exiting users generate 90% of new users and whose revenue model is 100% subscription is a business I cannot afford not to own.
Eleven, Dropbox has acquired a range of startups to add value to its cloud platforms. These acquisitions include TapEngage (advertising collaboration software), Audiogalaxy (music file cloud storage/streaming), Snapjoy (archive digital photos via Flickr, Instagram, Picasa etc.), Bubbli (3D tech mobile app) and CloudOn (cloud document editing mobile app). Dropbox software is platform agnostic and boasts apps for Mister Softy’s Windows, Apple Mac OS, Linux, IOS, Android and Windowsphone. Unlike the inflated, loony tune valuations of Uber Lyft and Didi, this unicorn has some real horns!