Competition, Weak Tech Market Haven’t Scared X:drive Investors
On April 14, it wasn’t easy to be Brett O’Brien.
The Nasdaq stock index plummeted nearly 10% that day, slashing market values of a slew of technology companies just as O’Brien was trying to convince venture capitalists that his Santa Monica company, X:drive, was a good place to invest millions of dollars.
“I was scared. All of a sudden people weren’t that enthusiastic about Internet stocks,” O’Brien said. “I called David and said, ‘What’s going on here?’ He said, ‘Don’t worry.’ ”
“David” is David Bohnett, who became $300 million richer after he sold his Internet company, GeoCities, to Yahoo last year. He has since invested $1.75 million in X:drive.
O’Brien kept his cool. This week, X:drive will announce it has raised $45 million from investors, a third round of funding that paves the way for a possible first-time stock sale later this year.
The company’s investors include not only Bohnett but such powerhouses as Goldman Sachs, America Online and Wit Capital, as well as Randall Kaplan, an angel investor and co-founder of Akamai Technologies.
In a nutshell, X:drive is a sort of Internet hard drive, allowing users to sign up for 25 megabytes of free storage space. All types of files can be downloaded, including MP3 and multimedia presentations. Fees are charged for more megabytes, though some space can be had for free if users sign up other customers.
The advantage for users, who typically need high-speed Internet access for X:drive to be effective, is that they don’t have to overload their computer’s hard disk with MP3s, Powerpoint presentations or photos.
X:drive, in turn, profits from fees users pay for more megabyte space (the free 25 megabytes allows only a few files or MP3s), and through banner advertising and sponsorships.
In addition, X:drive recently launched a service that enables users to access their files using any Palm VII or wireless phone. The firm expects that to be a hit with business travelers, who would be able to download a file and send it to a copying service, which could in turn send it to another party. X:drive would profit from that as well.
X:drive has 2.3 million customers and about 30,000 new sign-ups each day. About 65% of customers are active users, people who return to the site often to use their X:drive accounts, the company says.
But analysts point out that X:drive is operating in a field crowded with more than 20 competitors, such as I-Drive, the exclusive storage provider for MP3.com; San Francisco-based Driveway, (formerly Atrieva); and @Backup, a San Diego storage-space firm.
“If there are five or six that survive, X:drive will be one of them,” said Rob Jones, market analyst with Dataquest, a San Jose technology data firm. “They’ve got some good backers, and they are extremely good at marketing.”
O’Brien says his company is different, not only for its technology--including a “skip-the-download” service that transfers Internet files directly through a high-speed server to a compatible Web site--but also because of its marketing, both on the Internet and elsewhere, including billboards.
O’Brien is no stranger to marketing. Before X:drive, he started Murphy O’Brien Communications, a public relations firm. Last year, he said, he got the entrepreneurial bug and, along with his brother, brainstormed the idea for X:drive. A native of Tennessee who grew up in Florida, O’Brien, 33, is a graduate of the Wharton School of Business. X:drive is his first tech business.
Larry Jones, a vice president of marketing for competitor Driveway, said his company has chosen a different strategy, focusing on partnering with corporations rather than paying for ad campaigns that focus on students and individuals who need space for MP3s or photos.
“This is a market that is evolving and in two years isn’t going to look anything like this,” said Jones, who predicted survivors will include X:drive and Driveway.
Still, analysts such as Dataquest’s Jones question whether X:drive’s niche is too small, saying that larger companies might offer a bundle of services consumers need, such as e-mail and storage space, blowing smaller firms out of the water.
“I have reservations about this business model,” Jones said.
O’Brien said he eventually expects to offer fax and enhanced e-mail services within X:drive. “Our first goal was to build the membership,” he said.
X:drive has expanded rapidly, from 15 employees last year to 180 now in several Santa Monica office buildings, and so far no employee has left voluntarily, the company said. The average age is 30.
Bohnett and Kaplan said the energy and enthusiasm at the company is similar to what they found at GeoCities. “I’m just very excited about this product,” Bohnett said.
Ned Carlson, senior vice president of the venture capital group at Wit Capital, said his firm has been impressed enough with X:drive’s management to put in $15 million of the $45 million the company raised in the third round of financing, after investing $4 million in November during a $22.5-million second round. X:drive raised $3 million in its first round.
“What they said they would do when we met them last year, about 95% of that was done when they said they would,” Carlson said.
Market shifts don’t scare him, said Carlson, who is confident of the company’s long-term strategy to provide Internet storage space for both individuals and corporations.
“We don’t look at this as a B2B or a B2C; we look at this as a trend on how everyone uses the Internet,” he said. “Everyone is going to need a place to store things from the Internet.”
Still, with the market for initial public offerings on hold and no clear sign yet whether it will recover this year, it remains to be seen whether X:drive will become a public company.
“My concentration is directly on building the value of the business,” O’Brien said. “Our model calls for this financing to bring us to profitability. [Given] the opportunity to build a business even larger, obviously we would consider the public markets or other types of investment.”
*
Debora Vrana covers investment banking and the securities industry for The Times. She can be reached at debora.vrana@latimes.com or at Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
