How Sequoia’s $2 billion Dropbox win became as big as it is

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Sequoia’s Bryan Schreier (left) and Dropbox’s Drew Houston

Here’s how a few investors — Sequoia, Accel and Y Combinator — managed to score huge, even if not equal, paydays.

Dropbox doesn’t have a typical venture capital history.

And that means that Friday — when founder Drew Houston rings the opening bell at the Nasdaq — won’t be a typical IPO celebration for its biggest backer, Sequoia.

It’s an abnormally large win: The marquee venture capital firm owned 25 percent of the company before the IPO. And that percentage reflects a big lesson about Silicon Valley finance: It’s hard to get rich in tech if you aren’t early to a deal.

Sequoia, which as of now is poised to return between $ 2 billion and $ 3 billion on its initial investments, led the company’s first two new financing rounds, out of a total of only four. This means that the firm had less competition from new investors who would dilute its ownership stake. Sequoia also bought shares of the company at a drastically cheaper price than later lead investors — the valuation jump in Dropbox’s early years was wilder than other Silicon Valley darlings.

Those dynamics leads to a funky financial portrait. For example, Accel Partners — which did not lead any round but invested in the company’s Series A financing in 2008, which valued the company at $ 25 million — owns more of the company than Index Ventures, which led Dropbox’s Series B round three years later that valued the company at $ 4 billion, according to the company’s S-1 filing.

But the payday at Accel isn’t without some dispute, which originates with who gets the credit for the Dropbox success story. Sequoia’s lead partner on the company’s seed deal, Sameer Gandhi, left for Accel Partners in the spring of 2008. But a few months later, Sequoia made it a priority to cut Gandhi, now at Accel, into the company’s Series A deal, according to multiple sources with knowledge on the move.

That decision wasn’t nothing: It led to more than a $ 500 million equity stake for Accel.

Other early backers missed out a bit on some winnings: Y Combinator, the influential incubator that has marketed itself in part on birthing Dropbox, sold about half of its holdings to other investors at around the same time as the Series B financing round led by Index, according to a person with knowledge of the deal. This transaction hasn’t previously been reported.

That’s the only time that Y Combinator has ever sold any portfolio company’s shares in a secondary transaction, the person said — the money was directed to help fund Y Combinator operations.

Index, for its part, then had to buy shares at a substantially higher price than Sequoia, Accel and Y Combinator did, albeit with lower risk. Dropbox was so financially successful that it didn’t have to raise money between 2008 and 2011, a three-year gap during which the share price grew to 150 times higher.

Even rapidly-growing companies typically would raise a round — if not multiple rounds — between those share prices. But Sequoia, according to people with knowledge of the process, often told Dropbox in those early years that if the company needed more money, the venture firm could quickly supply the financing without the need for an external fundraising process.

In the eyes of some, the subtext was: We’ll take care of you — so no need to dilute our ownership position.

But Dropbox didn’t need it. Business was booming. Dropbox’s model was so strong and it was growing so rapidly in its early days that it was able to skip those traditional growth rounds — think financings that value a company at the hundreds of millions of dollars — and jump forward to 2011, when it was worth $ 4 billion.

The company would then go onto raise the Index round, a $ 350 million round in 2014 led by Blackrock, and then about $ 1 billion in lines of credit in two batches, the second as recently as last spring.

But Dropbox’s IPO filing earlier this month speaks for itself: This is a Sequoia company.

Sequoia did not start out with an unusually large percentage of the company in an early-stage deal — about 25 percent. But given how cheaply the firm bought into the company, it did not have to aggressively invest in later rounds after 2011 in order to maintain its ownership position. (Accel did participate in some later financing, or pro rata, to make sure it owned enough of the company.)

Sequoia has long had a particularly close relationship with Y Combinator, but Dropbox was not the hottest target among the YC batch of startups. There were competing companies — startups that later floundered like SugarSync promised to do the same thing. But Sequoia saw something in Houston and his co-founder Arash Ferdowsi, two highly-touted MIT engineers.

The company says the first outreach came from Sequoia’s Doug Leone. Also involved was Leone’s co-leader of the U.S. operation, Mike Moritz, who made a now-fabled trip to Houston’s apartment on Russian Hill in San Francisco on a Saturday morning.

“We walked into the Sequoia offices, and on the walls were the original stock certificates of Apple and Cisco,” Houston said in a 2011 interview. “It was daunting. I was thinking, Holy shit, I’m just some kid. What the hell am I doing here?”

Gandhi isn’t mentioned on the Dropbox page on Sequoia’s website. But it was he who later hammered out the terms with Houston over dinner, the CEO has said. Gandhi joined the board, but the Sequoia director seat eventually came to Bryan Schreier, a well-liked former Google sales executive who joined Sequoia in March 2008, a few months before Gandhi would depart for Accel.

Schreier has now served on the board for a decade and is one of Houston’s consiglieres. And he’ll be behind him at the opening bell on Friday morning.

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Meerkat was the darling of SXSW in 2015. Here’s why it pivoted three months later and became HouseParty.

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HouseParty CEO Ben Rubin in 2015, wearing a Meerkat t-shirt

Founder and CEO Ben Rubin explains the livestreaming company’s extreme makeover on Recode Media.

Three years ago, the mobile livestreaming app Meerkat was the app of South By Southwest in Austin, Texas. But this year at SXSW, Meerkat’s founder Ben Rubin was happy just hanging out.

On the latest episode of Recode Media with Peter Kafka, Rubin reflected on why, just months after SXSW 2015, he pivoted the Meerkat team away from livestreaming into a different product, HouseParty. For starters, the splashy debut was not as carefully orchestrated as it may have seemed at the time.

“Two weeks before the conference, people were already streaming and talking about ‘Meerkat at South By,’” Rubin said. “But it was just me, a chubby guy with a yellow t-shirt that didn’t even know he was going to South By four days before that.”

The mobile broadcasting model — later mimicked by Facebook Live, Facebook-owned Instagram and Twitter-owned Periscope, among others — wasn’t good for making “meaningful connections,” Rubin noted.

“The amount of people who can make meaningful live content on a daily basis is very, very few,” he said.

Although Meerkat attracted millions of users, the company noticed that they would broadcast once or twice and then peace out — so, Meerkat became HouseParty, which lets multiple friends video chat with each other simultaneously (think FaceTime, but for groups). Rubin characterized that decision as a “pivot from courage,” rather than a “pivot from fear.”

“The pivots from fear always come too late, and three months before you run out of money,” he said. “A pivot from courage is the one where everybody’s shaking in the chairs in the board meeting. Everyone was afraid because I was this crazy guy who’d just raised $ 12 million.”

You can listen to Recode Media on Apple Podcasts, Spotify, Pocket Casts, Overcast or wherever you listen to podcasts.

On the new podcast, Rubin said the thing he cares most about HouseParty creating is a sense of “presence” among the app’s users — a technological fascimilie of hanging out in the same room with other people, including not-close friends. Half of the app’s users are under the age of 24.

“Everybody has two or three friends who they can FaceTime at any minute, out of the blue,” he said. “But there’s another 20 people who, ‘It’s gonna be weird if Peter FaceTimes me out of the blue, why should I answer this?’ With HouseParty, it’s actually okay to say ‘I’m around’ and for your friends to opt in, and their friends can join in.”

“That’s one of the beautiful things about the internet, the ability to have connections that you otherwise would not have,” Rubin added. “Everything became flattened into a two-dimensional feed. A real dialogue between people is bringing back empathy that I think we’ve been missing.”

If you like this show, you should also sample our other podcasts:

  • Recode Decode, hosted by Kara Swisher, is a weekly show featuring in-depth interviews with the movers and shakers in tech and media every Monday. You can subscribe on Apple Podcasts, Spotify, Pocket Casts, Overcast or wherever you listen to podcasts.
  • Too Embarrassed to Ask, hosted by Kara Swisher and The Verge’s Lauren Goode, answers all of the tech questions sent in by our readers and listeners. You can hear new episodes every Friday on Apple Podcasts, Spotify, Pocket Casts, Overcastor wherever you listen to podcasts.
  • And finally, Recode Replay has all the audio from our live events, such as the Code Conference, Code Media and the Code Commerce Series. Subscribe today on Apple Podcasts, Spotify, Pocket Casts, Overcast or wherever you listen to podcasts.

If you like what we’re doing, please write a review on Apple Podcasts — and if you don’t, just tweet-strafe Peter. Tune in next Thursday for another episode of Recode Media!


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57 startups became unicorns this year and seven lost their horns

2017 is the third-busiest year for companies reaching $ 1 billion valuation.

The unicorn club gets new members by the week. This year alone, 57 startups around the world attained unicorn status with a valuation of $ 1 billion or more, according to data from venture capital tracker PitchBook.

Seven companies that were once considered unicorns have seen their valuation dip below $ 1 billion so far this year, either through down rounds or down exits. Last year there were only three down rounds or exits. The Honest Company and Prosper both saw their valuation shrink below $ 1 billion in subsequent funding rounds, according to PitchBook. Down exits this year included Souq.com, which was acquired by Amazon for $ 650 million, and Shazam, which Apple purchased for $ 400 billion.

Overall 2017 wasn’t the biggest year for unicorns — that award goes to 2015, which boasted 81 new unicorns — but it certainly has been busy.

Social platform Reddit, bitcoin marketplace Coinbase and ride-hail company Careem are among the notable entrants this year. Synthetic biology company Ginkgo Bioworks is the latest inductee into the group, thanks to a $ 275 million funding round last week.

Altogether there are now a total of 227 active unicorns, according to PitchBook.

Here’s a look at the companies that have attained unicorn status this year, by their valuation and how much venture capital they’ve raised. Revenue data is available from the few private companies that made that information public. Click on a company to see its industry category.

A few notable stats from this year’s unicorns:

  • Content recommendation platform Toutiao had the highest valuation, VC raised and revenue of all the unicorns this year.
  • Four startups — Outcome Health, SenseTime, VIPKid and Mobike — had at least one female founder.
  • About half of this year’s startups focus primarily on information technology and software.

The PitchBook data included goes through Dec. 14.


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