Dropbox: The hottest startup you've never heard of

March 16, 2011: 5:00 AM ET

A company that wants to bring online storage and sharing to the masses? Hardly original, but with numbers like these, Dropbox may do just that.

The startup on every venture and angel investor's lips these days isn't a social media company or a site hawking coupons. No, the tech world is currently enamored with Dropbox, a four-year-old company that aims to bring cloud computing -- that catchall phrase corporations use to describe services delivered via the Internet -- to consumers and businesses.

MIT graduate Drew Houston co-founded the startup in 2007, when he got tired of keeping track of his USB thumb drive. Without a quick and easy replacement, he did what any entrepreneur would do: created one himself.

Dropbox lets users store digital files -- photos, personal documents, music -- in an electronic locker that the owner can access or share on nearly any Net-connected device. Its strength lies in its simplicity. Download the utility, create an account, and you're ready to go. Users put all their electronic files in a virtual folder -- the one that lives in the cloud -- where they can interact with the files via the Dropbox app or website as if they were in any regular computer folder, view photos in Gallery format, and share them with non-users.

"They've said, 'Look, rather than try to do every folder on your machine, do it with one folder, and do a killer job at it," says Forrester analyst Frank Gillett. "That extreme focus has produced the 'Wow' factor to really impress people."

SalesForce.com (CRMCEO Marc Benioff, who knows Houston and says he follows the company, agrees. "I can take a file, access it anywhere, and it just works," he says.

Which is why, despite scant marketing and loads of competition, the service has earned millions of devoted customers who use it for tasks like co-writing books or even coordinating multiple self-steering farm tractors.

One of them is Dave Goldberg, CEO of the online questionnaire company Survey Monkey and a friend of Houston's. Last year, Houston shared photos of a dinner they had together via Dropbox, and Goldberg got hooked. Survey Monkey relies on Dropbox for file sharing, and Goldberg more recently converted his family to the service.

"It's not a new concept, but sometimes you have the right team in the right place at the right time with the right product, and it just clicks," he says. "I kind of think that's what Dropbox is and has done. Lots of people have done social networking before Facebook, but making it easy, fast, clean and simple, and then iterating based on what consumers want is also important."

Silicon Valley insiders attribute Dropbox's success mostly to word of mouth and an attractive referral program. The service uses a "freemium" model where the first two gigabytes of storage is free (more capacity costs up to $20 a month), but for every friend who signs up for a free or paid account, both the referral and the referrer get an additional 250 MB. Dropbox also earned some choice product placement: It's a featured app in the Apple App Store.

Dropbox has also accepted surprisingly little venture funding. It received seed money from Paul Graham's Y Combinator four years ago and snagged about $7 million from Sequoia Capital, Accel Partners, and others -- a pittance compared with the nearly $1 billion raised by Groupon earlier this year. Meanwhile, investors like angel Ron Conway, who says he sees roughly 70% of all startup deals in the Valley, are dying to get in on a piece of the company.

What gives? Thanks to a lean operation with some 45 employees, Dropbox reportedly experiences well over 10 times year-over-year growth and positive cash flow. Sources say its revenue met internal 2011 sales projections in 2010, and Benioff predicts sales could hit $100 million this year. (The company declined to comment.) Others, like tech entrepreneur Praveen Yajman, another friend and former coworker of Houston's, indicate the company may already be worth between $1 billion and $2 billion, making it ripe for acquisition and a healthy exit for investors, or setting it up to be a major independent player in the consumer cloud race. Good signs to be sure, and yet, the company doesn't appear to be taking itself too seriously. Case in point: Dropbox's jobs page has a random cartoon AK-47-wielding T-Rex riding a great white shark.

Obviously such shop talk, particularly about a company's valuation, can sometimes be more art than science. And there's little to stop Google (GOOG), which offers online storage through Gmail, and Amazon (AMZN), with its own Amazon Web Services, from making a greater push into Dropbox's territory. But all signs point to the fact that the company has enough general support and escape velocity to become one of the few real winners in the cloud once the dust settles, which cartoon dinosaur or not, is some serious business.

Also on Fortune.com:

Apotheker sets HP's course: Heading for the cloud

Google enterprise chief: Data is safer on our cloud than your PC

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About This Author
JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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