Dropbox, Inc. is a privately held file hosting service company based in San Francisco, California. The company specializes in cloud-based storage, synchronization, personal cloud and client software. Essentially, Dropbox allows users to create unique folders on their personal computers; the software saves and syncs those folders to the cloud, where the users can view the files within those folders at any computer location. The company filed for an initial public offering, pricing its shares at $16-$18 a piece and pegging its valuation as high as $8 billion. While this valuation is lower than $10 billion it received during a 2014 funding round, the company has achieved rapid growth since it was founded in 2007, with over 500 million users in over 200 countries as of 2018.

Along with the valuation and IPO pricing, Dropbox also announced a $100 million pre-IPO private placement to Salesforce Ventures (CRM), reported CNBC.

Valuation and Private Companies

With private companies, however, it's immensely hard for an outside investor or stakeholder to receive an accurate valuation. Unlike public companies, private companies are not required to disclose any financial information, proprietary data or financial statements to the public. Public companies are easy to value since they are required to disclose information to the public at least quarterly, and they also have a public market cap and price per share.

This inability to value private companies accurately has become more of an issue since technology startups have grown to garner multibillion dollar valuations in short periods of time. If an investor can accurately value a private company with confidence, they can either invest as an angel or as a venture capitalist, or they can confidently buy public shares in an eventual initial public offering (IPO).

Dropbox's Valuation

The latest $8 billion valuation is 20% lower than the previous numbers reported four years ago. Dropbox was given a $10 billion valuation in January 2014 after the company raised a $1.1 billion investment round. When a private company decides to raise funds, it goes through a 409(a) valuation by an independent third-party firm. The firm gains exclusive access to the company's books and data.

The 409(a) valuation gives the private company a overall value as well as a price per private share. After the value has been decided, investors can come offer to buy shares for a specific price per share, usually priced at a premium to the true value per share.

The $10 billion valuation was derived due to the post-money valuation after the $1.1 billion investment round. However, many knowledgeable firms, such as Business Insider and CB Insights, claimed that this valuation was too high.

Slow Growth, No Innovation

In January of 2017, CEO Drew Houston announced Dropbox's annualized revenue run rate was $1 billion, making it one-tenth of the then $10 billion valuation. With the company going public, it now faces an uphill challenge of delivering big growth in order to keep investors hooked.

Dropbox has chosen to operate in a highly competitive business environment. Competitors such as Google Drive, Amazon Cloud (AMZN) and Box (BOX) have caused what's known as a race to zero, where competitors keep slashing prices so they can compete in the marketplace. (See also: Dropbox's Top Competitors)

These large companies, such as Google (GOOGL), are not afraid to burn dollars. Dropbox may be facing a never-ending decline in prices. This especially harms the company due to an overall lack of innovation.

With falling prices, the only way to increase a price point is by developing and releasing innovative new features or products. If Dropbox is unable to do so, it could see its business decline in the future.

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.