Is Dropbox Worth $8 Billion?

The popular storage service is the latest young tech firm to coin a sky-high valuation.

Another day, another sky-high valuation of a tech company.

On Tuesday, technology investors turned their eyes to Dropbox, a cloud storage service that a lot of people (myself included) use for storing or sharing photos, videos and documents. Dropbox has a “freemium” model. The popular service is free until you use up a certain amount of storage, at which point users can sign up for monthly or yearly plans. The five-year-old startup, based in San Francisco, is embarking on a round of fundraising seeking $250 million—which would value the whole thing at $8 billion.

$8 billion.

This comes while our eyes are still returning to their proper place after news that popular-with-the-teens photo messaging service Snapchat turned down a $3 billion cash offer from Facebook, and an investment from Tencent that would have valued it at $5 billion. And it comes after revenue-less bookmarking service Pinterest was recently valued at $3.8 billion.

So what makes Dropbox think it is worth that much?

First, it has a large and growing audience. And in the case of Dropbox, more users is translating into more revenues. “With over 200 million users and 4 million businesses, Dropbox has continued and strong momentum,” said a spokeswoman. According to the Wall Street Journal, Dropbox had revenue of $116 million last year, $46 million in 2011 and $12 million in 2010. It expects revenues to grow to $200 million this year. In 2011, during its last fund drive, it was valued at $4 billion.

Second, storage is hot. It may sound boring and passive, but data storage is active and sizzling, with all sorts of Davids and Goliaths competing for a lucrative market. Why? With each passing day, more people are creating information that they’d like to store—pictures, texts, documents, videos. And Dropbox is the most popular for individuals seeking cloud-based self-storage.

As large as it has become, Dropbox still has tremendous room for growth and monetization, both in the consumer and enterprise worlds. “It could become the universal place to put stuff,” says Jeffrey Mann, vice president of research at Gartner Inc. If users deposit everything from financial information to saved video game data in their Dropbox accounts, “it increases usage as well as audience.” And any time anybody can become the default for something (Google for search, Microsoft Office, YKK for zippers) that’s huge. “I think in terms of storage, they come closest,” says Mann. Should that happen it would open up the possibility of charging third parties to make themselves more Dropbox-friendly. As Dropbox CEO Drew Houston told Wired in a company profile, Dropbox wants to become the “spiritual successor to the hard drive.”

Dropbox is well-oriented to making it easier for consumer to turn to it. A year ago it introduced Dropbox Mobile, which made uploading and sharing files on the go easy. The second major area for growth, and perhaps the most lucrative is in enterprise (companies). “The scourge of enterprise IT departments” is how Mann referred to current attitudes about Dropbox. Due to security concerns (thanks to security breaches and outages) most IT heads often are asking how they can get rid of Dropbox. And yet Dropbox, as investors well know, is in such a unique position that it almost doesn’t matter. In what has been dubbed by some as the “Dropbox Myth”, Dropbox has developed a novel way of selling its services to companies. It tells potential corporate customers that their employees already use Dropbox (even when they’re told not to do so), so it would make sense for the company to add the service. Of course, cracking this market will require some costly legwork. While it has released more enterprise functions like Dropbox for Business, which allows a single sign-in that separates business files from personal ones, it is still far behind competitors in terms of security, functionality and reputation. And some companies, apparently unaware that a lot of employees hate their internal company systems, will always seek out storage systems they can control. Yet if, let’s say, companies stopped fighting Dropbox and it added more control and security, there are gobs of money to be made. As Mann says, “people just drift back to Dropbox.”

However Dropbox does face some daunting challenges. While it is certainly the belle of the ball in terms of consumer popularity in the online storage industry, there is a downside to being in an industry on the upswing—lots of competition. On the enterprise side companies like Microsoft, Google, Salesforce and EMC already have large parts of the market and don’t piss off IT departments nearly as much. Another storage competitor which also has some investors salivating is the snappier-named Box. Dropbox also has challengers like Sugarsync, YouSendIt, and Amazon (as well as Microsoft and Google) in the consumer sphere.

And so while Dropbox’s self-valuation of $8 billion is high it is still less pie-in-the-sky than other tech valuations. Unlike Snapchat, for example, Dropbox has significant revenues and a clear plan to get more. Plus, some see the fundraising move as a holdover until the company makes more inroads in enterprise and can make a huge splashy IPO. And when that happens, we’ll reconvene to wring our hands once again about the overblown valuations of young tech companies.