The risks to Dropbox's approaching IPO

We round up some of the most significant threats to investors and its overall success

Dropbox filed for an IPO last week, and while it's the natural next step for a company dominating the cloud storage space, the filing also revealed a number of risks that could put a whole lot of pressure on the organisation if things go wrong.

By law, IPO filings must detail the risks to a company's success so investors are able to make a considered investment, knowing all the facts. Dropbox's filing is no different, and it has highlighted areas the company may struggle with when it goes public.

We've rounded up the main risks to Dropbox's IPO filing and how it could affect the company's potential to raise the investment it expects to achieve.

Number of Dropbox users and upgrading customers

At the moment, Dropbox has 500 million registered users around the world, but many of these are using the company's free storage option rather than taking advantage of the extra storage offered in its premium options. In fact, only 11 million customers (2.2%) pay for a Dropbox subscription.

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To ensure it can be profitable, Dropbox needs to convince as many of its free-tier customers - or those on a free trial of Dropbox for Business for example - to start paying for the use of its service.

The company must also focus on attracting new users. It explained in the filing that the number of unique users (those that have only registered one account) is a lot lower than its total active users and so its figures may be even more skewed than the initial numbers suggest. This also means there's likely to be fewer customers it can convert to paying users, because each will only pay for one account.

Revenue vs profit

As a result of its failure to persuade customers on free trials and those making use of the free service to commit to a paid subscription, Dropbox's revenue growth is slowing. The company explained in the filing that the major reasons its revenues aren't growing as fast as previous periods include that there's more competition now than there was previously, less demand for the platform, an overall decline in the content collaboration market and the company's inability to maxmise growth opportunities. It also noted the business has matured and so saturation is higher than it previously was. 

Profits are also on course to decline as Dropbox invests more to scale its business, including supporting the infrastructure to support its customers and research and development. The company notes that these investments may not directly result in increased revenues or profit, making it likey both will slow, or start to fall.

No outbound salesforce

Dropbox also revealed that it doesn't have a specific outbound salesforce on the ground hard-selling to businesses or other volume users. It has instead relied upon organic adoption and viral growth rather than actively selling its services to new prospects.

The company does believe it will be able to scale to reach new markets without a large outbound salesforce, but it also accepts that its current word-of-mouth and user referral marketing model may not continue to work as effectively as it has over the last few years.

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However, there's a significant cost and time investment attached to recruiting a specialised sales team, which could adversely affect the company's profitability in the future.

"Further, adding more sales personnel would change our cost structure and results of operations, and we may have to reduce other expenses in order to accommodate a corresponding increase in sales and marketing expenses," the company noted.

The filing can be read in full here.

Main image credit: Shutterstock

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