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Cloud storage is one of the most competitive sectors within the cloud services market. But these services still face challenges in the enterprise.

Cloud storage is one of the most competitive sectors within the cloud services market. But these services still face challenges in the enterprise.

Cloud-based backup and storage service provider Dropbox is said to be in the process of raising a new round of funds, with sources close to the matter suggesting the company is valuing itself at over $8bn, according to the Wall Street Journal. The news arrives as one of the company’s main competitors, Box, readies its IPO for early next year, a move that may see the cloud storage wars heat up significantly in 2014.

According to multiple sources Dropbox is currently in talks with investors to raise about $250 million, nearly double the amount the company has raised cumulatively since its founding in 2007. The funding could see the company’s valuation double to $8bn, up from the $4bn investors attributed to the company in 2011.

“We don’t comment on rumours or speculation,” a Dropbox spokesperson told Business Cloud News. “What we can say is that with over 200 million users and 4 million businesses, Dropbox has continued and strong momentum,” she added.

Dropbox has been growing its user base consistently since its inception. In November last year the company had about 100 million users on its service, and this month the company said it has broken through the 200 million user mark. It accumulated $116 million in sales last year, more than doubling its annual revenue in 2011, though recent reports suggest these figures might be slightly exaggerated.

Meanwhile, once of Dropbox’s biggest competitors, Box, is said to be readying an IPO for early 2014 and according to recent filings with the US State of Delaware is looking to raise up to $100 million in new funding (5.6 million shares of Series E-1 Preferred stock at a price $18 per share).

Box has just over 20 million users globally despite having a two-year lead on Dropbox. Part of that can be explained by the fact that Dropbox started out as a consumer play then switched its focus to enterprises, whereas Box has for the most part been after enterprise seats; the challenge is many businesses are still actively banning cloud-based storage and file sharing services because of the data privacy and cyber-security threats they potentially pose.

But despite the gap in user numbers, Box has proven it’s no slouch.

Much like Dropbox, the company offers its services on a freemium basis – users get a certain amount of cloud-based storage for free, but enhancements like extra storage and added security come at a cost. But Box’s freemium conversion rate – the amount of free users it converts into paying users – sits at between 6 and 8 per cent, whereas Dropbox’s conversion rate sits between 3 and 4 per cent despite the fact that its user base overall is growing faster.

The company raised $125 million last year from General Atlantic among others, bringing its total secured funding to just over $300 million. It also counts some fairly big tech companies as customers including Dell and Nokia Solutions Networks.

Last year the company raked in over $70 million in sales, up from $11 million the year before, which is rapid growth, albeit from a low starting point. Box’s founder Aaron Levie has previously pointed out that he wants to keep the growth rate at more sustainable levels, in the area of 150 to 200 per cent.

Box, which in 2011 rebuffed a $500 million acquisition offer from Citrix, is currently being valued at $1.2bn – not bad for a company that has yet to report a profit. It’s also worth pointing out that when it comes to cloud services, there hasn’t always been a terribly strong correlation between demonstrating profitability and the value of a company’s IPO, something companies like Facebook, Twitter and Pinterest can attest to.

Nevertheless, 2013 has been a record year for cloud computing investment. According to Bessemer Venture Partners, a technology investment firm that regularly tracks the top cloud computing companies (and a Box investor), the top performing software as a service companies are worth more than $100bn in market capitalisation combined. With cloud-based technologies more broadly hogging just two per cent of the total IT spend globally, according to Gartner, that figure is set to soar and it is likely that as IT departments become more at ease with the use of cloud-based storage services these providers will capture a growing share of the investment floating around, too.

On the face of it, Box and Dropbox seem to differ very little in terms of strategy. Both companies are quickly moving to integrate their offerings with other software services to become a one-stop-shop for sharing, storage and collaboration. Both are holding to their freemium models and are fairly competitive on pricing. And both are moving quickly to develop new functionality (multi-platform syncing, security and encryption, auditing capability, digital signing, etc.) that will help make their offerings more enterprise-friendly. In doing so they hope to be able to compete more effectively against the likes of Microsoft and Oracle, which in many ways still dominate the enterprise software landscape.

Which company will dominate share and sync (and increasingly collaboration) in the enterprise is far from certain. Dropbox leads in raw numbers but Box’s slightly more favourable freemium conversion rate and sales increases indicate good momentum. The way Box and Dropbox compete with one another – and keep up-and-coming rivals like Huddle and Workshare at bay – will be something to watch. And with rival offerings from powerful incumbents like Microsoft (Sky Drive) and Google (Google Drive) likely adding further pressure on freemium conversion rates, remaining competitive will become more challenging, adding urgency to the need for these companies to raise the funding required to make more strategic acquisitions in the space, build out new functionality and bulk up their sales departments.

Comments
  • Eric P November 19, 2013 at 7:53 pm

    I love DropBox and have used it for years both personally and in a business environment. The biggest challenge that they face is they provide a service that is easily replicated by any number of companies, including powerful ones like Google , Amazon and Microsoft. The services are a dime a dozen right now and they way I see it, there are two things that can set a company apart: 1) tight integration with multiple platforms and 2) lots of storage space. Dropbox is doing a great job on the integration front. It couldn’t be much easier to use, whether on a Mac, PC, or cellphone. But right now, they are getting pressure on the storage space issue. I keep getting emails that Norton wants to give me 50GB and Google wants to give me 100 MB. So right now I am making the switch to a product by Barracuda called Copy. They start you out with 20GB of space (more than I have on DropBox after years) and with referrals o 5GB a pop it can go quickly from there. Check it out at https://copy.com?r=BlX7tm.

  • Patrick Best November 24, 2013 at 10:35 am

    Is a corporate culture that responds to paying client feedback with “we’re too busy to even read your feedback” truly ready for IPO? The technology may have hit a sweet spot, but to be a heavy hitter, you’re going to need a well rounded customer service department! Here’s some examples of recent bad customer support!

    I hope they use some of that capital to hire some staff!

    http://realworldnumbers.com/how-dropbox-values-its-customers-feedback/

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