Entrepreneurial Management

1. Entrepreneurial Management
Dropbox company analysis
Alan Tuganov
Introduction
This paper begins from definingthe role of innovation in entrepreneurial success and introduction of Dropbox.The
company is the leader in the filehostingmarket providingcloud storageand filesynchronization services.This
section is followed by introduction of generally accepted structureof start-up expansion and analysisof financial
growth of the company. In final section the author focuses on strategic choices made by the company, industry
analysis,marketingefforts and overall effectiveness of existingbusiness model.
Role of innovation in success
In a rapidly developingbusinessworld innovationsareplayingthe main rolein achieving competitive advantage.
Innovation is a successful exploitation of new ideas that allowentrepreneurs to differentiate their companies from
the competitors (Norman Fahrer, 2012). Ability to produce radical and incremental innovationsand efficient
management are the key attributes of the successful entrepreneurship in any industry.
In the US modern business the main generators of innovation aretechnology start-ups.These companies are
inherently agile,adaptiveand areable to generate substantial amount of profits.Some of them, called gazelles
because of their rapid growth in accordancewith common startup classification system,may produce 20-30$
million revenue after 5 to 10 years of presence in the market (Robert D.Hisrich et all,2005). Often, those startups
are technology oriented. Thus, accordingto Investopedia’s radar,8 of 10 Hottest startup’s founded in 2015 deploy
advanced technologies, such as Internet, mobileapplicationsetc.
One of the startups,that generated innovation,which in its turn created valueto customers and achieved
tremendous growth by implementing effective strategy, is Dropbox Company. Today, after years of operations the
company provides access to onlinestorageservices to million users.Thestar of this company rosein 2007 and
sincethen the valueof the company has steadily risen and reached 10$ billion by January 2014,accordingto
BusinessInsider .
The idea of file sharing services emerged when Drew Houston, the founder of Dropbox, realized that he had an
incurable habit to forget to take his USB drive with him. As a person with IT background he started to search for a
solution that could help him transfer files from one device to another via internet. He suddenly found that all
applications that were available for a download had terrible performance without any reference to user-friendly
interface. The shortcomings of the fileshareservices led to a birth of a new fail-safeapplication concept that Drew
Houston implemented in partnership with Arash Firdowsi, his classmate from MIT.
Dropbox entered the US market with very intensivecompetition with the existence of similar products.His idea to
sharefiles was not new. However, accordingto Hana (Hana,U. 2013), Innovation does not necessarily originate
from new scientific discoveries,butmay arisefroma combination of already existingtechnologies and their
application in a new context (Eisenmann et all.2011 ).Similarly,the concept created by Houston and Firdowsi
engaged millionsof computers to download or upload files via existingencrypted internet connection.

2. Another importantfactor leading to success was Dropbox founder's ability to make the application of innovation a
systematic approach throughout the whole lifecycleof the venture. For instance,in the beginningof his venture
creation Houston was courageous enough to useinnovativeapproach to promote his product even though he
admitted itwas technically incomplete.One more technique, used by Houston to improve his product,was his
hand-on experience to make recruitingvideos for his collegefraternity.This knowledge helped him create a
screencastof a program demo and upload itto a popular forumfor developers, where he asked users to providea
feedback that might have been useful in the further development of the product features. In addition,by this
approach Houston gained the interest of a potential investor who was closely moni toringthis web site and was
impressed by the enthusiasmthe users demonstrated when referring to the product. All these efforts finally made
Houston’s’ plan work. As a result, he received 15000 US dollars fundingfromYCombinator seed fund and
immediately started workingon the finalization of his product.
The emergency of preinstalled versions of Dropbox on Android OS devices was another success factor produced by
the founder's innovativeapproach.The need of the mobileapplication allowed the company to raiseadditional
$250 million in 2011 .The importanceof this deal was tremendous. On one hand,this deal was promising to
Android phone manufacturers: the Android users could now enjoy build-in accessto reliablecloud services
provided by Dropbox. On the other hand, Dropbox services have also become availablefor Apple users.Bearingin
mind that Bluetooth synchronization of files between Android and Apple devices is still notpossible,Dropbox is
becoming an irreplaceabletool playingtherole of a bridge between the devices.
Accordingto Spinelli,start-upshavea high rate of failures atthe initial stageof the lifecycle.In software and
services segment of the technology industry,for instance,55.2 percent of firms usually closetheir doors in the first
two-five years of operations (Spinelli etal.2011).Meanwhile,the authors suggest that the survival rateincreases
as soon the venture reaches a critical mass employment level (10 to 20 people in a company staff) and $2 million
to $3 million in revenues.However, before achievingthis level of profitability,entrepreneurs need to overcome
scarcity of financethatthey faceon the early stageof product commercialization,which is also referred to as the
“valley of death”.
Dropbox fortunately avoided having difficulty of coveringthe negative cash flowin the early stage of the venture.
Obviously a status of Computer Science student in prestigious MITUniversity significantly boosted Houston’s
chances to raiseseed capital.Theuniversities,likeMIT,routinely transfer their technology through the formation
of new firms (Di Gregorio et al.2002). Venture capitalists areawareof this factand know the ability of skilled
researchers in eminent universities to startfirms to exploittheir own inventions.Therefore, they provideinitial
funds to “startupers’” from top universities likeMIT more willingly than to the entrepreneurs from less eminent
universities.
At the same time, a possession of a student card from MIT does not guarantee its owner the receipt of the
necessary financing.Entrepreneurs should be able to generate cost-efficientideas to attractinvestors’attention.
Dropbox founder was reasonableaboutcosts usinglean start-up method that is broadly discussed in Eric Ries’s
book: “The lean startup: how today's entrepreneurs use continuous innovation to create radically successful
businesses”. Ries's philosophy seeks to eliminatewasteful practices duringthe productdevelopment phaseso that
startups can have a better chanceto expand without requiringlargeamounts of outsidefunding, or ready-made
product. (Ries.2011) Ries believes that customer feedback duringproductdevelopment is a corecomponent of
lean startup process,and ensures that the producer does spend time on designingunnecessary features or
services thatare not required by consumers. As itwas mentioned in the previous partof this paper,Drew Houston,
who had a significantlack of initial capital, successfully applied this costeffective method. He produced a
minimum viableproduct and engaged users of Hacker News in the discussionson the uploaded demo video
instead of the product itself.Afterwards, the feedback received from them was used to tail or the product to the
customer needs.

3. Financing of the venture
Seed stage
By 2007, the year Dropbox was established,the options to obtain supportfrom incubators were limited.From the
various startup acceleratorsthatareavailabletoday there were only two major players in the market providing
seed capital to start-up builders.The firstone was Y Combinator, from which Dropbox obtained its firstfundingin
exchange for a small percentageof the venture’s common equity (usually theamount varies from 2% to 10% ) The
second option to consider for Dropbox was TechStars that nowadays still remains themain competitor of
YCombinator. When Houston decided to apply for a funding, YCombinator had a significantadvantageover
TechStars. The company was founded in 2005,and, by the time of Dropbox creation,simply had more time to
grow, and obtain bigger portfolio than Techstars which held its firstprogramin 2007.
Upon entering into YCombinator’s seed program, Dropbox benefited from mentoring, workspace,and
introductions to other advisers and investors over a three-month period. At this stage Houston and Firdowsi
worked on a cost-effective business model and once itwas completed, they received a 1.2 million USD convertible
debt from California–based Sequoia Capital.
Start-up stage
On a start-up level,Angel Investors or funds likeSequoia Capital provide financingto approximately 20%of equity
of a company in exchange of funding. Usingthis opportunity allows start-ups to identify the moment when the
venture may recruitworkforce and acquirethe assets needed for the business operations .Thus,once Dropbox
founders received the funding, they relocated to 900-square-footoffice in San Francisco and hired first6
employees from MIT’s computer scienceprogram to work on beta version of the program. Usually duringthis
period start-ups may experiment with market, pricingand sales tryingto cook their "secret sauce" (13), the
practicebrought in by the fellows.In September 2008,Dropbox launched the final releaseof their product .The
company offered their customers a freemium software which suggested that registered users could receive two
GB accounts with option to upgrade the spaceto 50 GB for $9.99 a month or $99 a year. Upon completion of
buildingthe final conceptof application,when itwas clear there was established revenue and customer base, the
company was ready for partnering with venture capital firms with bignames in the venture capital circuit. As a
result,Houston and Firdowsi applied for Series A financing,which is provided to the firms that already raised a
seed capital and ableto generate some revenue from its business model,although the generating net profits may
not be high. Typically,on this level venture, capitalists investthe needed amount (usually 3 to 5 millions) in
exchange of 20% of equity of a company .Houston, as a talented entrepreneur, managed to engage even more
funds. Using$6 million of Sequoia's the second loan to Dropbox, Houston expanded his company’s market
presence. Techcrunch reports that by 2011 the number of registered Dropbox users hit45 million.Onebillion files
were saved by Dropbox users every three days.
Despite this achievement, Dropbox still required additional funds to use for acquisitions,strategic partnerships and
the recruitment . Meanwhile, Dropbox founders were aware of the fact that industry giants likeMicrosoft,Google
and Apple kept their eyes open continuingto enhance competing products likeICloud or Google Docs. Itis also
worth mentioning that Dropbox’s main competitors, Box, raised a great round of $162 million financingin 2011 .
Therefore, Houston and his co-founder realized the importance of engaging more venture capital engagement.
Expansion/Mezzanine Stages

4. As already mentioned above, the main reason why bigventure capital firmsprovidemore funds on later stages of
start-up development is obvious.Thus,the risk of capital loss isdecreasingon each next step of start-up
development (see table1). From the table below it can be concluded that as soon as an operation gets less risky,
more investors come to play.
Stage at Which Investment is made Risk of Loss of Capital Causation of Major Risk by Stage of
Development
Seed stage 66.2% 72.0%
Start-up stage 53.0% 75.8%
Second stage 33.7% 53.0%
Third stage 20.1% 37.0%
Bridge/pre-public stage 20.9% 33.3%
Table 1 (David Shelters, 2012 )
Venture capitalists leavethe responsibility to cultivatenew ventures to seed funds.They areinterested in
established ventures likeDropbox with capability to produce ready-made products rather than promising
enterprises with high potential.In essence, the venture capitalistbuys a stakein an entrepreneur’s idea,nurtures
it for a shortperiod of time, and then exits with the help of an investment banker.
From April 2011 till 2014 January,Houston,effectively pursuingfundraisingchannels,could raiseSeries Band
Series C funding engaging enormous amounts of venture capital (250$Mand 350$Maccordingly) ,to capture the
market share. Accordingto Investopedia Round B and Round C capital isusually spentby companies to enhance a
winningproduct, supplement the team with talented professionals and acquisition of other companies that have
the competitive advantagethe venture may benefit from As it can be learned from different internet web-sites,
the capital raised by Dropbox duringthis period allowed them to acquire23 companies includingpromisingstart-
ups likeSnapjoy,or Readmill.The purposeof the purchasewas perhaps to diversify the company by new customer
segments and absorb new talents. Nevertheless, such approach can be considered as very controversial.On one
hand, the acquisitionshelped the venture to hitthe target of $200 million revenue in 2013 . On the other hand,
several of the acquired companies were shut down a few years later. In spite of the fact that Houston and Firdowsi
repeatedly stated that they were goingto enhance their main product by incorporatingsomeof features from
closingCarousel and Mailbox applicationsmany criticsargued thatMicrosoft,Apple and Google were simply better
in terms of creatingmore valuableproducts.Whatis more, Google pursued low-cost strategy in segment where
Dropbox had the greatest presence - onlinestoragesegment. Google dramatically cutprices on its GoogleDrive
offering 100 gigabytes for $23.88 versus the same size storagefor $99 offered by Dropbox. Dropbox reacted by
raisinganother $500 million worth of debt financingin April 2014.Itcan be assumed that the greatest part of this
tranche was purposed to increasethe number of Amazon and in-houseservers supposed to supportnew features
of Dropbox application.
Exit
Indeed, today the competition in onlinestorage segment is becomingmore and more severe. The rivals offer more
popular apps in the enterprise market, where Dropbox has plans to expand its business and its revenue base.
Dropbox led the $1.46 billion worldwidemarket for file-sharinglastyear with a 27% market share. However,
Microsoftand Box grew at faster rates than Dropbox putting in danger the company’s leadership in a long-term
perspective, accordingto researcher IDC . Many analyticssuggestthat, perhaps,for Dropbox now it is the best
time to exit as the company hitting10 times a $1 billion "unicorn" valuation and becomingan absoluteleader in

5. cloud storagemarket. Whenever it happens this year or later on, the divestment will be achieved through two
common avenues: a public offer (IPO) or a saleto a strategic investor (Klonowsky,2010). Although today it is hard
to predicthow Dropbox investors will decideto get a return on investment, one thing can be already concluded:
Dropbox will remain determinant of the growth of filestorage industry for the next several years.
Commercialization:
SWOT analysis
Strengths
 More than 500 million activeusers
 Easy installation and multi-languageinterface
 Availableto work on different platforms
 High awareness among internet users
 User-friendly interface
 Strong financials and trustof investors
Weaknesses
 Smaller spacefor free version compared to Google drive
 Customer data on cloud is limited
 Switchingcosts arelow
Opportunities
 People are in need of an easy way to transfer files
 Rapid technological development
 Well-established R&D
 Increasingnumber of smartphone users
Threats
 Fierce rivalry
 Changes in consumer tastes require continuous improvement of the product
 Availability of substituteproducts
Competitive advantage and strategy
As itwas mentioned earlier,Dropbox created sustainable competitiveadvantage outperforming competitors of
the industry over a long period of time. This advantageis determined by the quality of well-done, hardly to imitate
product that consumers wanted. The company’s mission talks abouthowthey envision thei r product to bring
about a change in people's lives. Duringalmosta decade their product has made people's lives easier by

6. simplifyingtheir daily filestorage.Houston and Co have continuously pursued differentiation strategy defined by
Porter(Porter,1980) by deliveringuniquefeatures and service.They were lucky to avoid cut-throat pricewars
creatingoutstandingvaluefor its customers. However, the situation has changed dramatically duringlasttwo-
three years. The competitors expanded their own services,puttingin danger the growth of Dropbox. For instance,
Google claimed to have 240 million user for Google Drive, and 250 million users for Microsoft’s OneDrive,as of
May 2014 . So how can Dropbox compete nowadays? The answer is simple:with price, valueand speed.
Adjustments to Current Price
It would be appropriateto suggest that Dropbox management starts to focus on combiningtwo different
competitive strategies at the same time—a cost-leadership strategy and a differentiation.
At the moment Dropbox user pays 10$ per month for additional 1 TBof space.This offer is pretty much
competitive to compare with the rivals (Box offers 100GB for same price, Google also offers 1TB for 10$) .The
problem with the paid plans is thatthe deal worth the money spent only if a user is near the edge of the provided
plan.Why pay $10 for 1 terabyte if all you haveis a 30 GB worth of content to store? Therefore, for Dropbox it
would be appropriateto reconsider the paid plans and add an option to purchaseless s toragefor less money. One
driveoffers 50 GB for 2$ a month. There is no need to losethe opportunity to expand by providing a similaroffer.
What is more, the free storageplan that is availableto the users upon registration looks out-of-date and should be
reviewed. Despite the opportunities like Getting Started tutorial,thatgives user 250 MB additional freespaceor
referral programthat allows user to earn 500MB for each friend, this can be hardly considered as a reasonable
offer today as competitors providemore gigabytes by default.
Creating Value
As itwas noted in SWOT, one of the strengths of Dropbox analysisisthattheir product is distinctfromGoogle,
Apple, and Microsoftapplicationsin its ability to provideoperating system interoperability.Their application
currently supports more operatingsystems than those created by competitors. Dropbox should realize,that sole
pricecompetition is no-win strategy, as itmay work only for group of users that only want a placeto store and
easily accesstheir files for cheapestprice – nothingmuch. In order to create value for the rest of consumers,those
who arelookingfor special features likephoto/video preview, onlinevideo editingetc., Dropbox should providea
largenumber of applications ableto operate in any of existingecosystems.This wi ll allowpremium pricing.
Improving performance
At the beginning of its expansion Dropbox encountered with problem to store petabytes of information on servers.
The purchaseof costly datacenters was againstDropbox philosophy to stay as leaner as possi ble.For these
purposes the decision was madeto engage third party servers to store users' files.The company established
strategic partnership with Amazon that agreed to store data on its bigultra-securedatacenters.However, recently
the newspapers have reported that Dropbox announced the launch of user-data migration to its own datacenters
driven by the improvement of performance and the need for customization.Itlooks likea reasonableapproach,as,
if the venture achieves the goals itset, itmay strengthen company reputation as a reliablestorageprovider and
reflect in higher revenues for the company.
Marketing efforts
Dropbox achieved its sales pursuingboth Market Penetration and Market Development strategies defined by
Ansoff in 1957. Accordingto Ansoff’s paper, Market Penetration happens when a company seeks to improve
business performanceeither by increasingthevolume of sales to its present customers or by findingnew

7. customers for present products.In contrastto Market Penetration, Market Development refers to the firms that
try to expand into new markets usingtheir existingofferings.(Ansoff. 1965)
At the dawn of Dropbox expansion,Houston believed that there was a huge demand for his productas users
weren't really satisfied with the existingones. He entered the market with a product similarto others, but better in
quality and strugglingfor market share. Houston used a different approach relyingon word-of-mouth promotions
and unique referral program instead of common advertisements. The Blue Ocean strategy applied by the Dropbox
founder allowed the company to avoid the pain of going head-to-head with rivals in the"Red Ocean" (Cahn Kim$
Mauborgne 2004) and eliminated the costs associated with entrance to the market.
Nevertheless, as Dropbox has a good customer base itmay be suggested that the venture should startto focus on
deliveringnew products to the market engaging product development practices defined by Ansoff.
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