Dropbox's Shift in Focus While Planning To Go Public
Since Box hit the market with its Initial Public Offering (IPO) in January 2015, Dropbox has long been expected to jump on the bandwagon toward an IPO. While no final decisions and comments regarding going forward with the IPO process have been made, Dropbox has been making several significant moves to prepare investors for the IPO. Additionally, many financial publications are making bets on Dropbox filing an IPO as soon as this year. If that bears out by the end of this year, the event will mark the biggest tech IPO of the year since Snap Inc went public this March. While sharing some necessary financial facts from the company’s road to its IPO when needed, the premise of this article is mostly to discuss Dropbox’s shift in focus and its impacts on the company’s plans on filing an IPO. Additionally, I have touched base with Alan Pelz-Sharpe, founder and principal analyst at Deep Analysis, as the market research firm published an in-depth report on the matter. However, first, I'd like to give a glimpse into Dropbox’s efforts on the road to its IPO in order to make more sense of my interview with Pelz-Sharpe below.
In recent years, the market has been getting more conservative as proceeds from technology IPOs dropped to $6.7 billion in 2015 from $34 billion in 2014, and nosedived even further to $2.9 billion in 2016, according to Thomson Reuters. On top of this bloodbath, there has been a prevailing concern that stock market investors focus more on profitability than do private investors and are likely to assign lower valuations to them, and this concern keeps large young technology companies like Uber and Airbnb refraining from filling their IPOs. The cases like Snap and Blue Apron are also feeding this hesitation. Because of this very reason, I assume, Dropbox has been aggressively ramping up its offerings of business products and services, so it could generate more profit before it hits the market with its IPO.
In an effort to be viewed as more lucrative in the IPO investors’ eyes, the company built a world-class data processing and delivery platform that is used by a whopping 500 million users, including 200,000 businesses, storing and sharing files online through its cloud service. The vendor has expanded its Dropbox Business where companies pay a fee depending on the number of users within their organizations. In January, it also began offering Smart Sync, which allows users to see and access all of their files, whether stored in the cloud or on a local hard drive, from their desktop. Additionally, as part of the same efforts, the company started unveiling its financial results on a regular basis, which, I believe, are only the ones that cast the vendor in good light such as:
Dropbox announced to the Wall Street that it has become cash flow positive.
Dropbox CEO Drew Houston announced that the company has hit $1 billion annual revenue run rate.
Dropbox raised over $600 million in funding.
Dropbox announced that it had achieved positive EBITDA (excluding share-based compensation).
Alan Pelz-Sharpe Weighs In On Dropbox's Shift in Focus
Thanks to all of these occurrences, the company hit a $10 billion valuation. By the look of it, all the changes seem to have worked out in favor of the company, however, along the road to its IPO, Dropbox has shifted its focus from its core enterprise file-sharing business to enterprise collaboration software. In fact, Dropbox’s Chief Operating Officer Dennis Woodside himself stated that collaboration software would be the next major investment. To go more in-depth on the motivation behind this shift, I reached out to Alan Pelz-Sharpe, founder and principal analyst at Deep Analysis, who has expansive experience in this industry.
Since Dropbox seems to be pitting itself more directly against Google and Microsoft by wading into the world of collaboration software, I inquired with Pelz-Sharpe on whether he thinks the motivation behind this move is the reason that Dropbox’s core file-sharing business is rapidly approaching commoditization or simply, to entice more IPO investors. He explained: “I think the key motivation behind the shift is to appeal to investors should there be an IPO later this year. Collaboration to the non-IT person is more sexy and appealing than file sharing. But it does indeed potentially pit them against not just Google & Microsoft but also some heavy hitters like Cisco & Salesforce. There is also an army of mid-tier and smaller collaboration vendors out there that will see it as a threat.” However, he also noted that Dropbox’s core file-sharing business is part of a still rapidly growing market: “The twist in this is that the core file-sharing business (for enterprises at least) is nowhere near commoditized or exhausted. The vast majority of enterprise file data remains on premises and will for at least another decade if not longer. Margins are tighter for sure when Microsoft etc try and throw it in for free - but most buyers don’t mind paying a premium for a superior service.“ The figure retrieved from an IDC study also backs up Pelz-Sharpe’s point as the market is expected to reach almost $5.5 billion by 2020.
Letting the cross-functional department work all together to develop a marketing campaign or sales pitch has lately been on many software makers’ radar. However, given the collaboration software space has been becoming overpopulated, since the market lured the big players, I pondered whether investing in this area is even a good strategy for Dropbox to appeal to more customers and drive more investors. More importantly, may this shift in focus result in confusion about the company’s overarching strategy?
Speaking to CMS-Connected, Pelz-Sharpe put my questions to rest with his splendid answer: “The danger is that there could be confusion particularly with Dropbox’s existing and very loyal customer base. If you ask them, the standard answer is ‘I love it - it just works’. The sheer simplicity of the message could be diluted. Of course genuinely improving collaboration is a worthy goal - but where most have failed in the past is not because of poor technology but cultural challenges to working together. Where enterprise collaboration has worked well is in very specific job processes in specific industries. Generic collaboration is again a great idea but very hard to actually achieve due to the change and cultural management issues.”
Although Dropbox has long been known as a provider of consumer-facing online storage solutions, the company rolled out Dropbox for Enterprise in November 2015 to make an entrance to the public cloud-based enterprise file synchronization and sharing (EFSS) market. It was a smart move as that way, the company has added an additional revenue stream besides its B2C. However, this move may result in a slump in organic customer acquisition.
There has been an increasing pressure on private companies to go public from investors as they would like to cash out, even though the IPO market is not strong anymore considering Blue Apron’s catastrophic IPO and Snap’s share going downhill since going public. Now, we don’t really know if Dropbox is trying to fully grasp whether the market holds a particular interest for buying shares in the company at a good valuation. Nevertheless, from an IPO investor standpoint, the company is an attractive acquisition candidate due to its impressive financial results and its enterprise-level data processing and delivery platform that has around 500 million Dropbox users working in 8 million businesses globally. There is an opportunity to upsell.
Additionally, Dropbox has arrived late to the enterprise market, meaning that there is still untapped opportunities as long as the company steps up its game and goes beyond playing catch-up in the enterprise space. When it comes to the question how to do so, I couldn’t agree more with Alan Pelz-Sharpe as he suggests the vendor put more focus on “the ability to analyze true volumes of big data and provide operational, risk, cost and efficiency feedback,” instead of “creative types and channeling collaborative energy.”