Season 2, Episode 5: The Dropbox IPO

Transcript from https://podmenti.com/t/e701a6bb1f91a111

And then they raised.
Three hundred and fifty at a
Ten billion dollar.
Plus money, so they sold three percent of the company. God's crazy.
Mm-hmm.
Welcome to episode 2, Season 5 of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert, I'm David Rosenthal, and we are your hosts. We are coming at you 24 hours after the trading began for the initial public offering.
Dropbox.
David, what do you think?
It was a big day here in uh here in San Francisco yesterday. Is the window open? Are we uh are we about to see a whole bunch of these? Are we are we about to see the stampede of unicorns?
Uh I wish. I think we're
Well, I think the window's open. Uh I don't think it's gonna be a stampede, but maybe it'll be a uh slow procession.
Which would be a good thing for everybody.
Um, listeners, as you know on on the show, we generally like to uh do most of our episodes taking a good amount of time since either the acquisition or the IPO happens so we can analyze, you know, was it a good decision for an IPO? Was it a good idea to
um hit the public markets and raise that money and what did they end up doing with it or with an acquisition, what did the acquirer end up doing with the acquiree. But sometimes the current narratives and the story is is so juicy and there's such a good backstory to the company and a narrative to talk about how they got where they got, where we just got to do it.
And so we are uh um
You know, we're here in real time, uh after Dropbox IPO and did one day of very successful trading to uh to talk about Dropbox the company.
Yeah.
So if you're new to the show, uh you can check out our Slack at acquire.fm. It's easy to either join uh the Slack there or get
email updates about when we have new episodes.
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All right listeners.
Now is a great time to talk about a new partner of ours here on Acquired, Lagora.
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And just tell'em that Ben and David sent you.
Well David, uh
There's no shortage of uh
of fun history on the founding of Dropbox and and and how the whole thing came together.
You ready to dig in?
I am uh for sure ready to dig in. It's funny, you know, I was thinking leading up to this, we recorded our last episode on Softbank and Fortress and the Vision Fund.
Uh, exactly a week ago, right? Or maybe or was it Sunday? Was it less than a week ago?
A little less than a week. A little less than a week ago. And I thought, you know, Dropbox, like it's a pretty straightforward story. Um so you know, of course we do lots of research here and um, you know, it's the hallmark of the show. We love doing it. This is like, okay, this is great because we don't have a lot of time for this episode. You know, I'll be able to knock this out pretty quickly.
Well per usual, uh proved wrong. Once again, there is a lot to this story. Nothing is ever straightforward, right? Like every formation of every company and every growth and every fundraise and every it's always messy. Like there's no
There what there's some phrase there is no deal deal without a little bit of hair. Like there is no company without a an uh um
you know, tumultuous and twisty and and often thrilling backstory.
has its own unique history and uh
Yeah, I think that's what makes uh
makes this show so fun to do and uh so
With that, should we dive in?
Let's do it.
All right.
Well
Uh
really truly um do justice to the history of Dropbox.
you kinda also have to talk about the history of another organization that
Uh sort of surprisingly we haven't talked that much yet about on this show, but it's pretty important. I'm sure most most of our listeners are familiar with it, and that is Y Combinator.
the seed fund slash incubator that was started in two thousand five.
Um, and really the history of Dropbox and the history of
Y combinator or Y C as it's known, uh these days. Pretty intertwined. So
Let's start with Y C. So back in the really early days, I think a lot of people know about Paul Graham, uh, who is one of the founders of of Y Combinator. Uh, he goes by PG, he's very prolific, writes uh lots of essays, he's sort of like
Decent Lisp programmer. Decent Lisp programmer, right. Um so back in two thousand five, uh Paul was uh PG
was living in Cambridge, Massachusetts, uh not Cambridge, England, although he is English and uh by birth, and uh and actually today he and Jessica uh live in England, back in their his native country. Uh so it's two thousand five.
He starts YC with Jessica Livingston, who then was his girlfriend and now is his wife, and two other folks. Uh Trevor Blackwell.
And Robert Morris.
And uh so who are these people? Well, it turns out so Paul had been the founder of a company back in the dot com days called ViaWeb.
And Veb was sort of like um
I don't know, it was like an early Shopify. You know, it was like a Yeah, it's the the way to sell things on the internet. Yeah, exactly. It was like a commerce software solution for selling things online. Um and one of the first. And they ended up
Hugh. So I think that was
the mid nineties when when he started that.
Uh and his co-founder was uh was Robert, Robert Morris. And so they started it.
In Boston,
And um ends up getting acquired by Yahoo in nineteen ninety eight for about fifty million dollars. And and then Trevor, Trevor Blackwell, had worked for them at Via Web. And so when Yahoo acquired the company, Trevor moves out to Silicon Valley, goes to work for Yahoo. Robert well
PG bounces around a bunch. Robert uh is actually a professor at MIT, professor at computer science, um, in addition to being, you know, co founder of multiple companies. Uh he stays in Cambridge. Uh Paul eventually comes back to Cambridge. He's living in Cambridge.
And uh he starts he starts dating Jessica, and Jessica is working in marketing at an investment bank in Boston.
And uh she's not super happy with banking. I know how that goes. Uh and the culture there. And so she she starts interviewing
at VC firms about coming on and being uh or one VC firm in particular about being the director of marketing uh at the VC firm.
And uh and one night Paul and Jessica are out at dinner and um you know, they're talking about Jessica's
uh you know interview process, uh and the V C firm in typical V C firm fashion is like taking forever to get back to her, totally dragging their feet. The process is super opaque. And uh uh one thing about PG that uh anybody who um
you know, certainly has read any of his essays or knows of his reputation. He's uh he's kinda nothing if not opinionated. Uh so they're walking back from dinner and he just like goes off on VC firms uh in general and their practices and how they operate. Remember, this is two thousand five, so like the concept of quote unquote founder friendly is you know still years away.
at this point on the uh on the V C side. And he says, you know what, screw it, let's start our own VC firm. And and he's and he's been thinking about this for a while. He's you know, ever since he r he writes about this, ever since the uh via web exit years before, he'd been thinking about getting into angel investing
He never really had and he didn't know why, and and this seemed like a good catalyst. And so he's like, Well start our own VC firm and you can work for work for that. Don't go work for these guys. Uh so the next day he calls up he calls up Robert, uh, who's still a professor at MIT.
Uh and Trevor.
And I I believe Trevor I don't know if he was back in Boston at this point or if he was still out in Silicon Valley.
Um and says
Hey, you know, I wanted I had this and I have this idea. We want to do this. Um
And concurrently with this, he had just given a talk at Harvard. So Paul has his PhD in computer science from Harvard. He'd gone back to Harvard and he'd given a talk at the Harvard Computer Society, um, entitled How to Start a Startup. Uh, and he had
talk to all these undergrads about like, you know, his experience, his journey starting a company and
what it's like. And this is you know, Facebook's like a year old, I think, at this point.
And they'd probably
They'd probably just move from Boston out to out to Silicon Valley that summer.
Yeah, and if you think about sort of the hype train of startups since then, this is like I it's it's it's right before the wave crested.
Like
Facebook is is taking off, but n but the American dream sort of of the high school college student is not drop out and start a startup yet, despite the fact that there there have been some sort of well, I guess there's still scars from the dot com bust and it doesn't yet feel like
you are likely to be successful if you drop out and start a startup. Yeah. So it's still a thing that you're you're sort of convincing people to do with you as if you're a total nut job if you're doing this.
Totally. And I I I was in college right at this time, like as this was all happening, down at Princeton and New Jersey instead of up in Harvard. Maybe my life would have been different if I'd been up in Cambridge. But yeah, like you know, even you know, Google had just gone public and everybody was like
Google, it's some crazy startup. You know, the Eric Schmidt was a Princeton Alam who was CEO, so it was like known, but it was like
It wasn't something people went and did. Even people in C S departments, uh, you know, they all wanted to go work in finance. Um
And uh
So so Paul has this idea. He says, you know, I wanna get into angel investing. Jessica and I are gonna start our own V C firm.
Um, but what we're gonna do is we're gonna start by
Uh, the way we're gonna get our first deal flow is we're gonna run a summer program this summer. Uh so this is in the spring of two thousand five, when they have the idea. We're gonna run a summer program for all these undergrads. I just gave this talk at Harvard and uh and we're gonna bring them in. We're gonna have them start companies over the summer. It'll be summer projects for them. Probably most of them will go nowhere.
Um and uh
And and then they'll you know, that's how we'll get into it. Maybe some of these companies will turn into something. So Paul and Deska put in a hundred thousand dollars.
And Robert and Trevor each put in fifty thousand dollars. So they have two hundred thousand dollars and that's what they start
Y Combinator with so and and at this point it is just marketed and called the Summer Founders program. There's no no Y Combinator yet. And no Y Combinator yet. They eventually I actually don't know when they do, but it was fairly early on. They changed the name to Y Combinator, which is a uh a math
term for a function that generates other functions.
Um
Uh I guess it was I don't know if it was during the program or that they kinda realized that like
Oh no, this is gonna be the long term thing. It's not like we're not gonna bootstrap an angel firm by
Funding.
You know, kids in in college, like this is the thing. We're gonna help start these companies.
So uh so they do the first batch that summer and then they decide it works so well. The companies are are, you know, so impressive coming out of it more than they thought that they're gonna keep it going year round.
And they're gonna alternate do winter programs in California, uh out in Mountain View, uh where Trevor was.
I think the first mountain view office was actually in like
Trevor's office, uh on Moundview. So he had separately, uh I forgot to mention this, he had started after Veb a company called um
called uh Anybots, which is the the company that makes those telepresence video conferencing robots, you know, like the screen on the wheels that's in like Silicon Valley episodes and stuff. Oh yeah.
Yeah. Um so I think
I I I think the initial Y C office was in their office out in Mountain View. So they come out that's
Early winter two thousand six. They do the winter batch in Mountain View.
uh and then they come back to they come back to Boston the next summer of two thousand six uh for their third batch.
Um and a company, uh a fateful company applies to them from MIT.
in that in that third batch in the summer of oh six.
And it was an engineer from MIT who left school early to come start this company. But it was not
Drew housed it. We're getting to that in a minute.
It was Adam one year later. One year later, yes. It was Adam Smith. And he had an idea
for a company that we've we've actually talked about in the past on this show.

bring social elements and um personal information to email inboxes starting with Outlook and he started a company called Zobni, which is inbox backwards
And applies to Y C with it.
ends up getting in. Uh, and then immediately after the program, he moves out to San Francisco, raises a bunch of money, and they're kinda like the new hot startup.
And uh so what does all this have to do with Dropbox? So it turns out
that Adam was the in the same fraternity and actually the little brother of
of Drew Halston at MIT. And so Drew is back at MIT. He sees all this and he's like, Man, my little brother in my fraternity
Just raised five million bucks out in California. I gotta get in on this. I need to start a company. He's super inspired. You know, he sees Adam's kind of path through Y C. Uh says he has to do it too.
Well, it turns out that Drew uh had a company
on the side at MIT called Acolade, which was doing SAT tutoring and so he applies to Y Combinator, I believe it was that winter, with this SAT
prep company. And uh
You know.
Oh, I didn't realize he he he had applied with the he had applied once before Dropbox. He had applied before Dropbox with Acolade. Which actually is a pretty good name for a company. Uh just turns out it was not a good business. So he applies and uh and Paul and Desco like Oh this
Guy seems like you know, this kid seems pretty talented, but like it's an SAT prep company. We're not gonna we're not gonna fund this. So they reject him.
But but Drew is is undaunted. He knows he wants to start a startup. He wants to pursue the you know, the dream that he saw his little fraternity brother go through and and probably Mark Zuckerberg too, you know, who now moved out to moved out to um
Uh Palo Alto and uh and started Facebook out and
you know, move Facebook from Boston out to California. Um
He continues with Acolade, he's still working on it.
And then this is where now the canonical founding story of Dropbox comes into play.
So one day, while he's at MIT working on accolade on the side, Drew decides he's gonna go take a weekend trip down to New York.
And he gets on the Chinatown bus. Uh, the Chinatown bus. I don't think it exists anymore, but it was super cool. I used to take this, you know, living in the east coast back in New York, it was this bus, this like super sketchy bus that you would pay for in Chinatown in New York, and then it'd go like to Philadelphia or to Boston.
Uh Drew gets on it in in Boston. He's intending to do a bunch of work on
on accolade on the bus. He opens up his laptop and he realizes
He's forgotten his thumb drive. So all of his files that he has that he was gonna work on for Acolade
Aren't
Yeah.
Uh literally not on the bus.
Mm-hmm.
And uh and so so as legend has it.
He's he's so frustrated, he says, You know what, I'm gonna fix this
I'm an engineer at MIT. He starts coding
Uh solution for file sync.
Yeah.
And that was how Dropbox was was born.
You know, it's tough thinking back to that time where it's possible for you to not have all your files with you at all time and then without LTE networks not even be able to reach them. Like it's it's just a weird
like mental leap that you have to go back. And that was only eleven years ago, you know. Yeah. Now everything is always either
f actually downloaded in with you or
Easily available to you and in all likelihood sort of
you you that's abstracted away from you in the user experience so that it feels like it's with you, but it actually ends up getting downloaded from the cloud on demand and most of these things.
We've come a long way in eleven years. We we certainly have. Now
He was not the only person that saw this, uh saw this vision at the time. I mean famously
Another team of young
kids in college out in California had the same idea.
Uh actually they're from Seattle, uh from uh I think from Mercer Island High School, uh USC.
And uh
Basically had the same thing happen and they started
Which which also as was was uh going after the same opportunity as them at at the time. Yep. Also started as a consumer company before they then obviously pitted pivoted into into enterprise. Uh but Drew Drew knows nothing of this.
He's uh he's just he's looking for a great business opportunity, wants to be a founder, yeah, he's got this company, he sees this and the and he realizes as he's coding this up and it starts to work over the next couple of days, he's like
This is it. I'm gonna get into Y C
With this company. Uh so he incorporates it, he's super pumped. He's got like the best name he can imagine for it. Not Dropbox.
But even flow because he's a huge Pearl Jam fan. Uh it also comes up uh anything you watch interviews you read with Drew or or uh or or watch of him giving, he's a huge music fan, he's in a band, loves Pear Jam, so he calls the product even flow.
And actually the company was still named Evenflow Inc. Even Flow Inc. Yeah. So read the S one.
I in the S one and when um the initial investment by Y C the check is made out to even flow inc.
Yep, yep. So uh
You know.
Any better. Um
But uh but pretty quickly I I actually I d I wasn't able to find the story of how or why
They changed the product name from even flow to Dropbox because it happens
by the time he applies to Y C, which is in like within like a month or two of this time frame. Um
Maybe it was trademark issues with the name or something like that. Um
But so he uh submits his
He applies to to the summer
Now it's now summer two thousand seven uh application cycle for Y Combinator.
Um he submits his application. It's it's out there, online, publicly available. We'll link to it uh in the show notes.
And actually it so it used to be a little note on this, so it was a text file that lived in Drew's Dropbox and was public.
And you it was I always thought it was the coolest thing that like you could go to Dropbox and look at the application for Dropbox that the dot TXT. And first of all, it's cool'cause the Y Caplication really hasn't changed much.
Um, but unfortunately it's it's no longer available there. Drew must have uh moved some files around in his dropbox getting ready for the IPO or something, but it is available in a in a business insider article that we will link to. And it remains, you know, I I read this um
I think I end up reading it probably every other year or so, but it
Is
absolutely the canonical example of how to clearly articulate the problem you're going after, how you know that you are solving, why you feel your solution is the best. Like if if you ever want to benchmark one of your ideas and particularly the clarity you have around the opportunity in front of you against one of the best,
You you gotta check out the Dropbox Y C application. Very, very worth reading. It's like the um initial start up phase or or seed funding, you know, version of an S one. Uh. And it's uh it's really, really worth reading. It's it's um
It's it's great.
But there's just let me take a quick aside. So so uh
At at this point, so early on in the Y C process, uh Drew posts
the Dropbox to Hacker News and says, Hey, here's my here's my Y C No, this com this comes a little bit later.
Alright, I'll hold.
Okay. It's it's coming up, but but we'll it'll be fun.
So he so he applies with the text file.
Uh and and he I think he mentions in the text file that he's gonna do a video.
Um so Paul emails him em em emails him back and he's like
Hey, you know, like this looks pretty good, but um
It's just you. You you kinda need a co-founder. Um
But there's a problem, which is like the deadline, they're gonna make their decisions and and the the batch is gonna start in like two weeks at this point.
So so Drew is is undeterred. Uh he starts scrambling. He's like, All right, I need a co founder. I need somebody. You know, I'm an MIT. I should be able to find somebody. He he emails I don't know if he email or calls or talks to uh
Kyle Vogue.
Uh who
then ends up would end up being in the same batches as them as Dropbox that summer with just in TV.
Which of course should become Twitch.
is like mind blowing thinking about the fact that they're in the same batch.
Totally mind blowing. Trying to help each other find co-founders. So Kyle was also at MIT.
And and then Kyle would then after, long after um
uh Justin TV and Twitch, he would go on to found Cruise, which uh Cruise Automation, which was self-driving car technology that got acquired by for by GM for a billion dollars a couple of years ago.
Uh so it's really quite the mafia here.
Um
So Drew and Kyle were in the MIT entrepreneurs club together. Drew's just talking to anybody, trying to find like good leads on a co founder.
And Kyle, uh Kyle says, Hey, you know, uh I'm busy, I got my own thing I'm working on, obviously. Um, but I know this guy who lives on my floor in my dorm, who's a pretty good coder. Um, and his name's a rash, uh, and uh why don't you guys get together? So she's like, Sure, done.
They get together the next day in the student center. Apparently they jam for a couple hours, as legend has it. By the end of this couple hour meeting.
They have decided
This is, by the way, not how your is the not the best way to find a co founder. They've decided to work together. They've decided to drop out of school. They've decided that uh that they're gonna go for it. David, so w when you're chatting with entrepreneurs and you say, like, Oh, how did you the how do you guys know each other? You look for like
We work together for five years at this previous company, or we've been best friends since high school. Or like we know each other we finish each other's sentences and you I I just like laughing
My friend told me about this guy and I met him for two hours.
And like, you know, Arrash is the CTO today, like at IPO. Amazing. Amazing. I mean basically like, you know
When you ask the question about how do you you know
How do you know each other when you're talking to co founders?
The one answer you don't want is we don't. And that was their answer. Uh but
Hey you know.
Y C takes a chance on them.
Uh so they accept their application.
They start. Um and uh
Uh sometime I don't know if it was after they started NYC or um
uh or before they decide that they're gonna make a video um kind of an explainer video of how Dropbox works. And at this point, Drew
Uh mostly Drew maybe Rash have worked on it a little bit, um, have gotten a kind of an MVP prototype up and running. Uh and we'll link to this video in the show notes too. Uh we'll try to link to it. But um
It's pretty amazing when you watch this.
Well, it it's funny for two reasons, but but one, it's basically Dropbox today. Like within weeks
everything that Dropbox is today and still like the core of the product is there.
uh all the little um images on the file the check marks and then the sinking, you know, the the the circle circular arrows when it's sinking and all that.
Uh all the low level operating system hooks.
Uh it's all done. I mean basically very little has changed.
Um
But uh, David, it sounds like a feature to me.
Yeah, you know, how could this be big? Um
So they they make this video.
And then the
really also this is the other core of the product on the distribution and marketing business side.
Um
They decide that they're gonna throw in some like
allusions to to you know popular culture memes uh in the video. So like a bunch of the files that they're sinking are like, you know, they've got some Tom Cruise images, they've got Steve Bomber with his tongue out, like all this stuff. Um it's funny watching it now, like I don't even remember what half these things are referring to. Um
And uh
And so then they they they make the video and then they post the video on Hacker News
on Reddit, which Reddit had been in the first batch of Y Combinator. Um I think the first batch. Um
And uh
And Dig, which was Dig was huge at the time.
Uh
The video goes viral.
And then that's how they get their wait list for um
For their first users. And then it's really.
clear, clear video. Like you look at this and and like
There's definitely product I suppose it's like product usage fit, as uh as Ben Thompson said on the most recent episode of uh of um Exponent. But it really is like
You look at it and you go.
Oh yeah, no, I understand exactly how that works, and I definitely want it.
Yep.
I mean it's really you know, even watching it now and um you know
You also go watch it.
Watch it too. Um
It is Dropbox today. And like it was it was magical at the time. Still is in a lot of ways.
And like the feature that came out three weeks after they founded the company, which is you put stuff in a folder and it sinks, is like
the feature that David and I use to produce this show.
Like we we upload our audio to Dropbox, it syncs, and then we edit it.
It's uh you know.
It
They just nailed it so hard out of the gate.
Totally. I mean like we
You know, are we more into this later in the show, but um
Yeah, we hired we we had a great, great designer uh for us at Wave who did our uh did our logo, did our website, like, you know, did an amazing job.
This guy's awesome, you've worked at Facebook, like, you know.
Great.
It all just runs on Dropbox, you know? Like it just has a Dropbox account and that's how we collaborated on all this stuff.
Um
And uh so then Ben, what you're referring to, when they post this on Hacker News.
Uh this is this is like
Somebody replies to the comment.
From Brandon M on April fifth, two thousand seven.
I have a few qualms with this app.
And then the first one is about being a Linux user. So already, you know, let's let's narrow the market. For a Linux user
you can already build such a system yourself quite trivially by getting an FTP account, mounting it locally with
Uh curl FTPFS and then using SVN or CVS on the mounted file system. For Windows or Mac, this FTP account could be accessed.
through built in software. And David, you know, I don't know why we don't do this for for acquired to
To produce I mean it just it's so obvious. That sounds so much more fun than just
Putting stuff in a folder and having it work.
Two, it doesn't actually replace a USB drive.
And then there's more about that. It doesn't actually solve the connectivity issue three.
it does not seem very viral or income generating.
So you know, David, I uh I think you I think you should rethink if this is gonna be big or not.
Yeah.
It and this this surfaced uh this week'cause Sam Altman, who's now the CEO of Y Combinator, tweeted, don't uh
Um
I think don't let the haters get you down and link to it. And it is just so uh
It's it's always always good to see something like this and remember it and when you're going through the tougher times as a founder and you need to put your head down and barrel through it.
Yeah. On the other hand though.
It's a great parable, but if you read the rest of the thread, uh I forget the user who who had replied to to the link uh with these arguments. So Drew gets in and responds to him right away.
And he has really great arguments in response. And then the and then the the guy who was criticizing was like, Hey, actually you have really good arguments. Like great. Best of luck to you. Like so it actually is a really nice ending.
It's true. Hacker News was such a nice place. I know. And then the internet all, you know.
Went to hell. Uh, this was pre Cambridge Analytica and Russian trolls and all that.
It is actually kind of interesting to look at um
look at these objections, uh
With
the lens on the company today. Like the concept, it doesn't seem very income generating.
It's
It's kind of not.
Like if if if you think about the non business users, and we'll of course get to this later in the show, but
It's like oh this is a really nice thing.
People w will consumers pay for this?
So there you know, you're there's another parable in there that's your earliest objections are often the demons that stay with you your entire time as a company, even through tremendous success.
Yep.
Totally.
Um
Well and and at the time too, you know, we mentioned this earlier, but there are like a thousand other companies out there trying to do the same thing. There's Mosey, there's Carbonite, there's I don't know, it was Sugarsync, um, there's what uh Hightail company I forget the company that maybe it was Sugarsink that became Hightail that
Anyway, there there's box, of course, um, which was box.net at the time. Um
But then also there's the whole there's the like
the looming specter of Google. Sure sure feels like this is something the platforms should provide. I don't know. Yeah, right. You would think so.
And for years, I mean I remember
even back like maybe even when I was in high school, like
But uh definitely I either in high school or in c or in college, but definitely in college. There were rumors. Like everybody was talking about that Jugle is working on the G drive and it's like gonna be, you know
The most amazing thing you've ever seen. Oh, we were we were in in PM meetings deciding on on feature set and the way that we were going to communicate with the cloud for office for iPad. And that that kept coming up. And it's like, Well, we can't build for something. We don't know if it's gonna exist or not. We can't decide if it's you know it's it's competitive with SkyDrive, which then became OneDrive. Um it you know

We can talk about this later. But it was not this at all, and then it was exactly this, and then it was exactly this and not this at all. And then like even a month ago they they changed it again into two different things that are
Much less consumable and digestible and understandable, but
It I it all speaks to like
Dropbox just nailed the crap out of the user experience and and it
The small competitors and the large competitors just couldn't touch it.
Well, even to this day, I mean at Wave we run we use Google Apps and so we store all of our you know, all of our documents and files on
G drive.
Google made a change to the sync client, a major change to the sync client, like two months ago, and it completely nerfed all of our stuff. Like, you know, and it's like
Dropbox since day one, it just works, you know?
Yeah.
Yeah. It and it's uh it's funny looking at how much didn't change
I was uh I was l getting ready for the show and looking back at all the things in my Dropbox to try and like
it's almost actually nostalgic to look back at at all the stuff in there because
E like every project and company I've worked on for the last decade has in some way had its its hooks into Dropbox.
And uh for better or for worse, like it's all still there.
And
Um, you know, there there there's a little bit of like I've got some complaints about the fact that like do I need
you know, fifty root level or I guess first level shared folders with people that I don't collaborate with anymore, or you know, the whole model
is very predicated on like it's a polder folder that you put stuff in that sinks and every time they try and stray away from that they get in the danger of doing what Google did and being confusing. Um but it does it does leave you with this nice history of everything you've ever been a part of.
Oh. It totally does. Um
And uh it's funny, I mean I was trying to figure out
Uh when I actually
Joy signed up for Dropbox. I I couldn't. There's no way to figure out as best as I can tell when your account was created. But what I did find was
An email from
When the
app store when the iOS app store launched and it used to be'cause it was all done through iTunes, you would get receipts when you would download email receipts when you would download apps, even though they were free. Like'cause it was like structured as you as if you paid for'em. The very first set of apps I download, like Dropbox is on there, you know? Like uh it's just so core. It's so important for what you do.
Yeah, it's funny now you've got me like wanting to search back what's the first email I s I had that uh
That had Dropbox in it.
Uh nine seven oh eight. I've been enjoy invited to the dropbox beta by Paul.
Uh September seventh, two thousand.

What does Dropbox share the love? Thank you.
Get dropbox dot com.
That's awesome.
Yeah, for some reason I couldn't find my I think I signed up directly, uh, but I didn't get any like email confirmation, so I don't know when it was.
Anyway.
So
Suffice to say, there there was a big market for what they were doing. So they get accepted into Y C
Everybody's excited.
Um they do Y C that summer of O seven and then later that fall
uh they move out to San Francisco, um which kinda is what Drew had always wanted to do.
Uh he wanted to follow.
Zobde and Adam out there. So they move out to San Francisco.
And uh they just finished Y C and they need to raise uh funding. Need to raise a seed round. So
They end up meeting Sequoia Capital.
And this is where where things get interesting. So um there's a famous uh supposedly a famous meeting where uh where Mike Moritz, the legendary investor and at the time you know co head of Sequoia.
uh comes to their brand new office in San Francisco on a Saturday afternoon and meets with them and uh and then Sequoia decides to invest and then they sign a term sheet and get it done the uh the following Monday. Uh all of which may be true. But what doesn't get talked about a bunch, and there's actually a big recode article about that this this week, um
on the eve of the IPO.
Uh it was actually another
partner at Sequoia, Samir Gandhi.
uh who was an MIT alum and was part of the MIT network that made the inroads with uh with with Joe and Arash. Um
got excited about them and then ended up leading the investment for Sequoia.
So that was in the fall of two thousand seven. Uh Samir and Sequoia do a one point two million dollar seed round in the company.
as convertible debt, as we alluded to earlier.
Uh and then the following year, um, the company's doing really well after they launch. Um, you know, traction is great.
They do an inside round, they do a six million dollar series A in October two thousand eight.
Um
But in the interim, though, Samir actually leaves the comp leaves Sequoia.
uh in the summer of two thousand eight and he moves over to Excel where he's still a partner, um to this day. So uh so that was before the series A got done. And then that's how Excel ends up coming in and doing a little bit of the series A, uh, because they really the founders have the relationship with Samir. Um
And so while Sequoia owns uh
Yeah.
twenty three percent ish of the company uh before I PO
Um Excel ends up owning about five percent of the company as well.
Which is by far the second largest V C shareholder in the company, which we'll get into later.
Which is amazing. I mean you
We'll definitely get into it later, but like
People put
north of five hundred million dollars into this company and owned less of a per less less of the company than than Excel does having never let around.
Yeah, totally. It's uh
Well, it's a testament to um
Unlike, you know, what people thought at the time, the uh the quality of the business model behind it, um, or the scalability of it.
Uh so the board seat, the Sequoia board seat ends up transitioning to Brian Schreyer, who joined Sequoia in April two thousand eight uh from Google, and then Brian's been on the board.
Um ever since. Uh and he is actually the only venture investor on the board of Dropbox, uh, which again is crazy.
Wow.
Wow, Condolina Rice is not a venture capitalist. Not last time I checked.
But there's some fun other uh side history here. So really when Sequoia does this investment in in Dropbox, that really cements the Sequoia Y Combinator relationship. Sequoia had invested in a few other Y C companies in the past.
Most notably Looped, which was Sam Altman's company that was part of the first batch. Um
where Greg McAdoo had led the investment for Sequoia was on the board there.
So much so that the next year in two thousand nine, Sequoia actually ends up investing in Y Combinator itself. And Craig McAdoo leads that investment. And then fun side fact, that of course the most important thing of this whole episode
uh pretty much directly leads to wave to my to my venture firm and what we're what I'm doing now with my partners, Riley and Sarah. Uh because Greg
By investing in Y C in two thousand nine, he ends up meeting the founders of Airbnb who are in that batch, the summer of two thousand nine, ends up investing in in Airbnb. Uh my partner Riley joined the company shortly thereafter.
Uh and then Greg really helped us uh a couple years later get Wave off the ground. And and then our partner, Sarah, uh was at Dropbox at the time. So
All of this is all coming back home here.
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Anyway, back on track. This is really like
The start of
the go go years for Dropbox. So
We talked a little bit earlier about
You know, it's got this product that just works when nothing else on the market does.
It also has this amazing viral distribution and and freemium mechanics that they put in place where
Both you use Dropbox to collaborate, like we're doing on this podcast, and so it naturally virally spreads the product, but they also put in place this kind of gamified incentive to do so so that everybody that you share Dropbox with who signs up for the product, you get more free storage. This worked so hard on me.
Like I I was a referral maniac to get more space.
And you I think it was two hundred and fifty meg per person who signed up for an account that you invited.
Which back in the day was a lot of storage.
Yeah,'cause I I think you got two gig for free. I have no idea what it is now, but I you two gig for free, and I think I was up north of like eleven gigs from inviting friends. And at some point there was some educational multiplier where for everyone you invited you got double or something because they they knew that their growth was in students.
Yeah, it was it was crazy. And it works so well.
Most of it still to this day, the vast majority of Dropbox users don't pay them anything, or just free users, but the small percentage who do, just the the number of users are so big, they make so much money.
All throughout this Dropbox is just
raking in cash. They're massively cash flow positive, even as a young startup.
To give you guys a sense, today we'll get to these numbers, but today half a billion uh people have have accounts. Um
and two point two percent of them are paying. So it really is that that, you know, tried and true freemium model.
Yep, and even with that.
Very small percentage.
Last year Dropbox made three hundred million in free cash flow.
Uh that's you know cash flow profits, not not revenue, which is incredible.
So I'll do this.
The company is super lean. It's like uh it's like an engineer's like, you know, dream. Uh there are only about twenty companies, uh twenty twenty employees at the company through like twenty eleven, twenty twelve, the first few years. They're all engineers. There's nobody, you know, no business folks there.
Uh it's just this this viral and referral dynamic that's like That's also the nice thing about having uh the operating system be your user interface. I mean shy of like a very
basic web interface. They basically don't have to do any
product design it other than really like system design and then engineering that system.
Yep. And this leads to one of if not uh if not the uh probably biggest error of Steve Jobs' career, uh, of which there weren't that many of them.
where he sees this and you know, like many people saw this and thought, Well, okay, this is like a feature. This isn't a product, let alone a company.
The company had gotten so big though, the product had gotten so big
In two thousand eleven.
Steve Jobs invites Drew to come down to Cupertino to visit him.
And it was really clear that Apple was very interested in in acquiring the company.
Uh, and this is sort of a famous meeting that happens where, you know, they talk for a little bit.
And it
Steve, un unclear how much he implied this or not, it kinda comes out later sort of in the rough
order of magnitude of about a billion dollars that Apple was kind of interested in paying for
um to acquire Dropbox at the time.
Drew says no, essentially, or implies no. And Steve kinda goes off and is like, you know
You're a feature. You're not a product. You're not a company. Like we're gonna crush you. We're gonna do you know, just like the mythical G drive, you know, we're launching iCloud. Global me will destroy you. Oh man. Incredible.
Uh obviously he was wrong. Um but apparently the rest of the meeting went really well. Drew talks about it and says, you know
That part was over in about twenty minutes and then
the rest of the time, uh, to just talk to Steve about like being a founder and
then all the lessons learned along the way and supposedly he was really magnanimous. So
You know, even when making mistakes, he's still Steve Jobs. Um
But so after that, uh
The company basically s Dropbox says well.
Man, we just turned down a billion dollar plus acquisition offer from Apple. Maybe we should raise some more money. Uh, what could we raise money at?
And they so they go out, they basically get every venture firm out there to participate in this round. Index Ventures leads their series B, but Benchmark is participating, Graylock's participating, IVP, Goldman Sachs, like this is party round of party rounds.
From people who usually don't do party rounds.
Right, two hundred fifty million dollars, you're really rounding up the troops to pile it up to that number. Yeah. So I mean most companies would be ecstatic.
If they could raise a series B at a valuation of two hundred and fifty million dollars.
Dropbox raises cash of two hundred and fifty million dollars at a four billion dollar valuation.
So they only sell like six percent of the company in this series B.
Yeah, and to give to give folks a sense, I mean, typically at each one of these rounds, you you sell twenty to thirty percent of your company to the next venture investor. And so their seed round that was a one point two on a post money of five, twenty four percent.
That series A also from Sequoia where they raise six million.
twenty four percent. And then you get to this round, which
It it it was from two thousand eight to twenty eleven. So that you know, there was a a
a decent gap in there where they didn't raise money.
Only six percent.
I mean if you think about the dilution that the founders are are typically taking, you know, twenty to thirty percent of each time just didn't happen.
Yeah.
Um
It's really uh and the early venture firms.
I mean, uh obviously they were very lucky to be blessed with a a business model that just printed cash. Um but this is like a clinic in, you know, if you're a founder or an early investor, you're aligned with this. Like
You know if you can
uh raise fewer rounds and take less dilution in each of them.
Fast forward today when the today when the company went public, you know, Drew still owns twenty five percent of the company. That's incredible.
Yeah.
Yeah, I mean it helps it helps that the next round that they raise was only a four percent dilution and they raised even more money. Yeah. So the next round a couple years later, they raised three hundred and fifty million dollars at a ten billion dollar valuation. This is in twenty fourteen, led by BlackRock, uh, but Morgan Stanley comes in, T Row Price, Salesforce comes into it. Um

Crazy. Uh
But then worth noting just a few number of rounds. I mean they they IPO'd after their series C.
Yeah.
Yeah.
Absolutely. I mean, we talked about this in the Stitch Fix episode. Uh Stitch Fix obviously didn't raise the valuations that um uh that Dropbox did, but
If you can raise fewer rounds and take less dilution, it works out better for everybody.
And it's funny, like thinking if let's rewind ten, fifteen years, like
Of cour uh it's not out of the ordinary to IPO after a series C, but in the world that we're at where we've gotten so far that you have a softbank vision fund that has a a a hundred billion dollars in it to deploy, like
Companies tend not to IPO after their series C.
Yeah.
Yeah.
Well.
It's uh it's a different world these days.
But then
There is this kind of we've talked about uh we talked about a little bit on the South Bank episode. There's this sort of law of gravity with fundraising for startups uh that
If you raise the money.
You're gonna spend the money. Yeah, the lean mean years of Dropbox.
Or over.
They come to an end as this is happening. And that turns out to be not so great for Dropbox.
Um, so they have all of this money, these grand ambitions. They said no to Steve Jobs.
Everybody thinks Dropbox is gonna be the next like Google, uh or Facebook or what have you. Um and in fact a lot of people were coming from Facebook to Dropbox at this time.
So let's tee this up, you know, um amazing product.
Check.
Perfect market fit.
Or perfect uh usage fit.
Check.
Um viral distribution. Viral distribution check.
Tons of cash in the bank.
Check.
Cohesive
Brilliant business strategy.
Question mark. Well, check, but then
Uncheck, unfortunately. Uh I know, I know. We should go into photo sharing.
And we should be highly acquisitive and go into email clients. And we're gonna the email clients. We're gonna go into the enterprise, but not really. But now we're gonna go into the enterprise. Uh actually whoops, we're gonna go into the enterprise this way and and specifically this type of enterprise. Also, we think that we're gonna monetize our our consumers better. Uh oh, uh back to the enterprise.
Yep.
Well and my favorite of all so what we're referring to is basically
The year's like
kind of twenty thirteen ish to twenty sixteen are kind of like the lost years for Dropbox. They hire a ton of people
They do a ton of stuff. They build all this stuff. They go into all these markets. Like none of it makes any sense. None of it works.
Um the the craziest thing, and uh it's easy to throw stones in retrospect. Um course during during this period they become free cash flow positive. They're they're printing cash while they're lost in the woods. So I think you know, it's hard to knock'em too hard.
But they deserve some nox the craziest most cockamimi thing ever, which is now completely buried in history. But of course that's why we exist and acquired to unearth these things. They of course everybody has to be if you're gonna be a Google, a Facebook, whatever, you have to be a platform. Everybody's gotta be a platform. So they build and launch
The Dropbox Platform. They launched this in twenty thirteen. And they do a big developers conference. They call it DBX Dropbox for developers.
The vision of the Dropbox platform. Ben, you're you're you you know, you're a computer scientist. You studied C S in undergrad. I mean I did too didn't major in it, but I know a little bit about it.
So so tell me tell me how this sounds to you.
They wanna you know, Dropbox is files, right? But not just files. Dropbox is going to be the
The storage
Uh
infrastructure and and solution for all of computing across distributed multi mobile devices. So you know you're writing apps and and you need you need storage. You need you know you need your code needs to live somewhere. You need assets that you need to execute. You need databases.
Don't do that locally on your device or in the cloud. Do it in Dropbox.
Does this make sense to you, Ben? Well it's it's AWS plus all the actual storage and compute on your devices.
In Dropbox, right? Yeah.
Well, I mean, as long as they're not building a platform that allows me to authenticate and give you all of my data and all the data of everybody I've ever met, I don't think there should be that big of an issue.
Yeah, yeah.
Or just let alone like
Okay, I could uh if I'm an app developer.
I could use all the native tools uh that the Android and iOS development systems provide me and all of the
storage uh functions that they give me. Or I could just use this third party like Yeah, I mean the biggest issue was that at Dropbox at this point.
you know, as an organization was trained that they can beat the platform provider because their killer use case of it's a folder on your your computer that sinks and it sings everywhere, just nailed it so hard that, you know, you get

And you decide that uh, you know, even though these platform providers have all these things for developers and and um
you know, w we we can do better and we and we can build the the tool chain they want. And it's
it's much, much harder competing with the platform itself when you're down at the developer level. Um and and really in in most cases, like
if you look at anybody that's trying to be a better voice assistant, you lose unless you're the home butt, not IOS. You know, there there's um competing with the the platform is always difficult and Dropbox found one little tiny wedge into where you can actually meanfully compete.
Well, and I think it's to pull forward a a tech theme here, um, as we so often do on this show. I I think it's that like they just kinda lost sight of
what it was that was so brilliant about Dropbox in the first place, which was which was, you know, two things.
One, they solved a real problem that a lot of people had.
And two, they made it just work. You know, and all this stuff that they were doing
uh during twenty thirteen to twenty sixteen.
A, it's unclear if they were even solving, uh tanking real problems. Um, but B, it didn't just work. Like
I could use the native, you know, stuff within within iOS and and Android
Or I could use this clue deer Dropbox thing. Like an old what
It was always frustrating to me as a user too because like you had that then Dropbox Carousel app that came out that was asking for photos access in my system and the Dropbox app wanted to get it hooks into it too, and it you just couldn't you couldn't figure out like how much access you were supposed to give it and what it was supposed to replace for you and it was
It was duplicative and confusing. It just wasn't
Wasn't it was the opposite of all the magic that the original Dropbox product provided.
It was the opposite of the the initial Y C application, really. Um
So
That was kinda till twenty sixteen. Uh and then uh
Drew talks about this. Uh supposedly he he read this great book that I I've never read, but was uh'cause I think it's out of print. I've been trying to find it, uh, but was talked about a lot in in business school. Uh great book by Andy Grove, the former CEO of Intel called Only the Paranoids Survive.
And in this book Andy talks about
when Intel got out of the memory business and into the CPU business and basically completely shifted the company.
It's like the most bold business decision of all time.
Totally, totally.
Uh, that would be a great episode someday. We'll have to find a way to do an acquired episode on that.
Yeah.
But
The point of
the that Andy makes in this book is that when companies you know, they're sort of like
Ben Harowitz par paraphrases it as like wartime and peacetime, you know, that like in peace time, which Dropbox was in during all of this, like
They could go do lots of things and try lots of things and invest a lot of money and stuff.
But now like the company's kind of going sideways. They're stuck at this massive valuation. People are starting to question what's going on. They're bleeding talent. Um
Now it's war time and in wartime
You have to you can't do lots of things. You gotta do one thing and it's gotta be the right thing and you gotta do it better than anyone.
Um
So overnight, and I think a lot of this was helped by they Dropbox hired a guy named Dennis Woodside from Google. And Dennis is the COO at Dropbox now. Um he had previously he'd been at Google a long time. He ran Motorola within Google. He was like
kind of a turnaround guy, uh taking like stuff that was struggling or stuff that Google brought in, like Motorola for other reasons.
Turning it around, making it work.
Um
They cut all this stuff. They kill Mailbox, they kill carousel, they kill the developer platform.
They way scale back the
Um
The
uh sort of enterprise aspect of drop back dropbacks for business and they refocus on the core customer base.
Um so this was two thousand sixteen.
Um
And once they do that, things really turn around. Uh
They get
Um they become
They've always been cash flow positive, but uh
But during those years they actually dip down into cash flow negative, they become
back to hugely cash flow positive. Um as we as we mentioned last year in twenty seventeen, they go they generate over three hundred million dollars of free cash flow.
A big part of that.
And part of the doubling down.
is over the last couple of years they've transitioned off of AWS. So for most of Dropbox's life, it was all running on S3 in AWS.
They decide to build their own
data centers and bring it all in house.
And their cost of goods sold goes way down. So even though revenue basically doubles over the last couple of years, the cost of goods sold actually goes down from where it was at the lower revenue base.
Um
And this massively improves the company.
Yeah, and that was that was in sort of the first half of twenty sixteen is when Dropbox really actually waned off of AWS in that year before, you know, they were they're actually duplicating their data. So their costs were way high while they were doing that that transition and making sure that everything was uh um working as expected.
Um
And it's interesting to look at this because you start to see the company shift to this mindset of of lean operations, not only in cutting all these product lines in a very Steve Jobsian way, um, but also changing their cost structure where they're saying, look, we're gonna make this big investment up front where we're gonna use
two, three years of engineering resources um and take on all these capital leases to to create our own data centers and build our own technology to actually store stuff um and not give that margin away to to Amazon because in in the long term
we wanna have our cost basis be lower and we're supporting, you know, ninety seven point eight percent of our users don't pay us anything and we're holding other files. We need to have the cheapest possible way to hold their files.
Yep.
Yep.
And um
And it makes a big yeah.
huge, huge impact on the company. It was basically like
all of the stuff that they could get away with.
during the first period of Dropbox when they were just growing of not, you know, sort of efficiently managing the company, which makes sense when you're a growing startup. You don't want to optimize for efficiency, you want to optimize for growth. Um
But then those years in the middle where they just got way too fat and lazy. Well not lazy, but way too overly ambitious without
Good rationale for it.
Now they're back to
They've really professionalized. Really it's an efficiently run company. Um
And you can see that in the financials.
So So what let's um I want to make a statement here and then we'll revisit it later. So the the success of Dropbox and the box the Dropbox that you want to bet on is the one that is lean, mean focused, uh building this very consumer oriented, easy to understand
file sharing product or or let's even say file collaboration.
um product that that
may permeate into or does permeate into um monetizing small business and teams users.
Yeah. Well I think it's you know
If you take if I if I look at this from a venture investing perspective, when Sequoia led the seed round and then did the inside round for the A,
Um
They were investing.
on the promise of the future, but there was very strong data and signal that like the market was there, that the market fit was the product market fit was there, that there was a ton of growth ahead of the company.
Then the four billion dollar, you know, valuation series B and certainly the ten billion dollar series C, those were people coming in and investing on the promise of the future.
But the promise of the future, there was actually no data that like those promises were had any hope of coming true. Um so like maybe they would, maybe they wouldn't, but nobody knew. Um I think that's the difference here. And so back where you are with Dropbox today and at the IPO is
Um
You know what this company is, uh, and you know what the market is. Now the question is how big is
the market for
collaborative file sharing and people paying for it, especially in a S M B type use case, which is really
You know.
As a personal user, I don't pay for Dropbox, but as a you know acquired user, uh I do.
Yeah.
It's how we're market.
Are we both paying for Dropbox?
Uh well no no, uh only one of us is. Yeah exactly. Um
So it's not as as large of a market as the consumer um market, but it's still
It's still pretty impressive.
Um
So anyway.
February twenty eighteen.
And to c and to and to capture that, uh, the way that Dropbox reports this in in their S one, and I know I'm fast forwarding ahead a little bit, but I want to make this this point, is that they say of our eleven million paying users, and that's out of their their five hundred million
Approximately thirty percent use Dropbox for work on a Dropbox business team plan, and we estimate that an additional fifty percent use Dropbox for work on an individual plan, which is what we do, collectively totaling about eighty percent of our users. So eighty percent of that
two point two percent. So eighty percent of people who pay are using it for business purposes.
Yep. And so even though the
the growth of the company and the use case and the vast majority of their users looks like individuals, the the place where they make eighty percent of their revenue is people using it for work.
And I think this was to be fair to Dropbox, I think there was a little bit of a head fake that the market did to them where
You know, th say let's assume 30% you know using Dropbox for business is relatively constant. Like you could identify that those are enterprises.
the other fifty percent that they estimate are SMBs using Dropbox, there's no way really to tell um that they're businesses. Like you can't tell that we're businesses. Like
You signed up for Dropbox with your Gmail account, not with the acquired account, right?
Yep. And that is a thing too that like, you know, the everyone who's used Dropbox
uh personally for a long time and then enters an organization like
you you know that there's this weird tension between you kind of have your one drop box and are you gonna invite that personal dropbox to the organization or you gonna try and create a new drop box and have multiple drop boxes syncing and now a selective set like that's where it actually gets a little bit hairy. And so the best Dropbox, like the Dropbox in their their absolute
best shining light is the drop box where I'm just using my personal drop box and I'm sharing stuff out of that with other people and not where I'm officially raising my hand and saying I'm a business.
Yeah.
Yep.
Uh well there are a lot fewer.
Um
businesses that are gonna do that, there and there are a lot more
You know, acquired's out there.
Mm-hmm.
Yeah.

Um
So uh
As we're alluding to with all this, finally, February twenty eighteen, the company files to go public.
uh they set the initial pricing range for the IPO at sixteen to eighteen dollars a share.
Which uh
Equates to evaluation.
Much lower than the ten billion dollar valuation that they did in the last private round. But in two thousand fourteen.

Yeah, there's a lot of hand wringing. We're we're gonna get into narratives in a sec here.
Then they raise the range to eighteen to twenty dollars a share before they price. They ultimately price at twenty one dollars a share, which is equivalent to and this was Thursday night, equivalent to an eight point one billion dollar market cap.
Still below ten. And I should say it's important to note that that that eight point one is their non diluted market cap. So that did not include
options that we are that were issued but not granted for future employees. And if you roll that in and you have a fully diluted market cap, it was 9.2 billion.
Right. Um
Good point. Uh which is common in
Start up when you
funding startups that the ungrantted option pool is counted as part of the company less clear when it comes to public companies. Um
Uh
So important to remember.
Then when they finally finish trading yesterday on their first day of trading, they end at twenty eight
Dollars and forty eight cents a share.
Which, no matter how you count it, is above the ten billion dollar watermark. So And and that's a pop.
Yeah, major pop it's about forty percent.
On the first day of trading.
Yeah.
So e every single shareholder who bought in as it was a at a private company valuation made money.
Indeed.
Maybe not a lot of money. But uh
Yeah. Sequoia capital made a lot of money.
Yeah, so it's actually do you wanna it's gonna be one of my sort of investment themes later, uh investment slash tech themes, but do you wanna dig into that before we get into narratives?
No, I mean w we can get into narratives later. I actually haven't done the calculation, but Sequoy owns about a quarter twel well, twenty three percent ish of the company.
And they finished it roughly a twelve billion dollar valuation. So
What's going on make that uh two and a half billion on the
On the IPO.
Yeah.
Yeah.
Sounds about right.
Not not bad, uh not bad in a day's work or a decade's work in that case.
No, and uh when you when you look at the dilution it per round, it's twenty four percent for the first two, six percent, then four percent. So really, I mean the way that they raised money, if you had gotten in early, you made a ridiculous amount of money. If you got in later, you just didn't own that much of the company, even if you paid a ton for it.
Um
And if you look at YC and assume that they there a news story came out that Y Combinator sold um about half of their shares in the series B when index led, um, they typically take seven percent as part of the accelerator program would have gotten diluted down to four percent. Um so their their value of their shares would have been about 150 million.
um at that point and and would have been able to uh um
clear about seventy five million for uh quote Y C's operations uh by selling as a part of that round.
Yeah. That's when they sold it the Series B.
Interesting.
uh at the market cap um that the company closed at yesterday
Uh even s even Y C's remaining stake is what about half a billion dollars?
Um let's see. So in the series C
uh their remaining stake would have been about a hundred and seventy million, so uh may maybe about two hundred.
Oh, okay, so probably about the same, maybe a little more.
Yeah.
Yeah, yeah. But I think this is probably the first of uh of many Y C uh IPOs that we'll see where they all they will take home about that much cash over and over and over again over the next several years.
Yeah. Well that's a
To pull another theme forward, uh and then we'll jump into narratives, uh real quick. Um
It takes a long time. And this is actually a core, you know, Sequoia ethos that uh
Um, you know, the uh the lemons ripen quickly in venture, uh, but the apples take a long time to bear food.
But when they do, they bear a lot of fruit.
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Uh narratives.
Covered this basically.
I think when we've had the most fun with the narrative section, it's been we were able to tease out what is the company saying and what are the skeptics saying. And so um
I've got a few here. So Dropbox went from it's a folder that you put stuff in that sinks
to looking at the first page of their S one now with these crazy graphics and completely r new brand as of just a few months ago um is unleash the world's creative energy by designing a more enlightened way of working.
Which
Uh here's where my bias is about to come out. That scares the crap out of me.
Like the company made an amazing product by a folder that you put stuff in that sinks.
and like generated a ton of cash on that.
And this is where I start to get
out on my ledge a little bit and and and starting to feel like uh oh are we in a
Uh
twenty fourteen, twenty fifteen situation again.
No. I'd argue the other side.
Mm.
Because
What are we doing on Dropbox right now with acquired?
We are, you know.

Being creative. Is it enlightened? I mean like
I I may maybe I'm just getting caught up a little bit in the semantics, but anyway, so this is this is the company's positioning. Um
They they say our market opportunity has grown as we've expanded from keeping files in sync to keeping teams in sync. Today Dropbox is well positioned to reimagine the way that work gets done. We're focused on reducing the inordinate amount of time and energy the world wastes on work about work.
tedious tasks like searching for content, switching between applications, and managing workflows.
So what what their big positioning here is is that that our market opportunity is not just syncing files, it's this reimagining of the way work gets done, which
Is
I again, and I'll play the the skeptic here, similar to twenty thirteen, twenty fourteen, a bet that you're making, I think with very little data. I mean the bet here is on Dropbox Paper and a lot of the collaboration features and a lot of the it's it's asking you to dream with them a little bit, which um I I'm very familiar with and operating in the seed stage, but um
It it it continues to strike me the amount that
Um
Yeah.
public company investors at at big banks uh are also asked to dream with someone at the time of IPO.
Yeah.
Feels well. Feels a little snappy to me.

I think they're gonna think they're gonna happen to them financially. I don't think it's gonna happen to them financially, but like uh it it the
The high flying mission statements that are starting to to happen here are a little
Yeah. Well I think the question is um
By reimagine it whatever

Do they mean
You you know, you need to make a big bet on us because of paper, which I don't even know what Dropbox Paper does. I'm very likely to ever even try it, let alone use it. Caveat, I don't know what it is. But um I've actually heard really amazing things.
Well, okay. Fair enough. But I'm not like looking desperate for a solution to whatever it is. So do they mean that or do they mean
By reimagining how the world works.
Um
magic folder that you put stuff in and it sinks.
If they mean that, and I think if you look at the financials, that that's what they mean. I mean that's what people pay Dropbox for, who who pay them. Um
Like that's that's pretty great. And like they're made a billion dollars in revenue last year on that.
Yep.
That's very true.
And so they um um this is apparently a thing now. Uh the content collaboration platforms has a magic car uh magic quadrant with Gartner, um, and uh Dropbox has been in it.
as a as a leader for the last two years. And so part of what they're selling in the in the prospectus here is um, you know, can we will continue to be a leader in this emerging category. The category itself is growing. Um the opportunity is to expand from syncing files being this collaboration platform. So think Dropbox Paper, they specifically like call out
uh a bunch of features. Search, preview, smart sync, version history and and showcase. So there's all these sort of
Um, and this is where I think it's a lot smarter than the way that they were trying to expand before. It's
It's focused. Like all of these things are sort of no brainer ways to make the existing workflows better rather than betting on completely new workflows, except for Dropbox Paper.
Yeah.
What is DropX paper?
It's a and I'm gonna mess this up'cause I've looked at it like very briefly but heard great things. It's it's effectively Google Docs compete but with um uh
uh subjectively more intuitive way of of uh
of laying it out, of putting in the the features and the all where all the controls are. Um it's tightly coupled with Dropbox instead of being outside of their ecosystem. Um
Yeah, better collaboration features let's use sort of and it's amazing to say better collaboration features than Google Docs, because that's been their thing forever, but um that that is the promise.
Interesting. I don't know. I'm
I'd love to be proven wrong, but I'm skeptic like to me that sounds like Dropbox Carousel and photos, like
Carousel may well have been a better product, but like
Google and Apple own the
phones and devices and so that's where the photos should leave should should live. And at this point, you know, if I'm a
uh organization. Now maybe maybe the market is is um
Just like for storage collaboration for such small enterprises that don't have Google apps built in. But you know, I'm way if I'm a small organization, I run on Google Apps.
I'm gonna use Google Drive, uh uh could use Google Docs and Google Drive for that type of paper like product. Um
Just'cause that's where
My organization lives.
So here this is the f I just opened up the Dropbox Paper landing page.
And I was hoping to see some maybe like features or like uh illustrations of here's the the killer features that are better than the word processing that you're used to. And it just says bring ideas to life. Dropbox paper is a new type of doc where teams can bring ideas to life in a single place.
There is a video.
And then it says there's testimonials. So there's companies that have used it. And then a sign up button. See how paper can make your ideas better and brighter. So they're very much not positioning as as like here's the they're not selling on features here. Um
And it's
Uh
I don't know
I'm very curious what the strategy is to convert people to using this who are already Dropbox customers over what they're already using.
Yeah.
Mm.
So
The the the the n the so to sum up the narratives around uh um
Dropbox.
from their position, it's really we're set apart by simple and intuitive design, an open ecosystem, viral bottom up adoption, performance and security, and we're moving out of just a folder that sings into broader team collaboration and workflow.
Great.
Okay.
There's a lot of reasons to be skeptical.
So as we saw, which which didn't didn't come true, um a lot of people were worried about it being a down round from the last fundraise. Obviously with trading up in the first day, um, the the company was not able to benefit from um a a lot of that uh
uh a lot of the upside that happened in that trading on the first day, but um the the bankers that took them public were, uh lots of individual shareholders, all the employees that have their stock locked up, um ev everyone benefits from that. And of course we've had one day of trading, so we'll see what continues to happen. But um tons and tons of demand for Dropbox. So that skeptic
Um
um narrative that we've been seeing in the news over the last few weeks really didn't play out.
Um the
The um
Uh the other things that people have pointed out is that they're da as David and I said, they're quite erratic. Um if you look at the last ten years of had headlines, uh every six months there's a new way to push into business and they they sort of
continue to have trouble exactly figuring out how do they go to bigger businesses. And maybe th maybe the market is just SMBs and that's actually a huge market and will continue to grow, but that is a major concern.
Um, and Aaron Levy gave a great Aaron Levy style interview in uh in Axios. And if you don't follow Aaron Levy on Twitter, you should,'cause he's
probably the most entertaining person
I mean definitely the most entertaining CEO, um, but a a very entertaining person to follow. And he just gives very great, straightforward, um, um compelling answers. But in in in this one, um
he talks about how he says there's there's never been a B2B that looks like this,'cause the Axios uh was looking for sort of comps. Does it look like Atlassian? Does it look like Box? How should we think about this?
Um, so he says there's there's never been a B2B company that looks like this, which is partially because consumerization of the enterprise is brand new. I think that
it's more like Skype, if Skype had been taken public. And there's probably two comps within the structure of Dropbox. One is a consumer business, like a Spotify or Netflix, or Pandora.
albeit with extremely low conversion rates to paid.
Um and I just put that in and he says, and the other is a sort of SMB type company, maybe like HubSpot.
I I think that's the right way to think about it. Like I I think that's the
Um
I like that way of thinking about it and it probably can be a huge company just thinking about it like that.
I I totally agree. Yeah, I think it's like Skype is probably the closest
Uh closest analogy here.
Um
'Cause I don't you know.
I I don't maybe they can figure something out in the future. I don't have a lot of faith that they can crack into big enterprise because box is already there, frankly, as are Microsoft and Google. Um
And uh
You know, on the consumer side, um
It's just really hard to get people, consumers to pay for storage.
Yeah.
So but on the other hand, like there I just keep coming back to there are a lot of, you know, organizations that look like acquired out there for which Dropbox is
A magical solution.
It's true.
There's three other
Sort of um
I won't say skeptical, but narratives that the company wouldn't wouldn't put forth that uh Ben Thompson called out this league this week either on um Exponent or when the S one came out he he did in the Strategary Daily Update. And all three of them are are are really great points. One is that the S one is is confusing and lacks data and specifically monthly active users.
There's this big chart.
that doesn't actually have numbers associated with it, that is uh signups is the axis instead of monthly active users. And they recently just deleted the data of a hundred million inactive accounts last year. And so if you're gonna talk about sort of active versus inactive, but then all you're gonna show us is the user build for signups. It's a
You know.
Uh David, if I were to pitch you a company and I were to show you a graph of signups, you would probably ask me like how many of these are active users? That's kind of the first question that any venture investor would would ask in the a private company's round. So it's probably great, but it's it's
Concerning that that's not part of the S one at all.
Uh although I don't know, given the nature of the Dropbox product
I I totally hear the criticism.
I don't know though that active users are the right
way to think about it, because the product it's like the there is no UI to the product, you know, it just lives within the operating system. So if you're using if you have installed Dropbox, you're an active user. Um
Yeah. So so your point would be that like uh
it you can go a long time without intentionally using Dropbox, uh
And they still sort of retain you as a user?
Yeah, I think a better
Two better metrics would be one
um some way to capture like
Percentage of
storage quota that users are using, right? Because as you get higher up towards the top, you're going to become more likely to convert to paid. Um and then the most important thing is the rate of conversion from free to paid and the velocity of that and cohorts of that. It's true. In knowing that we know sort of the most important thing.
Um a a couple of other narratives. One is is they can't decide if they want to focus on top line or bottom line. They're they're massively cost cutting by spending years shifting to to cheaper infrastructure, but they're still also trying to expand into into new markets and and build things like paper and sort of
Um
You know,
risk being we we've seen the company be a little lost in the woods before, so it's always concerning to see to see that a little bit. Um I don't know if that's totally a fair criticism. I could see why you would do both things. The last is that it's difficult for us to calculate the cost of customer acquisition because as you dig into this, um
they do report what they spend on sales and marketing.
Um that is broken out, but that
Doesn't but Dropbox doesn't include
uh their infrastructure, uh particularly for all the free accounts in sales and marketing. I think that's in cost of revenue. So it's it's difficult to understand sort of
Do when when we think about acquiring a customer for Dropbox, a customer uh acquiring a paid user, like how much money does Dropbox have to spend on them as a free user for years storing gigabytes of their files before um before there's an upsell opportunity. So it's difficult
um if you really wanted to model it as like a pure cost of customer acquisition lifetime value um equation. Um
I feel like if I were a series D investor that could go ask the company a bunch of detailed information and look at analytics, I would want to dig into that more, and as a public company investor who only has access to the S1.
Uh it makes me a little uncomfortable.
Yeah.
Agree.
So
That said, none of those narratives make this a bad company and they traded great on the first day and they were massively oversubscribed and got to bump up the price a few times before they hit the street. Everyone made money, they're continuing to have great free cla cash flow, and they're on a a really great
path toward profitability, like not just free cash flow, but like complete and total profitability. In twenty fifteen they they lost uh three hundred and thirty million. In twenty sixteen they lost two hundred and ten million. Last year they lost eleven or I'm sorry
I uh a hundred and eleven million and like they're well on track tw this year, maybe next year to to cross that finish line and become a a true profitable company. So income passitive. Yeah.
I I I think uh
Um
it's been a while since we saw an IPO go out like this that was a big name tech one that was so close to being profitable and and uh
would look more like a traditional business.
Yep.
Um
And I think really, you know, the last few years, as we talked about
They have really executed very well on this. The the crowning achievement being um
You know, the the building of their own data centers and moving off of AWS.
Yep.
Yep. Um

Well, should we quickly spin through what would have happened otherwise?
Yeah, let's do it.
That is in this case is
They didn't need to go public. They certainly don't need the cash. Um they're generating cash.
It could have
Stayed private forever.
I didn't need to raise more money.
Um
I think in this case the cash they had on their balance sheet when they IPO'd.
Um
I don't know.
I'll see if I can find it in the S one while you're Well. But I think in this case they they they had to go public because um
Even though they were very efficient with their
Fundraising.
Um
The
both investors and and then also but even more so employees need liquidity. Um, you know, you you can't and there are gonna be so many other of these companies, you know, whether it's Airbnb or Uber or Lyft or you know what what have you over the next
Year or two.
Um
You have to go public because
Because your investors, you know, can't uh can't
you know, returns on paper uh aren't going to uh aren't going to help them, you know
after a certain point raise their next funds. But even more so, and especially in
San Francisco and the Bay Area, you can't pay your rent with, you know, illiquid Dropbox shares. Um and so many employees at this point.
Um
You know, they need uh they need liquidity.
Um
So I think they I I think they had to, you know, if not now, uh in you know, all of these companies are going to have to in the next one to two to maybe three years.
Yeah, so they um here it is, they had uh four hundred and thirty million in cash and cash equivalents on their balance sheet at the end of twenty seventeen. So they probably could have gotten to um
net income positive, you know, full profitability, uh, just based on the amount of cash they had left in the bank to to kinda turn that corner and start start shooting up. So um
I think the main reason to IPO here really is uh really is for liquidity.
Totally.
To do themes. Yeah, but I mean what here's I mean, here's we just did Softbank, like
What if they just go raise uh I mean, they only raise seven hundred and fifty million dollars in their IPO.
Like
Yeah if if you're soft bank, would you consider making a bet that Dropbox will be a forty billion dollar company you know, many years from now. Given their track record. Yeah, and it's actually worth floating a billion dollars their way, uh to to give'em a few more years and then take them public.
Yeah, well I'm gonna save my thoughts on this for grading. All right.
Alright, sounds good.
Um
Tech themes.
Tech themes. Let's do it.
Alright. Um
Well,
One of my
Uh one of my tech themes is definitely we saw this bring your own device thing that the the iPhone um started and then uh Dropbox is really the first example and and maybe Skype, but let's call it Dropbox of uh bring your own software as a service. So whatever
Whatever you're using at home, that's your really phenomenal software user experience, um, you you're gonna do that in the workplace too. And their sales model um really reflects that where uh the vast, vast majority, I think
ninety percent of revenue is generated from self service channels. So people who who purchase a subscription through the website or app instead of dealing with a salesperson like a traditional enterprise software. And so you see this work in in Slack, Atlassian, lots of other um um companies that sort of did the same thing, but Dropbox is certainly a pioneer of the model.
Yep.
Indeed.
Um
And it really is a new
Category of company that's um
been created over the last ten years, ten to fifteen years. Um
Uh this
Um
You know, like you say, broad sort of broadly consumeration of I IT, bring your own device enable, but but really it's it's
Enterprise companies and S M B companies, companies serving B to B who don't sell to CIOs who are adopted by the users and then
Purchased via credit cards.
I think
We have covered all of my tech themes throughout this
Very long episode. Thank you, listeners, for bearing with us.
Um
But uh and then they were, you know, this idea of round skipping when you're raising venture, like that is how you win. Uh
Whether you're a founder or or whether you're, you know, an early investor. Um, the way you don't get diluted down to
Diminimus ownership is
Is by by not.
raising, you know, by by being able to when you raise money, minimize dilution and minimize the number of times you raise money.
Um
You know, we talked about building on AWS and and and you know at first head that enables quick.
you know, going to market through that, but then eventually
you know, y if you get to a certain scale, you need to move off of it.
That's been you know w well, we didn't talk as much on this episode, but lots of people have talked about that. But I think their thing
the my main theme for this episode that I you know just want to highlight again
Um is I think, you know, the two stories that we the intertwined stories we told of Y Combinator and Dropbox, I think the moral here is
is is you know, sort of the what each of them
have as their mantras, which is, you know, why combinator is solve a real problem. You know, that's what they say to

Make something people want. Yeah, exactly. Make something people want is how they phrase it. But when you're starting a company, when you're building a product, you have to solve a real problem, make something people want.
And then on the Dropbox side.
Their moral of the story is
is make it just work. Make something people you want.
Make something people want, but it has to just work. Like it has to be productized. You can't be mucking around in the you know in the uh registry settings for, you know, or or in
you know, Linux. David, if I move this C L L over here, then totally. Like, you know, that is not gonna be a mass market
Uh product.
Um
And I think when you pair those two things is like
Make something people want, solving a real problem, and then make it just work. Like that's when the magic happens.
Um but I think the other thing, you know, in sort of the second half of the story.
Certainly for Dropbox and uh you could argue in a lot of ways for a Y Combinator these days, too.
Um
As the organizations have success and get bigger, then there's this temptation to go beyond that. You know, and then you start
building products and doing things where it's like unclear does anybody want them and do they just work, you know? Um and uh
And I think like that's the
That's the trade off, you know, that uh
Uh, both in startups and then as they grow that you have to
You have to manage.
Mm-hmm.
Mm-hmm.
I have one tech theme that's one that I've been wondering about, and I uh I think I have examples and counterexamples, but I want to phrase it to you. So
Uh Drew got to own twenty five percent at IPO of this company. That's pretty unusual for a founder to to have a ten billion dollar IPO and still own own a quarter of the company.
Um
this was largely because of this explosive growth that they were experiencing while still monetizing, mind you. So the fact that they were monetizing meant like they weren't
you know, burning cash into a hole to grow as as fast as they were.
Um
But it exhibited these characteristics of a consumer company. And when you have consumer company growth metrics, you're able to m minimize dilution that you take through your subsequent rounds. And so
Do you think it's the right way to think about it that that his ownership percentage at IPO

Consumery.
Um
Or that or better phrase, do consumer companies allow founders to preserve more founders' equity?
I don't think necessarily. I mean there certainly are plenty of
consumer companies that were founders have been incredibly diluted. I I think it's more though that Dropbox and Atlasia and even more so in the episode we did on them.
is the cash flow dynamics of the business. Like they uh Lasian
Is
the extreme of this, they never raised a dollar of primary capital. They could fund all of the growth of the company just from cash flow from operations. Dropbox very well could have done the same thing if uh if they wanted. Um and when you have that as your Batna, um
You know, you it puts you in a very, very advantageous position for fundraising. Yeah.
Yeah, it's a great point.
You wanna agreed?

Let's do it.
I think
I w we've talked about the good, the bad, the ugly of Dropbox, uh um
In this episode.
the good and the magic of the company is the product market fit of the core product. And you know, Ben Thompson wrote about this in his updates and talked about it with James on on Exponent when they talked about the IPO.
Um
And yet the frustrating thing about the company is like they haven't been able to expand beyond that. And you know, Ben and James were very frustrated by that.
Um
But here's I ultimately think having survived that and being where they are now
Uh this is actually a really attractive
company. Um and the decision to IPO now.
Yes, if they hadn't gone off and walked in the woods for a couple years, they could have done this a couple of years ago. Um
But ultimately the question in front of us, as you were saying in narratives, is like what's the future? Um
I think
This market is both bigger than people think it is of these small businesses, but even more importantly the
I think the rate of creation of new
organizations that are gonna be in the Dropbox customer sweet spot over the next decade is going to massively accelerate. It's the it's the same thesis for why Square uh has a big opportunity. Um there are lots and lots of people that are going to be starting small businesses, gonna be being entrepreneurs of various types or or like acquired
doing this as a side project. Um
And Dropbox is the perfect one of the suite of tools that is going to be
they're going to need to run their businesses. So, you know, I think look, is this a
Is this an Instagram? Is this a uh
Uh on the M and A side or
I forget what our highest graded uh IPOs are.
No, certainly not.
Um
But I'm gonna give this a B plus. Um
in that even with all the execution challenges over the last few years, like the opportunity set ahead of Dropbox.
Uh because of I think this
This
Growth in the market. Um
Is going to be attractive.
Yeah, it's funny, in thinking about this I realize we have
There's sort of a
Little bit not a flaw, but sort of a I don't love the way that we do IPO grading as much as uh acquisition grading, because the way that we say we evaluate this is was how good of a decision was it for the company to take the cash in this way to do something with it.
And the question is, is that compared? And the way we do this is we compare it on an absolute basis'cause we always go, Well, the future growth ahead of it wasn't as big as Instagram. And like
Um
Oh.
What we probably should do is
Is
look at the company like Dropbox, amazing job, super successful company, great at so many things. Created a ten billion dollar market cap that's publicly traded, real liquid shares.
if we compare it on a relative basis to what were their options, like this is this is totally an A plus.
This was great.
Like they went out.
They are now publicly traded. They uh got all their stuff in order to to have the sort of uh reporting and public cup company governance. Um they they
issued a good number of shares, so lots of people are incentivized for the success of the company, but th you know, it's still less than ten percent of the company's shares are actually publicly traded based on what they they raised.
I think
that cash will enable them to do interesting but not that interesting things. So like do I think that
they're going to three or four X the company over the next decade.
Um or maybe let's say the next five years.
I I think it's kind of unlikely.
They do do we think that they're gonna get into the ranks of of a a fifty billion dollar company, a hundred billion dollar company?
Probably not. Like I think this was the best thing that they could do. They're a a great company.
Um
But you know, they're not they're not they're never going to be a huge company and I don't know that our greeting should
penalize them for that. Mm-hmm.
So I think the A plus job on doing what they should have done when they should have done it.
Um
relative to what Amazon did with their capital by IPOing. Like like
D. I that it's it's hard to see. Yeah, it's yeah, it's hard to penalize them for that though.
Yeah. Well yeah, ex the Amazon comparison is interesting, right? Or or Softbank, right? Like
You know.
Your you were your company was something
And then you were successfully able to make it much, much more than that. Uh that takes truly, truly visionary founders. Um
And Dropbox tried to do that and failed once.
Um
And who knows if they'll be successful in the future. But
The IPO was probably a really great thing for them.
Mm-hmm.
multi hundred billion dollar market cap company.
Mm-hmm.
And of course the counterargument for that is they'll be profitable next year. Revenue has has almost doubled is from twenty fifteen to twenty seventeen. So like they're still growing at a ridiculous clip. So then you if you if you're doubling as a as a near public company every two years, um
You know, the question does become where's your where's your ceiling?
Yep, yep. Well, and that's that was the argument that I was making in grading, which is
Um, I think the ceiling just for Dropbox as it is today is
Going to keep it. Yeah.
High and going to keep rising.
All right.
Well I'll go with B plus then two.

Uh
This was fun. Uh listeners, let us know. Uh we're fully aware that our episodes have been getting longer. Um
It's'cause we've just love doing all the work diving into these uh companies and it's probably also why we're releasing episodes a little less frequently. Um
But let us know your feedback. Let us know what you think. If this is way too long.
You want shorter.
Hit us up in the Slack. If you love it.
Let us know that too.
Yep.
Carvats.
Let's do it.
Um
I'll go first. Mine uh real quick is uh a good friend, my college roommate uh sent this to me the other day. Uh
A YouTube channel called Lazy Game Reviews or LGR.
Uh
Super fun. It's this guy. I don't know where the lazy comes from'cause he's definitely not lazy, but um
It's like retro game and technology reviews and so like uh
One of the most recent episodes is games on T I eighty three calculators, and it's like
Great nostalgia from
back when I was in high school or early PC gaming, like the sims or the need for speed, or that kind of stuff. Um
Very fun to watch.
Hm.
Cool.
Mine is uh an article that friend of the show Mark sent in. Um it is on uh
on Rs Technica, Direct X ray tracing is the first step toward a graphics rev revolution.
Did you see anything about this in the last week? No. There's been both a lot of news from NVIDIA and from Microsoft uh about ray tracing and uh using modern GPUs to do ray tracing instead of how we typically render things do real time rendering. So
qu as a quick primer, or the way that l let's say you you're watching a movie or you're seeing a cutscene in a video game
It looks way better than the things that are rendered in real time for the video game because they use a completely different process to render them. They render them in, you know, like two to three seconds a day on render farms where there's tons of machines that can work in parallel and can do all kinds of really crazy cool smooth stuff. Um and you look at it. This is what Pixar does, right? Yep, exactly.
And you look at a uh a video game and like you can kinda see all the rough edges and you can y you know, th sometimes there's like things missing, like you turn a corner and then suddenly bam you can see a reflection on someone's helmet that wasn't there a second ago, and you're like, Why wasn't that a available a second ago? The traditional way that you render
do real time rendering is is by mapping polygons that map effectively triangles and then drawing the textures on top and then drawing the light sources on top of that. And
What they do is they build it up from the furthest Z position to the closest Z position, the same way that your eye sort of perceives things as like, okay, build this layer, build that layer, build that layer, and that way the it's it's kind of like a stack where the last thing rendered is the thing that you see.
And so
uh obviously that th this this gets expensive if you're using very tiny triangles or if you're um if you're taking it advantage of uh or if you're showing uh
the light that would sort of be occurring everywhere instead of just um in the in the place where you're looking. So it does miss out on some reflections. It misses out on um the ability to do things in a very fine-grained way. And if you are in graphics programming, I'm certainly messing this up, so I apologize.
But ray tracing solves a lot of these problems and is a very it is like a total leap forward, but it's extremely computationally expensive. So you can't typically do it in real time.
Well, this new DirectX API and uh and a lot of the new hardware, um, a lot of the new advances in GPUs are starting to allow uh r real time ray tracing, um, so we can start to move toward movie quality graphics in in real time environments. So I'm very excited to see what the where the future of that will take us.
Well, especially for V R and AR. Um it's gonna be huge.
Oh yeah.
So again, my my apologize to people who who study and and work on this and actually know it, but um my fr from reading a couple of articles think it sounds very cool.
Yeah, that sounds awesome.
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