Cloud value questioned as Dropbox seeks funding

Even amid the current mania for investing in internet companies, there are few more intriguing cases than the cloud storage providers.

Saving your pictures or other files, synching them across devices and creating back-up copies sound like the kind of tedious tasks that few people would want to spend much time thinking about, let alone actually pay for. Should not this kind of thing just, well, happen?

Yet Dropbox, the best known of these digital backroom functionaries, hopes in the next couple of weeks to close a new round of funding that values it at around $8 billion (Dh29.3 billion), according to one person familiar with its plans. The financing, first reported by Bloomberg Businessweek, would lift the total Dropbox has raised above $500 million.

Aspirations like this count for little until the money is actually in the bank. But the figure sounds almost modest set against the $4 billion that the company was deemed to be worth at the time of its last financing two years ago.

Back then, it only had about a quarter of the 200 million users it claims today — and internet valuations have since gone through the roof.

Finding the right yardstick with which to measure Dropbox is not easy. The storage company had revenues of around $110 million last year, according to a second person familiar with its finances. Even if its subscriber growth has kept pace with its user base, which has doubled over the past year, that makes the valuation look like a stretch, at more than 30 times revenue. Yet Twitter hit an $8 billion private market valuation when its financial profile was very similar to that of Dropbox now — and anyone who invested at that stage made a killing.

Dropbox also has the sort of subscription-based business model that many investors prefer to the reliance on advertising of services like Twitter. Users who want more than a free 2GB of storage pay $99 a year. Few people choose to pay, though. A back-of-the-envelope calculation suggests that only around three out of every 200 users actually become subscribers. The rest are free riders. That hardly sounds like a must-have value proposition.

Alternative services from companies like Google, Apple and Microsoft are becoming more attractive all the time. Dropbox likes to say that much of its value lies in working seamlessly across these companies’ different mobile platforms, yet with the exception of Apple’s iCloud, most of the other services are also already broadly accessible.

Dropbox has just redoubled its attack on the business market against rivals like Box, a cloud storage company that has styled itself more like a traditional enterprise software concern and is preparing for an initial public offering of its own. As workers shift corporate files into their personal accounts on services like Dropbox, IT managers have strong incentives to sign up for “enterprise-grade” versions of the service to control how the information is used.

Dropbox may yet find the sweet spot dreamt of by many consumer internet start-ups — riding a wave of viral enthusiasm into the business world without the need for heavy investment. But Salesforce.com, one of the oldest software-as-a-service companies, still spends more than 50 per cent of its revenue on sales and marketing.

If so, then it does not matter that few of its personal users dip their hands into their own pockets. Their employers will eventually pay up. There is also a strong network effect. As more of the people you know want to share files with you from their Dropbox accounts, the more likely it is you will need an account as well.

However, this does not look like the sort of winner-takes-all market that exists in other parts of the internet world. Cloud storage services have much in common with another category of companies that has become a hot property recently: mobile messaging apps. Facebook’s unsuccessful $3 billion offer for Snapchat was a sign of how such companies are starting to make the incumbents nervous.

In the case of both cloud storage and messaging, it is easy to sign up for and juggle multiple services. Users tend to switch between different apps depending on the type of information that is involved or the people with whom they are sharing or communicating. The cost is a fragmented online life — but that is made up for by variety in the range of experiences on offer.

With a strong brand and a growing customer base, Dropbox is the clear favourite among pure cloud storage companies at the moment. But it will have to show that it can forge a more lasting, and valuable, tie with its users before it can convince Wall Street to pay a premium for a storage utility.

Richard Waters is the Financial Times’s West Coast managing editor