Dropbox founder reveals how he built a $10 billion company in his 20s - even though Steve Jobs told him Apple would destroy it
Houston joined Business Insider Editor-in-Chief Alyson Shontell on our podcast, "Success! How I Did It" to look back on the last ten years at the helm of Dropbox and the lessons he's learned along the way.
"No one is born a CEO," Houston said. "This is an acquired skill set and furthermore, it's one that you learn on the job. So everyone is a first-time CEO by definition at some point." Also, he added, "just about everything is learnable."
In the wide-ranging conversation, they discussed:
- Houston's early startup attempts, including an SAT prep company
- Coming up with the idea for Dropbox in an unlikely place
- How he applied for (and was initially rejected by) startup incubator Y Combinator, which would launch his company
- How he secured early funding for Dropbox in a shady rug shop
- His meeting with Steve Jobs, and what the Apple founder was like
- How he reacted when Steve Jobs told him he'd kill his business
- His mentors in Silicon Valley, including Mark Zuckerberg and how they met
- Developing Dropbox's business model while having to compete with bigger, better-funded companies
- How he learned to be a CEO on the job
- The advice he would share with his younger self.
You can listen to the full interview here:
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Or, if you'd rather read the Drew Houston interview, here's a transcript, which has been lightly edited for clarity and length.
Alyson Shontell: When Drew Houston was 24 in 2007, he started DropBox. And his company, which lets people and businesses easily share and store files, just turned 10 years old on May 8. It generates now $1+ billion in annualized revenue, and it was valued at ~$10 billion in 2014. So we're really excited to have you, Drew, thanks for coming in today to talk with us.
Drew Houston: Thanks for having me.
Shontell: Of course. I was reading up on you, doing some stalking online, and I realized that you've always been tinkering with startups before Dropbox even, programming since you were five years old, doing startups since 14, and you had perfect SAT scores.
Houston: That's right.
Shontell: And so naturally you started a test prep company when you were in college, among other things.
Houston: Yeah, that's one thing that SAT scores can do, I guess, they can get you into school and then they can be a reason to start an SAT prep company. I had started my first company when I was 21, so my junior year I took a year off and -- or I took a leave from school and teamed up with a former teacher of mine from high school. The SAT itself was changing from being out of 1600 points to 2400 and all the courses would basically have to start over given that the test had changed.
Shontell: But it seems like things really picked up for you once you graduate and you apply to something called Y Combinator, which, if you follow the tech world, you've probably heard of it. It's this big startup accelerator program that was cofounded by Paul Graham, who's this legend in Silicon Valley. And one of the legendary stories is Dropbox being one of the huge companies that rose from this startup incubator. But your application for Y Combinator could have gone better, right? You didn't totally impress Paul Graham with the first go around?
Houston: That SAT prep company was rejected by Y Combinator.
Shontell: So that's what you applied with? Not even DropBox.
Houston: That's right. Two years before for the first batch of Y Combinator in 2005.
Creating DropBox on the Chinatown bus
Shontell: Oh wow. So then you came back with this new and improved idea. How did you come up with Dropbox?
Houston: It was really out of personal frustration. I kept carrying a thumb drive around and emailing myself files and all the things that we used to have to do. The proverbial story is, I was going from Boston to New York on the Chinatown bus, forgot my thumb drive and I was so frustrated - really with myself because this kept happening. And I'm like, "My God, I never want to have this problem again." And I opened up the editor and started writing some code. I had no idea what it would become. But those were the beginnings.
Shontell: And so you apply to Y Combinator but you don't have a cofounder. I was rereading your initial application and you were like, "I've got some leads, some people that might be interested, but no one yet." And for Y Combinator, they basically make you have a cofounder, right?
Houston: Yeah and Y Combinator reminded me, actually, a lot of college admissions because you have a ton of people applying for a limited number of spots. I actually created a video for Dropbox, a demo video, which is still around somewhere. I posted the video -- a couple of good things happened. One, I did get an email from Paul saying that Dropbox seemed interesting but I need a cofounder. And, I didn't know it at the time, but Arash [Ferdowsi], who became my cofounder, actually saw the video on Hacker News and that sparked his interest in sending me an email later, which we can talk about.
Shontell: And that video is basically just you at 3 a.m. in your bedroom ranting, or not ranting but --
Houston: There was an element of delirium towards the end.
Shontell: Just explaining what your vision for DropBox was and it worked.
Houston: Yeah, it was really a demo. I had just dragged up a bunch of music equipment from my band and I wanted to show the Hacker News audience that, hey, here's this new way of having your stuff with you across different computers. And I wanted to do it all in one take -- I didn't want it to seem too overproduced, so I just kept doing take after take, scripted it out until I got it right.
Shontell: And you mentioned you're in a band?
Houston: Angry Flannel, yup. Boston's premiere 90s rock cover band.
Shontell: And you all found each other on Craigslist. What do you do in this band?
Houston: I play guitar and I sing backup.
Finding a cofounder in 2 weeks
Shontell: Well, cool, we'll have to go check out one of your concerts. So you make this video, it goes well, Paul Graham's intrigued but says you need a cofounder. Like, looking back, do you really think that, I mean, Arash clearly worked out, but do you think you could have done DropBox alone? Do you think that's -- is that a ridiculous rule or should everybody have a cofounder?
Houston: Well, it was intense getting that email from him because it wasn't just like, get a cofounder. When you think about the application deadlines, it's like, go get a cofounder in the next week or two. So it's like, hey get married, you know.
Shontell: It sounds like "The Bachelorette."
Houston: Yeah, it was crazy. So, I'm just trying to imagine in my head what it would have been like to try to do all of this solo. I think Paul's right in that you have a definitely higher chance of success if you have a team because, for a variety of reasons. First of all, there's so much to do, and so, especially in the beginning, you're competing against fully formed teams and if you're just doing everything by yourself, that's massively limiting. And then second, I think a lot of what Paul raised in his arguments about why he wanted cofounders was because it's kind of an emotional roller coaster and so having a team, or having a partner, makes it so you can offset each other's kind of ups and downs, which I've certainly found to be true.
Shontell: And so tell me about this first meeting with Arash. So you guys go to coffee, hit it off, and he agrees to drop out of school and join you?
Houston: That's pretty much what happened. So we met in the student center, We talk for an hour or two, and next thing you know, he agrees to drop out of school. He had maybe a semester left. And it was sort of like getting married on the first or second date. It was wild because I thought I would have to, like, talk to his parents or somehow reassure him that this was a good decision to spend most of our waking hours for the foreseeable future together, but to his credit, he just jumped right in.
How DropBox got a $1.2 million investment
Shontell: That's great. So you guys get into Y Combinator, it works, you raise your first million dollars from Sequoia, I think.
Houston: Yeah. Y Combinator ends with demo day, which is, they basically connect founders with a bunch of investors and then that's usually the starting point to go raise your first venture round. And so we were introduced to Sequoia. It's kind of a wild story. There's a guy named Pejman [Nozad], who we met in a rug shop and, it's like, welcome to Silicon Valley, and he had a boardroom in the back where we gave him a demo --
Shontell: In a rug shop?
Houston: Literally in a rug shop, I thought I was lost. And I go walk in and it's a medallion rug gallery and I go to the poor receptionist and I'm like, "I'm sorry, I think I might have the wrong place but is there a guy named Pejman here?" And she's like, "oh of course." And she like walks me, the mahogany panel opens up to a secret back boardroom and they serve Persian tea and we're like plugging in --
Shontell: Oh my god.
Houston: Our computer into the monitor, into the TV to give a demo. So the first few days of being in California were pretty wild. So that was one thing that happened then we went to some startup party where iLike, which was an early music startup on the Facebook platform and the Facebook exec team were all throwing a party together, a launch party, and then Third Eye Blind is the band that happened to be playing in a backyard in Atherton. And then yeah, a few days after that, Michael Moritz was in our living room in our apartment and then the Monday afterward, I'm hitting refresh on my computer and watching the balance go from $60 to $1.2 million. And so, yeah, life became very different in 2007.
Shontell: That's amazing and Mike Moritz is a legendary investor for Sequoia, I think tons of founders would kill to have him invest in their startup. So that's great.
Houston: Yeah, he was on the board of Google and a bunch of other great companies. I really admire what he's built at Sequoia.
How DropBox scaled from a startup to the company it is now
Shontell: Not only do you get your first bit of funding, but you get a lot of users. So what was the tipping point? How did you get that kind of scale?
Houston: We launched Dropbox publicly in September 2008, so that was maybe a year, almost exactly a year after that seed round from Sequoia. Took about a year and a half from the initial founding to launch because it's a product you really have to get right. And while you want to launch fast and iterate, people don't like that if you're doing that with their wedding photos, you know, or their tax returns.
So we really wanted to be careful. But that said, we had a beta period where we made these demo videos that ended up attracting maybe a couple hundred thousand sign ups for something that was definitely not a category you would think that people would flock to. But there's a lot of early adopter interest. Actually, one of the books I read on my roof was "Guerrilla Marketing, which is about, how do you get people to use your product or your service if you have no money? So low budget marketing techniques and these sort of viral videos were increasingly common back then.
Anyway, so we made a demo video for Dropbox, that was how we got our first couple hundred thousand users. But really, what ended up really working was we had this incentive referral program, so that if I invited you to Dropbox, you would get some free space, I would get some free space, so that two-side incentive and kind of gamifying ended up making something that was otherwise a pretty single-player utility into something that people used for sharing or that spread virally.
When Drew met Steve Jobs, and Steve Jobs trolled him
Shontell: One experience that you had that you've talked about in the past is you met Steve Jobs. And there was this moment where Steve invites you to Apple Headquarters.
Houston: Yeah, I wonder if it's more of a summoning than an invitation.
Shontell: Yeah, so how -- What was it like? I mean, I think so many people just wish they had had the chance to meet Steve, he's a legend, the Apple cofounder, unfortunately now deceased. You had the chance to meet him and he summons you to Apple as a startup founder. You must have -- were you terrified?
Houston: That was pretty intimidating because we'd had a bunch of conversations with Apple over the previous couple years and some of their teams were interested in actually a little bit in the technical implementation, they were asking us how we did some of the things we did to customize the finder and do some of the technical tricks to do the operating system integration but we kept getting kicked up the food chain and eventually heard that Steve wanted to meet us and I had talked to a bunch of my friends and the stories fell squarely in two categories: you either got Chill Steve or Very Mean Steve, so we didn't know which one we were gonna get.
Shontell: And so what did you get?
Houston: So we went into the boardroom, and you're looking around the walls and it's just this pantheon of all the Mac products or all the Apple products over the years, you know, from the original Mac onward, maybe even before. And so, everybody sits down and he leans back in his chair and he's like, where to begin?
Shontell: Not intimidating.
And so he started trolling us a little bit, saying we're a feature not a product, and telling us a bunch of things like that we don't control an operating system, so we're going to be disadvantaged, we're going to have to figure out distribution deals, which are risky, and sort of a bunch of business plan critiques. But then he was like, alright well I guess we're gonna have to go kill you, basically. Maybe not in those words but pretty close.
Shontell: So are you just shaking? Or how do you let that just roll off you? How do you not just say, ok Steve, I'm ready to sell. You convinced me, you're gonna kill me, you're freaking Apple.
Houston: Well, the thing is, a lot of the problems that he cited were not really specific to DropBox so, while it's true that we're not going to make DropBox work better than what became iCloud on an iPhone, Apple has the same issue if they want iCloud to work seamlessly on Android, or any other platform. And if anything, we were much more focused on solving this problem. So for each of the critiques, it was sort of like, ok I didn't want to get into much of a debate or make him angry. I was just like, don't make him mad, leave a reasonable impression, that was the only goal.
Shontell: And did he wind up giving you advice or helping you after you got all the trolling out of the way?
Houston: Yeah, the formal part of the meeting was over pretty quickly but then he stuck around maybe the rest of the hour. And I asked him,"Why'd you come back to Apple? And why Cupertino?" And things like that. And it was really interesting, he explained that he couldn't understand how Apple or any company could have $7 billion in revenue, have its customers paying several billion dollars, and still manage to lose $1 billion a year. He was like, I could not understand that. And he talked a lot about the early days. As troubled as the company was, as much as it was going to run out of cash in a matter of weeks, there were some, if you knew where to look, there were some gems in terms of talent and products in the pipeline.
Finding mentors in Silicon Valley, like Mark Zuckerberg
Shontell: You've had mentors along the way. Some famous founders. Who are some of the people that you kind of turned to for advice?
Houston: I think it's a lot of different kinds of people within tech, outside of tech. I really admire what Marc Benioff's done with Salesforce and Mark Zuckerberg's done with Facebook. And I think one of the great things about the Valley is they have this pay-it-forward culture and people are willing to share the lessons that they've learned. I certainly benefitted from that.
Shontell: Your birthday party was Travis Kalanick from Uber, and Mark Zuckerberg was there. Do you guys just all just hang out? Just swap advice and that's what you get when you go out to Silicon Valley?
Houston: Yeah. A lot of the founders who are building things at scale tend to be friends and trade war stories and get together every now and then.
Shontell: How did you first meet Mark?
Houston: It started by getting a Facebook message from Mark Zuckerberg and I thought it was like a prank or something or maybe like a fake profile, but I'm like, nope this really seems to be him.
Shontell: And what year is this?
Houston: This is maybe 2009 or something. 2010? A lot of Facebook alumni had ended up joining Dropbox so I think he was intrigued by that, probably didn't want that to keep happening. But he was like, "Why don't you come down to Facebook?" And so we talked about some of the things we could do together on the partnership front because they weren't really going to compete with us and as far as getting photos onto Facebook or other things that -- where we talked about maybe working together. And then we stayed in touch.
Developing a business model after raising piles of cash
Shontell: What is it like when you're founding a company and you're doing well and you're getting traction and then these giant companies like Amazon, Google, Apple, all decide that they're going to play in your sandbox and they've got so much money and they've got tens of thousands of people. As a founder, what do you do? How do you navigate that?
Houston: In some ways it's more intimidating when the product doesn't actually exist yet because it's like this boogeyman that will come at some point and might be really good and then when the product actually launches, then it's actually easier because it's something that you can react to. And sure enough, like a lot of the things that took us a lot of time to figure out took our competitors a lot of time to figure out.
We had gotten the advice that startups can win because they focus and because the density of talent on your team can be a lot higher. So you can have a really small, concentrated team of people who are really passionate, working really hard, you handpick them. And in a larger company, especially one that's working on a bunch of different things as they all do, that focus and talent density ends up being a big advantage. And we were fortunate that DropBox is something that looks easy to do because the interface is simple, but it's actually really hard under the hood. I think it was easy for the bigger companies to underestimate that and so we ended up having a longer window than we had anticipated to build up our audience and to build the foundations of business.
Shontell: And one thing you've had to do over your ten years at DropBox is create new revenue models and new business models. You started as a consumer product, which is great -- tons of awareness, 500 million users -- but now a lot of your revenue comes from a product that really didn't even exist for the first few years, right?
Houston: It was kind of a blessing and a curse that Dropbox was so general purpose and in the early days in particular, we struggled to explain what DropBox was for because if you go to a normal person and say, "hey, are you interested in some file synchronization?" They would have no idea what you're talking about. And people were using DropBox for all the things they would use a computer for, so they were using it for personal-use cases, work-use cases, kind of everything. But we found that the most valuable thing we did for customers was not just provide storage, it was really the sharing and collaboration, and certainly, even since the beginning, that's where a lot of the engagement has come from, that's where a lot of the value was created, it's certainly where a lot of the revenue comes from and whether it's individual people buying a subscription for themselves or expensing it on their corporate credit card, or whether it's a company buying DropBox, it's usually been some kind of work-use case particularly for paid users. And over time, we've worked alongside IT leaders to build in the kind of security control that you need when you go up towards the enterprise
Shontell: But that's hard to do -- to create kind of a -- this whole new business model almost from scratch and there's this kind of culture in Silicon Valley where you raise as much money as possible so you don't go out of business, and for a while there were these lofty valuations and if you're building a business model behind all of that, some startups never reach that lofty valuation. Looking back, you guys have raised $600 million. I think the 2014 valuation was $10 billion, which is huge. How did you think about the fundraising process and then how did you figure out how to grow into the valuation and make it all worth it?
Houston: Well I think the reason that investors have been excited about Dropbox and still are is that, just the market is huge. DropBox is something that every person, every team, every company needs and so, the ceiling is really high in terms of where this can go. In 2014, that was the last growth capital we really needed and then because we were doing a lot of work on the business model and tuning that and selling and the business version of Dropbox is growing, add all that up and then didn't need to raise more money, so we turned cash flow positive last year, hit a billion run rate earlier this year, and so, we wanted to make sure we raise the money because we wanted to make sure that we could grow and invest as much as possible.
Shontell: Did you ever have a moment where you were just like, it's too hard to go alone? Maybe we should join Steve or something? Did you have a moment where you almost were just like, I'm done?
Houston: I don't think we really ever had a moment where we were like ok, we really kinda need to hang it up. But along the way, there were all kinds of bumps in the road. You have all these really good things happening in a given week and then all these really bad things happening in a given week so it's especially hard for the team to kind of process the, not so much when it's kind of like things are going up or things are going down, but just that both are happening at the same time.
How Houston grew as a CEO on the job
Shontell: You started this when you were 24, it's ten years later, you've grown it to over a thousand employees, you have a billion in annualized revenue, how do you figure this out? Like how did you grow personally as a CEO?
Houston: I think at first you have to be systematic about training yourself and what you really want to solve for as a founder is making sure that your growth curve stays ahead of the company's growth curve.
And so that means figuring out what you don't know and learning it, and no one is going to do that for you. The challenge, especially as a company is scaling, is that your job as a CEO changes every 12 to 18 months, it's just that no one taps you on the shoulder and tells you that. Furthermore, you might not get a lot of partial credit for the stuff you've done well, you're judged by a completely new scorecard.
So for example, in the beginning, you're just spending time building a prototype and it's all about creating the product. But then, once you have a product, you need users -- how do you get distribution, how do you grow -- that's a whole different challenge. And then the scorecard changes again once you have distribution, then you need revenue and then you need a working business model. Then you get competitors, and then it's not just revenue but it's actual cash flow or profit. And so, as in real life, the scorecard changes at these different breakpoints and different points of adolescence or maturity in the company. That's probably the most bewildering part of the job is that your job changes so much. Just when you think you're getting good at the old job, you have a new one that is totally unfamiliar.
Shontell: And so what's your job these days? What do you do as CEO of a $10 billion company?
Houston: It does level off and you do learn all the different parts of the job, so it becomes less daunting over time. I focus on what's our pipeline of product? Some stuff is still the same. It's just, "How do I make sure that we have the absolute best people on the team, how do we make sure they're working well together?" And fortunately if you bring on great people, you divide and conquer on this problem. So we've brought in great leaders from all the great companies, which helps a lot.
Houston's advice to future leaders: start early
Shontell: So I promised I wouldn't ask you the question that everybody asks you, which is when are you going to IPO? But I think we can assume it's probably on the horizon soon, so when that happens, good luck with that. But let's go for a final question, if you're talking to a kid who's at MIT right now where you were 10, 11 years ago, thinking about starting a company, looking at Silicon Valley - what's your advice to them to get started?
Houston: It really helps to start the clock early and it really helps to think about -- again be systematic about learning. So what that means in practice is, I've always found it valuable to ask myself, "One year from now, two years from now, five years from now, what will I wish I had been learning today?" And what would have been a relief to my 24-year-old self is a couple things.
First, no one is born a CEO. This is an acquired skill set and furthermore, it's one that you learn on the job. So everyone is a first-time CEO by definition at some point.
Second, just about everything is learnable. I started out just on the engineering side, I had no real business experience, I literally went on Amazon and typed in "sales" or "marketing" or "strategy" and would just buy the couple top-rated books, and that's what I would do on the roof of the fraternity, I would just read.
But whether it's just the fundamentals of business or things like public speaking or being more inspiring or being a better leader, these are all things you can get better at with practice. You should set your sights high in terms of what you aspire to do, but you also have to be patient, it's like playing an instrument. You're not going to be great as a public speaker or you're not going to improve a lot in five days, but in five years you might be really surprised at how much you can improve.
Shontell: Alright, so basically just get started, start the clock early. Does that mean as soon as possible, get out there?
Houston: Yeah and don't -- I think the recipe to get into school is like, check all these boxes and get ready, get ready, get ready, but real life doesn't work like that. So instead of getting ready, what you really want to do is get started.
Shontell: Great, well thank you so much, Drew, and congrats.
Houston: Thank you.