Dropbox - Series B Financing

In mid-2011, as global markets corrected amid worldwide economic uncertainty, Drew Houston, co-founder and CEO of Dropbox, the fast-growing file synchronization and sharing company, found himself in a difficult, albeit enviable, situation. Houston, who had already raised over $7 million through two rounds of venture funding (one seed round and a Series A round) and developed a large and growing user base, began receiving significant investor interest. With positive cash flows and profitability achieved, additional financing was not necessarily needed. However, in order to pursue future strategic efforts, Houston knew that additional cash was essential. After all, Houston and his team had already successfully executed the freemium business model but they had a greater vision—one that included a “path” to one billion users. In order to achieve this goal, the team delineated a number of strategic initiatives: extending their popular consumer product to the enterprise segment; opening up a platform upon which to allow third-party developers to add services and applications in order to build scale; augmenting the consumer side through distribution partnerships; and finally, finding a way to transition itself from a web-based company to one that could service cross-platform mobile devices. The team also realized that they would need a robust balance sheet to compete with well-established industry leaders such as Google, Apple, Amazon, and Microsoft. They would also need to focus on strategic hiring initiatives and key acquisitions in order to carry out these goals. This case describes Dropbox’s path from inception up to its Series B round of financing. Specifically, it focuses on the team’s strategic decisions as well as questions surrounding the execution of each initiative. Additional considerations include how much financing to raise, at what valuation, which terms were most important, and with whom to partner.