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Money News

What Took Dropbox So Long to Go Public? We Explain What an Exit Is

March 13, 2018

  • Cloud storage and workplace collaboration software company Dropbox is going public
  • Dropbox hopes to raise more than $600M from the sale
  • Investors achieve an “exit” when a company has an IPO
3 min read

Cloud storage and workplace collaboration software company Dropbox is going public. Its initial public offering, or IPO, is expected to be one of the biggest for 2018.

The company hopes to raise $648 million from its stock offering, according to reports. The offering will take place in the next few weeks.

When a company has an IPO, it sells shares to the public through a stock exchange such as the Nasdaq or the New York Stock Exchange (NYSE). It has an IPO typically to raise cash to fund operations, to build new stories or factories, or to conduct research and development, among other things.

But why is Dropbox selling shares to the public now?

What’s an exit?

Venture capitalists and other investors put money into a company not only because they believe in its vision and want to help it grow and become successful, but because they hope some day to make a profit from their investment, just like any other investor.

One way they do that is through something called an exit. An exit occurs when an investor, or set of investors, sells its ownership in a company, with the goal of making a profit. One way investors achieve an exit is through an IPO, which lets them sell their shares to the public.

What’s a “unicorn?”

All along, the company has a value. And as investors put more and more money into a company, its value typically keeps growing.

In the tech world, private companies that have reached a valuation of $1 billion or more are called unicorns. That’s a big milestone for any company to reach. There are about 200 of these today.

Dropbox was founded in 2007 by Drew Houston, and since that time, it’s received more than $1 billion in funding from outside investors, in various rounds.

In Dropbox’s case, it has a valuation of about $7.1 billion, according to recent reports. That puts it in the company of other unicorns such as Uber, which has a valuation of $68 billion, and Airbnb, which has a valuation of $30 billion.

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Angels and investors

Typically, the first money a company receives is called an angel round, from wealthy individuals known as angels who put a small amount of money into the earliest stages of a company. From there, a company will often graduate to venture capital money, which is more formal financing from a partnership that organizes a fund.

Many of the most prominent venture capital companies are in Silicon Valley, where some of the fastest-growing tech companies in the U.S. are. But a number of important VCs also exist in Silicon Alley in New York.

The venture financing rounds are usually given letter names to indicate when they happen. So the first round will be called an A round. The second will be called a B round, and so on down the line. Typically, the rounds get larger as they advance.

Over the past few years, financial experts have talked about the increasing length of time it has taken unicorns to go public. These companies have received big valuations and pots of money, but often wait ten years or longer to go public, which is more than double the time it took companies to go public in 1999.

Amazon, for example,went public in 1997, just three years after its founding in 1994.

One important reason for the change, according to consultancy McKinsey & Company, is that promising young tech companies have more private capital available to them now than they did in the past.

Pricing shares

Before a company goes public, it has to set the value of its shares. It does this based on previous valuations the company has received, but also following a process called the “road show.”

The road show is when the investment bank in charge of the offering goes out to big investors to assess their interest in the stock. The price is usually determined following the roadshow, when the investment bank has a better sense how much people are willing to pay for the stock.

Dropbox’s $7.1 billion valuation is lower than the $10 billion valuation it received several years ago from private investors, which indicates Wall Street may not be willing to pay as much for the company as previous investors, according to reports.

Good to know: Dropbox’s Houston owns 25% of his company today, according to the company’s prospectus. Each time he received more venture capital money, he had to sell off part of his ownership of the company. (Venture capital company Sequoia, for example, owns about 23% of the company.) Nevertheless, considering its current valuation, Houston’s stake would be worth about $1.7 billion.

By Jeremy Quittner
Jeremy Quittner is the senior writer for Stash.

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