A Microsoft file hosting and synchronization service.
Thank you. I have also dug more on the issue, and see that Microsoft does say that external drives can be supported, but the distinction is that the external volume must be considered non-ejectable. Microsoft specifically documents APFS for Mac and says removable USB drives aren't supported.
Also, Dropbox's current documentation says that storing the Dropbox folder on an external drive is no longer supported on macOS 12.5 and later. The newer Dropbox implementation uses a secure location on the Mac's local drive, with files online-only by default.
I hope this information helps. If you have any more questions, don't hesitate to reach out. Wishing you good luck!