Drew Houston : How to Build the Future

Hi, I'm Sam Alden. This is "How to Build the Future." Our guest today is Drew Houston. Thank you for taking the time.

Thanks for having me!

So, you were in Y Combinator with Dropbox in the summer of 2007?

That's right.

How did you come up with the idea and end up at YC in the first place?

Well, I had the idea; it was born out of frustration. I kept forgetting my thumb drive. The sort of origin story of the company was when I was riding the Chinatown bus from Boston to New York and forgot my thumb drive and couldn't get anything done on the trip. Then I had another problem, as I was working on my first company, which we can talk about. I had a real pain point around collaborating with my co-founder on the things that we were working on. So out of personal frustration, I hacked together all these scripts to try to fix it, but that bus ride was the last straw.

You mentioned this was the first time you had applied to YC before and were rejected.

Yeah, we were rejected the first time. I thought it was a really good call.

I would agree, it was a good call. My first company is called Accolade, and it was doing online SAT prep because we realized back in the day the SAT was changing, and no one had really built a good online course. So, I started that company, applied to YC, and was rejected largely because we were both part-time on a couple of other reasons, and market-side products and other stuff.

Did you interview? What were you protected without it?

We were rejected without an interview. A little while later, I got more feedback about what happened and some of the concerns. One was that my co-founder and I didn’t know each other so well; neither of us was full-time on it.

What happened with your co-founder?

We kept working on the company until I started Dropbox, and then we sort of drifted apart.

You applied to YC as a single founder and then met Arash shortly after, right?

Yes, I met him shortly after.

So, you talked about that. Sorry, isn't it usually that these co-founder stories start with my childhood?

Oh, we played a jig! We only knew each other for maybe two or three hours before we decided to work together.

Wow, that’s pretty quick. How did you—what gave you the confidence to be okay with doing that?

A lot of it is funny. I applied as a single founder to YC and got an email from Paul saying, “Hey, the idea seems interesting, but you really need to find a co-founder.” The only problem was that the application deadline was like three weeks away. So, that’s like saying you need to get married in the next three weeks.

Okay, so what happened?

I asked Kyle Vocht, who was one of the founders of Justin.tv, which turned into Twitch, and then started Cruise. Kyle and I knew each other from MIT; we were both on the Entrepreneurs Club together. He knew Arash. They were floormates in East Campus. Arash was having a pretty similar experience to the one that I was having. We had friends who had moved from Boston who dropped out of school to San Francisco, and suddenly their companies were raising millions of dollars and taking off. I think both of us had a little bit of cabin fever. It was frustrating to watch that happen.

So Arash and you met after two or three hours of hanging out?

Yeah, we got introduced. Kyle mentioned, "Is there anyone great that you know who could be a co-founder?" because all my friends were for whatever reason—timing wasn’t right, or they were ready to make the jump. Then Kyle suggested Arash.

Do you remember the email exchange?

I probably have the email somewhere. "Hey, Arash is today; let’s meet up." We hung out in the Student Center for a couple of hours, and then Arash dropped out of school the next day.

It was pretty quick!

Yeah, it was like a special service blessing! I didn’t even know what this was.

So, you guys just started working immediately and talked about the equity and went forward pretty much?

Yes, we met up in the Student Center at MIT. He was already pretty excited about the concept of starting a company and doing YC, and we hit it off. I wish I could say that, “Oh yeah, here are the 17 things I was looking for on this seven-point scale,” but no, it was just that I liked the kid. He was clearly smart, a little quiet, but very thoughtful. Over time, it became clear that this was a really good fit.

How did you guys validate the need for Dropbox? I've heard stories that you posted on Reddit to see if people wanted something like Dropbox.

Well, the first real test was that I made a demo video because it was initially just to get into YC. The whole Y Combinator application process was pretty similar to the world I came from, which was college admissions. One of the things you could do to give yourself an edge was to do something different. So, I thought everyone needed a demo link in their application or whatever. I thought Dropbox would appeal to the Hacker News audience, so I made this three-minute demo video with some music equipment that my band and I put on Hacker News. It stayed at the top for two days. I got the email I was looking for, which was from Paul, but I didn’t want the part about needing a co-founder in three weeks.

That was the first, I think we did that at least twice. Does this tie into that comment either on the post where someone said, “I think this is the stupidest thing I've ever heard of. Don’t these people know that Wget exists? You can just use that; no one needs a company for this.”

We would send that around to other founders when they got demotivated because people had ideas like that.

That’s interesting because I think that raises a point I respect most about you. You've kept doing your thing, no matter what noise there is in the ecosystem about Dropbox or what you guys are doing. Whether it’s, “I don’t need this because I can use Wget,” or criticisms about how Dropbox is valued, you're just this behemoth now, and everyone is like, “Well, we were wrong about Dropbox.” How do you handle constant negativity? People say it’s not going to work or anything like that.

Well, I think the first thing is you have to recognize that that's always going to happen. We experienced that from the day we founded the company, actually before that, and all the way to now. When you zoom out, you realize that a company like Apple, quarter after quarter, can post the best revenue, the most profit of any company in business history, and the next day, like, “What? Are they really dead now?” You have to kind of get to appreciate that that’s human nature and that’s just going to happen.

I think what’s a little harder is you need to simultaneously have a thick skin and be able to tune things like that out. You also have to be kind of thin-skinned if your customers are unhappy or your team's unhappy; you have to respond to that. So, that’s a weird dynamic to handle, but I think it starts with just getting super accepted that that’s always going to happen.

How do you decide when you need to address something with customers or your team versus just letting it go in the normal course?

I think I’ll give you maybe an example where this is a fundraising context. In addition to people on Hacker News, a bunch of the comments were negative, but actually a bunch were positive. We heard a lot of pushback from investors saying, “Hey, look, Google is going to do this. It’s commodity online storage.” It’s kind of startup clichés behind the way that Bitcoin or other things have been. Frankly, I agreed with them; I was like, “Yeah, Google can probably do this.” We didn’t really have a lot of structural advantages; we weren’t really sure how we were going to make money. We didn’t even have users. What if it’s just… that’s all true!

But you have to realize that that’s not causal; just because other folks have done something doesn’t mean it’ll work or done it in a way you don’t think is good doesn’t mean it’s inherently a bad idea. Let me put it another way; I would ask investors, “Yes, there are 50 of these things out there, but do you use any of them?” They would say no, and I’d say, “Hey guys, I’m not interested.”

Was this the biggest problem you found in the early days—just the level of perceived competition in the market?

That didn’t bother me that much because our sights were also a lot lower in the beginning. I had a target customer of one, which was really myself, and victory for me would be never having to carry a thumb drive.

How long from the day you had the idea for Dropbox until you had a product you could put into a thumb drive?

It’s a couple of months, two to six weeks. You can certainly make massive product progress like that, but then it took a long time to make a bulletproof and stable version for the world to use.

What were the big initial problems?

So, what were they, if you think back towards like the few times Dropbox almost died? What actually went really wrong?

I think the earliest problems were just keeping up with growth. We had inside our yet-to-be-filled prototype. The prototype worked well; we made this video, we put it on Digg and Reddit, and it just blew up, which I can talk about.

But then you need to build a company because you start with a product, and you have your product. Then you’re like, “Okay, we have a product. Now we need users. Okay, let’s go for your users.”

And so, you always leave this part out of the movie of startups. You’re on this treadmill where you have to do everything you were doing yesterday just as well or better, and then you have much new stuff to deal with. It’s like, “Okay, we need to build the product. We need to engineer—before we need engineers, we need to pay them. I guess that means we need to fundraise."

We need to fundraise, then we need a lawyer, an accountant, you know, just the circle keeps getting bigger. So you deal with that by dividing and conquering. You hire people, but then you have a new problem, which is you’re hiring people to do something you don’t know anything about. Suddenly, everybody’s running off in different directions.

How hard were things really?

Keeping up with that was the rate at which things were breaking. It was faster than we could fix things, and that was a really hard thing to get used to because you’re used to—especially if you're used to getting good grades in school and things like that. I’ve heard it said that, on average, running a company is like getting a 22 out of 100. So when you’re used to getting A's, it’s a humbling thing.

You have to simultaneously keep two things in mind: on one hand, you really should aim for perfection and try to make things as good as they can be. When problems arise, you shouldn’t tolerate them. But at the same time, you have to recognize that things are going to break down. It’s like trying to bake a cake in five minutes; there’s just going to be stuff on the wall. It’s going to be a little screwed up no matter how good you are.

What you really need to do—and probably even harder—is realize that your job as CEO changes every six months, every year, or a couple of years. There’s nobody that tells you that. In fact, some of the things that made you good at the prior stage become a hindrance for the next stage. For example, I wrote most of the first version of Dropbox. Certainly, Arash and I did together, but there just became too much stuff to do. I had to stop coding.

Have they done some analysis on the product’s stability?

Yeah, I think there’s still stuff in there, and a lot of how the core product works is the protocol has been pretty stable. What’s cool is that there’s so much advice online about how to start a product, but there’s a lot less about transitioning to a company.

Do you have any good advice you would now give to entrepreneurs who are trying to build the next Dropbox about how to transition from being an engineer to someone running a large company?

So, the first thing is that nobody is born a CEO. The challenge is you don’t know what your blind spots are. In my case, I grew up programming; I knew I could make the code work. We knew we could get people excited about it. We knew we could make our early users happy, but if you want to bring a company to scale, there’s a lot more.

You need to be able to make smart and fast decisions about what markets to go into, your business model, competition, strategy, how to build a team, and how to run that team. That’s pretty tough when you’ve never done anything remotely similar.

What you need is a healthy paranoia. Ironically, one of the most useful questions that I like to ask myself and still do is, “One year from now, two years from now, five years from now, when I look back on today, what will I wish I had been doing?” So, I think really being systematic about how do I train myself and what am I going to need to know is really useful.

You go from being a coder to a psychologist, which I found is totally true, and then there are a lot of different points in between. Did you mostly figure it out yourself, or did you ask others?

A little of everything, right? Reading was probably the single most valuable thing that I did.

Anything you’d recommend other people read?

Yeah. I think my favorite book on management is "High Output Management" by Andy Grove, which is kind of the Bible of how do you scale an organization. I have a very long list of recommendations, but "The Effective Executive" by Peter Drucker is really good.

Basically, what you’re talking about is you need to have good judgment about a lot of different things. What really is being said is, “How do you gain wisdom very quickly?”

Last book recommendation: "Poor Charlie's Almanack" by Charlie Munger. It's probably the best book I’ve read on how to build a bunch of mental models to sort of break down the complexity of the world.

Don't you think learning how to think is part of it?

Absolutely. Having friends, especially those who are one step ahead—like five years ahead—and just short of looking at the deltas between them can be incredibly helpful.

I remember we had a meeting set up at Sequoia with our first potential investors, which were really helpful in connecting me with other entrepreneurs. I raced out of the office, ran down to Starbucks, and sat down with them, and started peppering them with questions.

I asked, "How do you spend your time? What’s important to you?" They said, “Well, it’s really important that we have a great mission as a company.” I’m like, “Okay.” Then they said, “It’s really important that we have great values and a great culture.” I'm starting to tune out because I’m remembering which bugs I didn’t fix and did I finish that before I committed the code.

That can be overwhelming, especially when you’re in startup mode.

Yeah, it is, but then you start hearing that five or six, or ten times, and you realize the only one here who’s confused is me. In that regard, you go from designing very orderly system code and algorithms to designing systems around people and things like culture and values, which is a lot more complex.

Do you think everyone is confused when they hear that for the first time?

Yeah, I think people often do. So, do you have any way to help entrepreneurs internalize that earlier?

I never have, but I’m curious if you’ve figured out a way to do that.

The thing is, you really need to develop that portfolio of ways you can train yourself. Reading is one, mentorship is another. I also like to study the history of business and excellence, looking at not just tech companies but also companies outside the tech industry.

How does the consumer packaged goods company run? How does Swiffer run? Where does the competition come from?

I’ve learned the most from studying businesses that are not in technology.

How do you think that relates to building culture within a large team?

That’s interesting because it makes you realize how important it is to understand team dynamics. I look at examples like Phil Jackson with the Lakers—how he built a culture on his team, how to address government-level problems.

You want to triangulate from various sources to help you internalize these lessons.

The most interesting meeting I had in the last year about thinking through how to build YC was going to the Vatican and listening to how they think about their time frames, and about a billion people. It was a very different perspective.

What do you think are the biggest opportunities?

I think the whole AI and machine learning sphere is going to be transformative, especially when paired with things like robotics. Machines are going to take on a new role in our lives, which will have a bunch of positive and negative effects that we can get into—I’m not as worried about robots killing everyone in the world, which we could talk more about later.

In our world, we’ve talked about Dropbox evolving from simply keeping files in sync to keeping teams in sync. That was a little bit of a departure because when we started, our goal was to make it so nobody had to carry around a thumb drive ever again, and life would be a lot better if your stuff was in the cloud. Today, we’ve accomplished that!

Mission accomplished, but along the way we opened our eyes to a bigger problem. We realized for a lot of our happiest customers, it wasn’t really the storage people were buying; it was the sharing. They were using Dropbox to get their teams on the same page.

What did that strategic shift look like? Did you say to the whole company, “We used to be a file company, and now files are dead—this is our thing”?

We did expand from—okay, there’s an expansion and then a contraction, which I can talk about. We knew that the role of files was going to change. We thought about, "What place do we really occupy in people’s lives?"

There were a couple of big use cases: one was private photo sharing, another was collaboration with a team on files, and the third was with the developer ecosystem.

We expanded to say, “Okay, we’re going to build separate things for photos because that’s kind of a different product. We’re going to do a lot more on collaboration.”

Then, that was one. We started buying—it didn’t mean we bought Mailbox to start something called Carousel for our photo app. Then, in 2014, we stopped doing those things.

How’d you decide to cut those initiatives?

It was tough. First of all, I think it’s usually the case that strategies look great on paper, and when you think about your overall market, you want to hold on to as many of these cases as possible. We were so happy with things like sharing photos, and we could do a much better job there.

But at the same time, when you look at photos and collaboration, they’re very different products, very different ideal business models, and very different competition. Everything is different.

We found ourselves sort of straddling these two worlds, which made it very hard to build the best-focused product. It’s just hard for people to understand.

And then suddenly, I reread a book called "Only the Paranoid Survive" by Andy Grove, which describes how actually Intel wasn’t always a microprocessor company—that just started in memory—and how they were getting crushed by the Japanese. He talked about the story of that transition from memory to microprocessors.

As I read it, my stomach started churning because I’m like, “Oh my god, the strategic inflection point is dying,” but that’s what we were in. There’s a part of the book where it says that CEOs like to keep their options open.

When you’re in the midst of one of these inflection points, what you really need to do is put all your eggs in one basket and watch that basket carefully.

So, I walked into the office the next week and said, “We’re not doing Carousel anymore. Not doing Mailbox anymore.”

How did your audience or team react? Did they get behind you quickly?

A little of both. When your company gets bigger, everybody knows it’s not a secret that some of these things aren’t working as you’d like.

So, in a sense, two up to one that people say, “What took you so long?” It’s obvious. I told you so—it’s very disappointing to cut things you’ve worked on for a long time.

Which ones were they? Two products you really loved?

It’s embarrassing—publicly embarrassing now, looking back at it. One of the changes is that lots of problems in your company get noticed, but most people don’t really care except the people in your company.

When roll on the upswing like we had, suddenly everything you do is a lot more visible. So, the peanut gallery is a lot bigger, and the pressure sort of amplifies.

Even if you understand that, and you can put it in perspective, it’s hard for the team. Everybody loves the idea of focus, but what focus actually means is shooting stuff you love and turning down options you know you can make work.

But you realize that’s going to be part of the cyclical nature you deal with every time you expand and every time you contract.

I remember those early days of Dropbox. But I also remember being impressed by just how much you got done. Ads for Dropbox were really taking off! To wrap up, how did you manage your time when you went from like seven users to seven million?

Sure! We, the team, were probably trying to keep under 50 people. One of the things that I better understood about our stage is that Dropbox looks easy, but it’s actually really hard to do.

I knew this because I wanted to just use the other products; if any of them had worked, I wouldn’t be here. But, that said, there were many competitors who built things that were reasonably functional but they didn’t get distribution right, and they didn’t get the reality right.

I had been paying attention when 2007 was kind of when the Facebook platform took off. A lot of the gaming companies went from zero to extraordinary growth with ridiculous speed records set all the time, and that was through a viral mechanism.

Dave McClure had a great model called startup metrics, or “Pirate Metrics.” I won’t go on and on about that, but basically it includes acquisition, activation, retention, and referral—which shaped how we managed the company.

Users came in, but very few of folks who signed up—like four out of five—didn’t put a file in Dropbox. We were actually bringing people in off Craigslist and watching zero of five people succeed at getting set up with the product.

They had never tried before, let alone heard of Dropbox! So paying attention to all the activations became really important.

Because the viral engine—tuning that as much as possible—was really focused on providing incentives to sign up. Coming up with things like the referral program, which had two-sided incentives where if I tell you about Dropbox, you’d get free space—in fact, about 30% of our signups probably came from that.

Shared folders were inherently viral, another 20%. So about half of our signups were thanks to the viral element, which was something that wasn’t well understood before that.

Coming from stuff I saw in the late '90s, like PayPal, or maybe early 2008, we saw large incentives for referral bonuses. I had the idea for the Digg and Reddit video based on a book called "Guerrilla Marketing," which is about how to market and get users without money.

So, a lot of these ideas came together at that time. To have fewer than 50 people, you didn’t spend too much of your time managing the business. When you were about 20 people, you could manage by intuition because, at that size, you all could sit in a room, and everyone knew what everyone else was doing.

But that transition to now when you say 30, 40, 50 people is very difficult.

Okay, last question. I won’t ask you when you’re going public, but how do you think about the decision framework for staying private versus going public?

I think there’s nothing almost magical about going public; it’s primarily a financing decision. It really depends on your capital needs. Your employees and investors need liquidity.

There are also branding benefits around currency for acquisitions, and what’s happened over the last five to ten years is that the private markets have found ways to solve most of those problems.

Going public is a way to solve them all. However, operationally, it’s tough for a couple of reasons: one position a lot of overhead with compliance and regulatory stuff.

You have a lot of people in your company spending time on things that don’t really have anything to do with your customers or your products. So there is overhead, but there are elements of discipline too that are good.

That said, the stock market tends to be manic-depressive. They’re either way more enthusiastic than they should be about your company, or way less, which creates impacts on morale.

But I think on scale, most companies are public, and that’s the patchwork of it.

Great! Well, thank you very much for taking the time.

Thanks for having me!