Business

INNOVATION ECONOMY

Dropbox’s tale speaks to a Bay State weakness

Several summers ago, an MIT student named Drew Houston showed up for an internship at Bit9, a Waltham network security company. After graduation, he landed a job there as a software engineer, but left in May 2007 to do his own start-up.

Since then, Bit9 has had a pretty good run. It has grown to 150 employees and set up sales offices in Europe and Asia. Among the customers it helps protect from hacker attacks are the Air Force, 7-Eleven, and Toyota Financial Services. Last Monday, it announced a fresh round of venture capital funding: $34.5 million, bringing the total amount Bit9 has raised to more than $70 million.

But the business that Houston started in 2007, Dropbox, has proven to be a rocket ship. Dropbox helps more than 50 million people store and synchronize digital files so the latest version can be accessed from any device. Investors have pegged the San Francisco company’s current value at $4 billion. Steve Jobs, the late Apple chief executive, tried to acquire it. Dropbox has raised $257 million in venture capital — some of it from Sequoia Capital, the same Silicon Valley venture capital firm that just put money into Houston’s old employer, Bit9.

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Has there ever been a summer intern who has done so much, so quickly? (Forbes estimates Houston’s net worth at $400 million. He is 29.) And how did Houston become the latest product of the Bay State to become an entrepreneurial rock star in California?

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Houston was born and raised in Acton, where, by age 5, he was playing with an IBM PC, and by 14, working for an online game company in exchange for equity. While studying at MIT, he started an online SAT prep company, Accolade. He also met Arash Ferdowsi, his Dropbox cofounder.

“Drew was a down-to-earth guy who had tremendous passion about what he was doing,” says Mark Roberge, who met Houston at MIT. “At the time, he wanted to revolutionize SAT preparation.”

Houston’s LinkedIn profile says Accolade was profitable, but after he graduated, he went to work for Bit9. The company’s software is modeled after the human immune system, in that it understands what is normal activity on a corporate network, but treats anything it doesn’t know as dangerous.

Todd Brennan, one of Bit9’s founders, says it was clear that Houston was “destined for greatness.” By the end of Houston’s first summer as an intern, Brennan used to joke, “Be nice to Drew. We’ll all be working for him someday.”

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Houston started working on the idea for Dropbox on the side, inspired by a bus ride from Boston to New York. He’d left some crucial files on a USB drive at home, and he started thinking about a service that might solve that problem. Why not store the latest versions of important files in a special folder — a Dropbox — that could be accessed from anywhere and shared easily?

Houston had connections at Atlas Venture, then in Waltham. It was the first investor in Bit9, and after Houston left the company, he’d occasionally show up at Atlas’s office, sometimes to use a conference room. “He had a strong vision for Dropbox,” says Pete Shannon, then a principal at Atlas. “He wanted it to be unobtrusive, and he didn’t want it to take a lot of work for the user.”

Jeff Fagnan, the Atlas partner who oversaw the investment in Bit9, says, “At the time, Drew wanted several hundred thousand dollars to hire a couple of developers” in order to make faster progress.

Atlas didn’t invest, and neither did General Catalyst, a Cambridge venture firm that also had Houston on its radar screen. Houston showed Dropbox at Web Innovators Group, a regular Cambridge demo night organized by venture capitalist David Beisel. “The first incarnation was certainly raw,” says Beisel. He didn’t invest.

Neither did a roomful of Boston and New York venture capitalists who saw Houston present Dropbox in August 2007 as part of a three-month finishing school for entrepreneurs called Y Combinator. I saw that demo, and it wasn’t clear to me, like many in the room, how a two-person start-up would compete against bigger companies that might do the same thing, from Google to Microsoft to Apple to Carbonite, a Boston data backup company.

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Dropbox’s founders moved to San Francisco shortly after that — Y Combinator’s guru in chief, Paul Graham, recommended the move to the companies that participated in his program — and they raised their first $1.2 million from Sequoia, the Silicon Valley firm that bankrolled Apple, Google, and Oracle.

Last year, Forbes reported that Dropbox’s revenue was on track to reach $240 million — even though 96 percent of its customers use a free version of the service. (Dropbox’s PR firm confirmed some statistics in this story, but wouldn’t make Houston available for an interview.)

Fagnan at Atlas is bullish on Bit9: “My personal feeling is that they will be a flagship IPO in Boston,” he says, noting that every new cyberattack helps sales. As for passing on Dropbox, Fagnan says he wasn’t convinced that Houston could build a file storage, synchronization, and sharing system better than Google or Microsoft.

“We screwed up,” Fagnan says. “When you see somebody of Drew’s ilk, you should fund them even if they are doing SteakKnives.com.”

Since then, Atlas has moved to East Cambridge, just a few blocks from MIT. And Fagnan says the firm has made it easier for its partners to make so-called seed investments of less than $1 million. “We want to be able to bet on first-time entrepreneurs,” he says.

The start-up ecosystem in Boston is definitely getting better. But when we don’t put money into companies — whether Dropbox or Facebook — we don’t get a vote in where they put down roots.

I did find one person in town who believed in Houston’s vision enough to invest in the company’s earliest funding round: Todd Brennan, the Bit9 founder who originally hired Houston as a summer intern.

Scott Kirsner can be reached at kirsner@pobox.com. Follow him on Twitter @ScottKirsner.