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Morning Markets: Dropbox is buying HelloSign for nearly a quarter billion dollars. Why?

Good Monday morning, and welcome back to work. There’s a lot going on today including a small selloff in cryptos, a very global cut of new venture rounds — the six largest venture rounds in the past 24 hours hail from five different countries — and the stock market is set to shed about 60 basis points when it opens.

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But the real news that matters in startupland is that Dropbox has gone shopping. Indeed, the San Francisco-based file-centric productivity company announced this morning that it is acquiring HelloSign, an e-signature company, for what CNBC reports as $230 million in cash.

That’s a lot of money for a company that hadn’t raised that much in venture capital. Let’s unpack the deal a bit.

Money And Money

Let’s start by examining the dollar situation at each company.

Dropbox’s most recently reported quarter is the third of 2018. At the end of that particular period, the well-known Silicon Valley unicorn had $1.04 billion in cash and equivalents. That means the $230 million HelloSign deal will consume over 20 percent of its known cash. The real impact will be lower, however.

Why? In the third quarter, Dropbox reported free cash flow of $120 million. Presuming that Dropbox didn’t see its business deteriorate sharply during the fourth quarter of 2018, it generated cash since we last saw its numbers. Thus, it had more than $1.04 billion on-hand with which to buy HelloSign. The real impact, therefore, of the deal on Dropbox’s checking account is more muted than it appears if we measure from its third-quarter results.

On the HelloSign side of things, the cash abundance turns into a cash dearth. Crunchbase has three listed rounds for HelloSign, but only one with a dollar amount, its $16 million Series B from June of 2017. That’s just under 20 months ago, meaning that HelloSign likely had spent its available funds to grow (venture-backed companies traditionally burn through a raise in 18 months or so, and then raise more off the strength of their recent growth), and may have faced a raise-or-sell moment.

With ample competition in the market, including Adobe Sign and the recently-public DocuSign, perhaps HelloSign felt it might fit better into a platform. I can see the logic in that. Also, a $16 million Series B likely didn’t value the smaller company at over $100 million, making the deal a better than 2x return for its latest investors.

So Dropbox can afford the deal, and HelloSign likely finds the exit inviting. Why did Dropbox write the check?

Revenue Growth

Dropbox’s third-quarter 2018 revenue of $360.3 million was up 26 percent from the year-ago period. Dropbox’s second-quarter 2018 revenue of $339.2 million was up 27 percent from the year-ago period. Dropbox’s first-quarter 2018 revenue was $316.3 million, up 28 percent from the year-ago period.

You can see the trend: Dropbox’s growth is slowing. And in SaaS, like any business category, growth is a revenue-value amplifier. The faster your business grows today, the more it may be worth in the future. Thus, investors are willing to pay more for growth-y revenue than less growth-y revenue, everything else held static.

HelloSign likely doesn’t have enough recurring revenue to reverse Dropbox’s revenue growth declines in its present form, but the smaller company’s products can be sold into Dropbox’s extant customer base and could add a juicing element to future contract values. If HelloSign manages to do much of that, it could help Dropbox’s growth story.

Which would be welcome at the file-focused firm. According to Google Finance this morning, Dropbox is worth $9.72 billion before the markets open. That’s a huge sum, but still lower than its 2014 valuation that put a price of over $10 billion on the popular service. More growth might help Dropbox get closer to that figure.

Top Image Credit: Li-Anne Dias.