by Randall Lane
These projects put him constantly on the road. He flew in a monthly loop from New York (base) to Los Angeles (music executives) to San Francisco (Founders Fund), then Stockholm and London (Spotify). It’s a routine he still follows, albeit in slower rotation since the 2013 birth of his baby girl, Winter. In my last meeting with him I asked where he filed his taxes. “That’s a damn good question. I don’t even know.”
Our get-together back at his New York town house started at 1:00 p.m. but went late. The next day, Parker was to fly to Stockholm to help the design team tweak the invitation process and shore up other features in time for the Spotify Facebook launch. “I need to go to the gym tonight, I got another hour’s worth of e-mail, and I have to pack for my two-week European journey,” he said, checking the clock on one of two computer screens on the desk. It’s 3:00 a.m. “I actually couldn’t honestly tell you whether we’ve been here for two hours or twenty minutes.”
CHAPTER 2
Drew Houston, Dropbox:
No More Hot Pockets
The entirety of Drew Houston’s business education came from fraternity life. If you’re a preternatural coder, that’s apparently now enough. As a student at MIT tired of eating microwaved Hot Pockets, Houston decided he wanted to start a company and get rich. He just needed an idea—which came to him while he was stuck on a bus with his laptop, with the data he needed parked on a different computer. Cloud-based file-sharing was soon available to the masses. When Victoria Barret caught up with Houston in late 2011, his four-year-old Dropbox was serving as the digital attic for 50 million people, storing their photos and files. Her Forbes cover story in late 2011 caused a sensation—more than a million people read the online post about the twenty-six-year-old suddenly worth $600 million on paper. And he was just getting started. Less than three years later, 300 million people use Dropbox. A huge, $325 million funding round in April 2014 gave him a war chest big enough to move into the enterprise market—and valued his company high enough ($9.5 billion) to give Houston, not yet thirty, a net worth of $1.4 billion. That will surely spike up further if the company, as anticipated, goes public in 2015. “I have to learn how to be big,” Houston told Barret. Indeed.
Here’s that rare Steve Jobs story, one that’s never been told, about the company that got away. Jobs had been tracking a young software developer named Drew Houston, who blasted his way onto Apple’s radar screen when he reverse-engineered Apple’s file system so that his startup’s logo, an unfolding box, appeared elegantly tucked inside. Not even an Apple SWAT team had been able to do that.
In December 2009 Jobs beckoned Houston (pronounced like the New York City street, not the Texas city) and his partner, Arash Ferdowsi, for a meeting at his Cupertino office. “I mean, Steve friggin’ Jobs,” remembered Houston. “How do you even prepare for that?” When Houston whipped out his laptop for a demo, Jobs, in his signature jeans and black turtleneck, coolly waved him away: “I know what you do.”
What Houston does is Dropbox, the digital storage service that has surged to 275 million users, with another joining every second. Jobs presciently saw this sapling as a strategic asset for Apple. Houston cut Jobs’ pitch short: He was determined to build a big company, he interjected, and wasn’t selling, no matter the status of the bidder (Houston considered Jobs his hero) or the prospects of a nine-digit price (he and Ferdowsi drove to the meeting in a Zipcar Prius).
Jobs smiled warmly as he told them he was going after their market. “He said we were a feature, not a product,” said Houston. Courteously, Jobs spent the next half hour waxing on over tea about his return to Apple, and why not to trust investors, as the duo—or more accurately, Houston, who plays Penn to Ferdowsi’s mute Teller—peppered him with questions.
When Jobs later followed up with a suggestion to meet at Dropbox’s San Francisco office, Houston proposed that they instead meet in Silicon Valley. “Why let the enemy get a taste?” he later shrugged cockily. Instead, Jobs went dark, resurfacing in June 2011, at his final keynote speech, where he unveiled iCloud, and specifically knocked Dropbox as a half-attempt to solve the Internet’s messiest dilemma: How do you get all your files, from all your devices, into one place?
Houston’s reaction was less cocky: “Oh, shit.” The next day he shot a missive to his staff: “We have one of the fastest-growing companies in the world,” it began. Then it featured a list of onetime meteors that fell to Earth: MySpace, Netscape, Palm, Yahoo.
Dropbox’s ascent has been just as stunning. The 50-million-user figure for 2011 was up threefold from a year earlier, and the company has solved the “freemium” riddle: 96 percent of those pay nothing, yet the company was able to hit $50 million in revenue that year—enough, Houston said, to make it profitable. With only seventy staffers, mostly engineers, Dropbox grossed nearly three times more per employee than even the darling of business models, Google.
It got better. That 96 percent of nonpaying customers were throwing their stuff into Dropbox at such a pace that thousands of people each day blew through the free two gigabytes of storage, upgrading to fifty gigs for $10 a month or 100 gigs for $20. As we went over this math with Houston, pointing out that sales would double even if he didn’t sign up another customer (indeed, in 2013, Dropbox reached approximately $200 million in revenue), he paused to garnish this lovely inevitability: “But we will sign up many, many customers.” By mid-2014, Dropbox had 300 million users.
• • •
WHEN DROPBOX BECAME A verb (“Dropbox me”), Silicon Valley took keen notice. By 2008 Houston had raised $7.2 million—enough cash, given the company’s robust economic model, to get it into the black. In August 2011, Houston decided to go for the kill. He invited seven of the Valley’s elite venture firms to visit Dropbox’s San Francisco digs over a four-day stretch, and asked them for offers by the following Tuesday.
Only one came back to him quickly. Just before midnight the eve offers were due, Dropbox’s head of business development—a former venture capitalist—suggested Houston either delay the round or even pull it. Houston’s reply: “We said Tuesday. It isn’t Tuesday.”
Sure enough, every firm came back interested the next morning. Houston eventually made a deal, which closed in September 2011, that included Index Ventures as lead, plus Sequoia, Greylock, Benchmark, Accel, Goldman Sachs, and RIT Capital Partners. Many stretched their deal definitions to get in. It’s the stuff of instant Silicon Valley legend: While the soft market, and Houston’s insistence on dealing only with platinum-plated VCs, crimped his valuation a bit, five-year-old Dropbox still raised a whopping $250 million on a $4 billion valuation. “This is the hot company,” says one prominent investor who didn’t get in. “Everyone wanted to be a part of it.” Houston’s estimated 15 percent stake was worth, on paper, $600 million.
Leaning back in an Aeron chair two weeks after the deal closed, across from a customized neon sign that reads “ITJUSTWORKS” with “just work” popping out in blue, Houston mused on what he would do with his new quarter-billion-dollar war chest. The single-room office on gritty Market Street would soon give way to an 8,500-square-foot spread with views of the Bay as the Dropbox staff swelled from 70 to 200, still an absurdly low number given the company’s size. And Houston would see whether he could realize the vow he made to Jobs about building a major company, or else fall prey to the MySpace-esque hazards Jobs predicted. “I have to learn how to be big,” he said.
• • •
IT WAS JUST BEFORE midnight on a Monday, and Houston turned his favorite late-night watering hole, the bar in San Francisco’s W Hotel, into a fraternity party—literally. The first to arrive was Adam Smith, who was a fellow Phi Delta Theta at MIT before dropping out to start an e-mail search company, Xobni. Then came Chris, Jason, and Joe (who has a Dropbox tattoo on his arm because he feels “Drew is changing the world”), more MIT brothers aiming to live a California dream they all imagined back in Cambridge as “billionaires, bottles, and babes.
” With girlfriends in tow, Smith and Houston gulped glasses of Pinot and reminisced about the summer they spent coding in boxers because the A/C was down. “Those were the days,” smiled Houston with his arm around Smith. “Just me and my code. None of this hiring and firing business.”
Houston clearly drew strength from this group—he even recreated the fraternity living experience in San Francisco, moving into the same downtown building as Smith and ten other entrepreneurs. If dropping out of college was a watershed moment for the likes of Bill Gates, Michael Dell, and Mark Zuckerberg, then staying in was equally transformative for Houston, particularly his fraternity experience.
The just-me-and-my-code default, after all, is wired into his DNA. His father is a Harvard-trained electrical engineer; his mother, a high school librarian. Growing up in suburban Boston, he began tinkering at age five with an IBM PC Junior. His mother, correctly deducing that her son was becoming a code geek, made him learn French and hang out with the jocks, and refused to let him skip a grade. During summers in New Hampshire she took away his computer, even as he griped about being bored in the woods. “She was subtle about making me normal, I guess, and I can appreciate it now.”
At fourteen, Houston signed up to beta test an online game, and began rooting out security flaws. They soon hired him as their networking programmer, in exchange for equity. That year, at a school assembly, one speaker asked the group: “Raise your hand if you know what you want to be when you grow up.” Houston was the only kid out of 250 with his hand up. “I wanted them to call on me, but it was rhetorical. I wanted to run a computer company.” He worked at startups throughout high school and college. Dropbox is his sixth.
By freshman year at MIT it seemed his mom had failed. Most of his time was spent coding. He was finally convinced by Daniel Goleman’s book Emotional Intelligence that “smarts weren’t enough” if he wanted to run a company. So he spent the ensuing summer on the roof of his frat reading business books. “No one is born a CEO, but no one tells you that,” says Houston. “The magazine stories make it sound like Zuckerberg woke up one day and wanted to redefine how the world communicates with a billion-dollar company. He didn’t.” Then he signed up to be rush and social chair, “a crash course in project management and getting people to do stuff for you.” (His roommate, Joe, recalled otherwise: “No one else wanted to do it.”)
When Adam Smith left the house in September 2006 to start Xobni in San Francisco, it gave Houston proper motivation. “If he could do it, I knew I could,” said Houston. “I wanted to live the dream and felt stuck eating Hot Pockets.” His MBA from Phi Delta Theta was complete.
The idea for Dropbox was born three months later on a bus to New York. He had planned to work during the four-hour ride from Boston but forgot his USB memory stick, leaving him with a laptop and no code to mess with. Frustrated, he immediately started building technology to synch files over the Web. Four months later he flew to San Francisco to pitch his idea to Paul Graham of incubator Y Combinator.
But Graham insisted he have a cofounder before even submitting his application. Houston had two weeks to find the right person. A friend referred him to Ferdowsi, the only son of Iranian refugees, who was studying computer science at MIT. They talked for two hours back in Boston and “got married on the second date,” as Houston describes it. Ferdowsi dropped out of school with just six months to go.
Dropbox landed $15,000 from Y Combinator, enough to rent an apartment and buy a Mac. Keen to make Dropbox work on every computer, he spent twenty hours a day trying to reverse-engineer the guts of it.
Dropbox answered a new, vexing problem for a world where people carry a phone or two, and perhaps a tablet, but have files and photos stuck on multiple PCs, laptops, and mobiles. “Devices are getting smarter—your television, your car—and that means more data spread around,” said Houston. “There needs to be a fabric that connects all these devices. That’s what we do.”
After one simple download of the Dropbox app someone could store any file instantly “in the cloud.” Once it’s there they can access that file from any other device and invite others to see it, too. An update to the file on one machine shows up on another.
Months later the duo presented Dropbox at a Y Combinator event. Immediately after, a slick-looking guy started chatting up Ferdowsi in Farsi. Pejman Nozad got his start as an investor during the dot-com era by exchanging commercial real estate for stakes in startups, notably PayPal. He operates out of a rug store (“I thought it was a joke,” says Houston), and entertained the pair with Persian tea in the back. Within days he had Houston and Ferdowsi in front of Sequoia, the firm that backed Google and Yahoo, claiming, falsely, Dropbox was fielding multiple VC offers. “Basically he was our pimp,” said Houston.
Sequoia’s senior partner, Michael Moritz, showed up at Houston and Ferdowsi’s apartment the following Saturday morning. “They were bleary-eyed,” recalled Moritz. Pizza boxes climbed the walls and blankets cluttered the corners. He told his partners to do the deal, and Dropbox landed $1.2 million. “I’ve seen a variety of companies attacking parts of his problem, like Plaxo,” said Moritz. “Big companies would go after this, I knew. I was betting they have the intellect and stamina to beat everyone else.”
Houston and Ferdowsi spent the next year pulling all-nighters. They were perfectionists. One time Houston had to track down a copy of Windows XP for Sweden because it had a unique coding quirk that was stalling Dropbox slightly. Ferdowsi had a designer spend hours tweaking the shade of Dropbox’s button inside the file system on a Mac. It was a touch darker than the Apple buttons, and it drove him “crazy” for weeks. “I am the gatekeeper here,” said Ferdowsi. “Everything has to be just so.”
Dropbox stayed lean, which enabled it to sail through the meltdown. In 2008 it had nine employees and 200,000 customers. Two and a half years later it had added five workers. Users rose tenfold.
Houston and Ferdowsi moved offices again and often just slept at work. They were getting every customer service e-mail and ignoring messages from their VCs. They toyed with advertising. “That’s what you’re supposed to do: hire a marketing guy, buy Google AdWords,” said Houston. “We sucked at it.” It was costing them $300 to hook one sign-up. Their challenge was marketing a product to solve a problem people didn’t realize they had and weren’t searching for. Ferdowsi from the start insisted Dropbox’s home page be a simple stick-figure video showing what the product does. No table of features and pricing; instead, a story about a guy who loses stuff and goes on a trip to Africa.
So rather than advertise, they turned their small but loyal customer base into salespeople, giving away 250 megabytes of free storage in exchange for a referral. One-quarter of all new customers come to Dropbox this way. Within two and a half years the snowball had rolled into a $4 billion valuation.
The opportunity in front of Drew Houston revealed itself again in the summer of 2011 during a booze-fueled lunch at VC Ron Conway’s Belvedere, California bayside villa. As Houston carefully explained what Dropbox did, he was cut off exactly as he had been by Steve Jobs so many years ago: “I know, I use it all the time.” Rather than a tech CEO, his drinking buddy was rapper Will.i.am of the Black Eyed Peas, who told Houston he used Dropbox to collaborate with producer David Guetta on the hit “I Gotta Feeling.”
Such tipping-point anecdotes now pour in. After his laptop crashed during final exams, one law student wrote in: “Without Dropbox I would have failed out of law school and be living under a bridge.” A watch design firm just outside of Venice, Italian Soul, used Dropbox to create new pieces with a designer in Mendoza, Argentina, the hulking 3-D files living painlessly in the cloud. Haitian relief workers kept up-to-date records of the deceased and shared those names with Miami and other cities. Professional sports teams inventory videos of opponents’ plays, accessible wherever the team is playing. On Thanksgiving 2010, the shadowy Ferdowsi, donning a Dropbox hoodie, was mobbed by starstruc
k teens in an arcade in Kansas City, his hometown. “That’s when I knew we’d hit it,” said Ferdowsi.
• • •
HOUSTON BELIEVES DROPBOX IS ushering in a new wave of computing, where people are untethered from their files. “Your data follows you.”
To pull this off Dropbox must manage incredible volume and stunning complexity—while making that all simply disappear to anyone using the service. As we talked with him in late 2011, 325 million files were saved daily to Dropbox (old files and newly created ones), which had to slide seamlessly onto any device. By early 2013, that number passed one billion. Houston and his geeks built tendrils into eighteen different operating systems, four browsers, and three mobile software systems. When even the smallest software update comes out, they have to make sure Dropbox still works. In June 2011 a password breach exposed up to sixty-eight accounts, underscoring the risk Houston faces as the company holding the keys to 50 million people’s digital attic. “I cannot express how deeply sorry I am,” he e-mailed the exposed users, appending his personal cell phone number. “Dropbox is my life.”
There’s also the issue of competition. Houston rattled off the list: “Apple, Google, Microsoft, Amazon in a way, then there’s IDrive, YouSendIt, Box.net, dozens of startups, even e-mail . . . people sending themselves everything.” While he believes Dropbox will torpedo the backup industry within five years, he especially fears iCloud, which has pushed itself upon the hundreds of millions of people who’ve bought iPhones, iPods, iPads, and Google’s Drive product. But Apple has proved less monolithic since the passing of Houston’s hero, Steve Jobs; Dropbox remains the leader.
Houston combatted an implosion by spending a lot of his war chest on ubiquity. He protected his flank against Google via a deal with phone maker HTC, which makes Dropbox the default cloud storage option on every one of its Android phones. Deals with other phone firms, plus PC and television makers came next. Houston hired a team to tailor Dropbox to businesses. Hundreds of outside developers are making apps for Dropbox.