How Dropbox billionaire Drew Houston hacked viral marketing and user retention to launch a $7.9 billion company
- Dropbox cofounders Drew Houston and Arash Ferdowsi entered a saturated cloud-storage space.
- They differentiated themselves with the strength of their product, which was created out of their own frustration with what was on the market.
- Houston told LinkedIn cofounder Reid Hoffman exactly how he and the team drove growth and retention, even without a powerful industry backer, on an episode of the podcast "Masters of Scale."
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Today, Dropbox is a $7.9 billion giant.
It brought in $428.2 million in total revenue in the last fiscal quarter, and had more than 500 million users and over 2,300 employees.
But it was once a scrappy startup in a crowded field.
Until, as CEO Drew Houston explained to LinkedIn founder Reid Hoffman on his "Masters of Scale" podcast, the founding team figured out a viral-marketing strategy to push them ahead of the competition.
It's a lesson for anyone trying to grow their audience — fast.
The founding story
In 2006, online storage was a startup cliche and the default virtual realm to conquer. The space was littered with the graves of companies that had tried and failed to implement a concrete solution.
Even though the idea of cloud storage wasn't novel, Houston and his cofounder Arash Ferdowsi came at the problem from the perspective of frustrated users. There were many cloud-storage options on the market, but there were none that Houston could personally trust with his files.
Houston and Ferdowsi ran with their approach to found Dropbox. Today, Dropbox has a market share of 24.10%, outdone only by Google Drive at 34.68%. More than 500 million people use the service, and paying users totaled 14 million in the third quarter.
"Part of it was not really thinking about a market or a company. I was just thinking, 'God, I need to get to my stuff from multiple computers,' as an end user," Houston said.
Houston knew he could outpace the smaller competitors in the field because he had firsthand knowledge of where their offerings fell short.
"I had some insight into why this looked easy, but it was actually hard to do, and kind of just jumped in," Houston said. "I thought I could outrun the smaller guys."
Twelve years ago, success wasn't guaranteed. After being accepted to the famous Silicon Valley accelerator Y Combinator, Houston and Ferdowsi faced skeptical investors and competition from the Goliaths of the tech industry, like Apple, Microsoft, and Google. Investors would tell Houston that Dropbox was "probably going to get crushed by the big guys."
Houston would respond: "We probably will get crushed by the big guys. That's OK. I'll at least not have to carry around a thumb drive anymore."
Eventually the venture-capital fund Sequoia led Dropbox's $1.25 million seed round. According to the PitchBook-NVCA Venture Monitor Report, Sequoia realized about $2 billion from its initial investment when Dropbox went public in March 2018.
Hoffman characterizes Houston as fearlessly obsessed with his product, with very little to lose. Houston decided not to partner with a large company, even after an in-person offer from Steve Jobs, because the weight of a large partner couldn't balance the loss of agility Dropbox would suffer.
Dropbox needed users but wanted to maintain internal agility.
Houston and Ferdowsi decided to use a method that their competitors hadn't mastered to spur growth in the Dropbox user base: referrals.
Driving growth
The referral method wasn't novel: PayPal had done it with its $5 referral fee. But Houston wanted to make things simple. He offered extra storage space for referrals, and there was no upper limit of how much extra space a user could get.
"There were a lot of companies that had credible products," Houston said. "But we were the one that cracked this viral playbook."
The result was exponential growth, to a certain point. Dropbox went from 100,000 users at launch to double that 10 days later. Seven months down the line, the company was at 1 million users, and the number kept rising.
Solving the retention problem
Retention was an issue, however. Initially, 60% of people who signed up for Dropbox via a referral ended up not using the service.
Houston wanted to know why. He went on Craigslist, offered $40 to anyone who would come in and work through using the service, from receiving a referral link in their inbox to sharing a file. Houston described this method as "a poor man's usability test."
The test results weren't great — failing, in fact. Zero of the five people succeeded in using Dropbox successfully, and most couldn't even figure out how to download it. Some would get frustrated if the download took too long, so they'd start browsing something else and then couldn't figure out where Dropbox downloaded to.
Houston and his team pinpointed exactly what tripped people up and fine-tuned user experience accordingly. They ended up with 80-some issues listed in a shared spreadsheet.
"We still fundamentally think about the business in those terms: How do we acquire customers? How do we activate them? How do we retain them, monetize them? And so on," Houston said. "I can't stress enough how important getting that right is for a product where you want to have scale."