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DigitalOcean raises $100M in debt as it scales toward revenue of $300M

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Re: DigitalOcean raises $100M in debt as it scales toward revenue of $300M

#21

Post by cdolan »

hinkley wrote: post #17
cdolan wrote: post #15

This article had more detail and substance than I usually find on TechCrunch or startup coverage in general. I do want to point out two things that bothered me in the article: 1. Using the word “raise” when talking about financing via debt seems inappropriate and very start-upy. This is a low cost of capital line of credit, is it not (due to their infrastructure and broad customer base)? 2. Why in the world are state…

Am I correct in thinking this is an EBITA situation? You can be making money and paying it all to Uncle Sam and your bank loans. 100 million is gonna be a lot of interest payments.

Perhaps, but debt is real and you cannot be “profitable” if you are under a mountain of debt... in fact, you become insolvent if you can’t keep up with the interest payments and pay down the principal.

Re: DigitalOcean raises $100M in debt as it scales toward revenue of $300M

#22

Post by brianbreslin »

hamandcheese wrote: post #9
brianbreslin wrote: post #2

What is their current valuation? I wondered if google or microsoft would buy them, amazon can't due to anti-trust issues, but the others might be able to.

I don’t see why they would except maybe to aquihire some talent.

That's why it might make more sense for a second or third place cloud provider to catch up. I would love for AWS to adopt the DO interface.

Re: DigitalOcean raises $100M in debt as it scales toward revenue of $300M

#23

Post by capableweb »

brianbreslin wrote: post #2

What is their current valuation? I wondered if google or microsoft would buy them, amazon can't due to anti-trust issues, but the others might be able to.

I'm interested to hear how the reasoning is behind thinking that Amazon would be hit by any anti-trust issues and not Google or Microsoft. As far as I know, all three of them are in the cloud/hosting business.

Re: DigitalOcean raises $100M in debt as it scales toward revenue of $300M

#24

Post by gruglife »

cdolan wrote: post #15

This article had more detail and substance than I usually find on TechCrunch or startup coverage in general. I do want to point out two things that bothered me in the article: 1. Using the word “raise” when talking about financing via debt seems inappropriate and very start-upy. This is a low cost of capital line of credit, is it not (due to their infrastructure and broad customer base)? 2. Why in the world are state…

Regarding point #2, many in the finance world (which I work in) consider cash flow positive a better representation of actual profitability than the actual net profit/loss reported on the P&L. In short, cash flow shows if the actual core business is bringing in money or losing money, while the net profit includes a lot of "noise" (probably not the best word to use but can't think of how to phrase this). For example, depreciation is an expense reported on the P&L but the company isn't actually moving money out of their accounts to pay someone for depreciation. This is known as a non-cash expense and effects the overall net profit reported on the P&L. Also, companies can be motivated to show 0 or negative profit on the P&L to avoid paying corporate tax. Amazon was notorious for this as any profit they had, they would re-invest back into the business.

Whenever I look at the profitability of the company, I don't look at the P&L number but jump to the cash flow statement and look at Net Cash Flows from Operating Activities (the first of three). First, I look if this positive, and second, if it is growing over time.

Hope this helps

Re: DigitalOcean raises $100M in debt as it scales toward revenue of $300M

#25

Post by danvoell »

toomuchtodo wrote: post #16
brianbreslin wrote: post #2

What is their current valuation? I wondered if google or microsoft would buy them, amazon can't due to anti-trust issues, but the others might be able to.

Would likely be a private equity leveraged buy out transaction, someone who leans out the operation and squeezes the margins up. Anyone with tech chops has their own cloud, and DO isn’t even cash flow positive yet. Thoughts and prayers to anyone with common stock (which isn’t looking too good at an exit).

Can you expound on thoughts and prayers comment? wouldn't debt help equity holders? Or you think any value created by debt is going to be less than the cost of the debt?

Re: DigitalOcean raises $100M in debt as it scales toward revenue of $300M

#26

Post by rsync »

"Spruill told TechCrunch that DigitalOcean will scale to $1 billion in revenue in the next five years, and it will become free cash flow profitable (something the CEO also referred to, loosely, as profitability) in the next two."

I find this to be incredible. DO is not a speculative e-business ... they are not a social network. They are the proverbial sellers of picks and shovels during the gold rush:

"The way to get rich during the gold rush isn't mining gold - it's selling the picks and shovels."

Here is a pick and shovel seller that can't make a profit and is going into debt ...

Re: DigitalOcean raises $100M in debt as it scales toward revenue of $300M

#27

Post by OJFord »

hinkley wrote: post #17
cdolan wrote: post #15

This article had more detail and substance than I usually find on TechCrunch or startup coverage in general. I do want to point out two things that bothered me in the article: 1. Using the word “raise” when talking about financing via debt seems inappropriate and very start-upy. This is a low cost of capital line of credit, is it not (due to their infrastructure and broad customer base)? 2. Why in the world are state…

Am I correct in thinking this is an EBITA situation? You can be making money and paying it all to Uncle Sam and your bank loans. 100 million is gonna be a lot of interest payments.

> EBITA

Have you both typo'd 'EBITDA' the same way, or is `EBITDA - Depreciation` a measure used too? (I searched, couldn't find anything.)

Re: DigitalOcean raises $100M in debt as it scales toward revenue of $300M

#28

Post by danesparza »

gruglife wrote: post #24
cdolan wrote: post #15

This article had more detail and substance than I usually find on TechCrunch or startup coverage in general. I do want to point out two things that bothered me in the article: 1. Using the word “raise” when talking about financing via debt seems inappropriate and very start-upy. This is a low cost of capital line of credit, is it not (due to their infrastructure and broad customer base)? 2. Why in the world are state…

Regarding point #2, many in the finance world (which I work in) consider cash flow positive a better representation of actual profitability than the actual net profit/loss reported on the P&L. In short, cash flow shows if the actual core business is bringing in money or losing money, while the net profit includes a lot of "noise" (probably not the best word to use but can't think of how to phrase this). For example,…

"consider cash flow positive a better representation of actual profitability than the actual net profit/loss reported on the P&L"

Wow. What a sad indictment of modern accounting practices that its accepted practice to create 'noise' to prop up a P&L (or avoid paying tax).

I suppose you could do this with household expenses, but if you don't look at P&L in a household you would be ignoring things like credit card debt or car loans.

This kind of debt in either a household or a company represents risk and shouldn't be overlooked, IMHO.

Re: DigitalOcean raises $100M in debt as it scales toward revenue of $300M

#29

Post by divbzero »

patio11 wrote: post #10
mhb wrote: post #4

Raising $100M in debt is the same as borrowing $100M, right?

Those are two ways to phrase the same thought, yes, but there are things about raising corporate debt which don't necessarily line up 1:1 with expectations consumers might have about borrowing money. One example, which is de rigeur for raising debt via bond issuance or for very large loans from banks, is "covenants" (restrictions on your future behavior for the duration the debt is in place), which may foreclose your…

Over the past decade the covenant light debt [1] has regained popularity [2] [3].

[1]: https://en.wikipedia.org/wiki/Cov-lite

[2]: https://www.businessinsider.com/leveraged-loan-record-87-per...

[3]: https://www.bloomberg.com/opinion/articles/2020-02-18/the-co...

It’d be very interesting to learn what covenants are attached to DigitalOcean’s new credit facility. Their press release [4] lists the lenders but does not discuss the terms, which will probably stay confidential until they file to go public.

[4]: https://www.digitalocean.com/press/releases/digitalocean-sec...

Re: DigitalOcean raises $100M in debt as it scales toward revenue of $300M

#30

Post by cdolan »

gruglife wrote: post #24
cdolan wrote: post #15

This article had more detail and substance than I usually find on TechCrunch or startup coverage in general. I do want to point out two things that bothered me in the article: 1. Using the word “raise” when talking about financing via debt seems inappropriate and very start-upy. This is a low cost of capital line of credit, is it not (due to their infrastructure and broad customer base)? 2. Why in the world are state…

Regarding point #2, many in the finance world (which I work in) consider cash flow positive a better representation of actual profitability than the actual net profit/loss reported on the P&L. In short, cash flow shows if the actual core business is bringing in money or losing money, while the net profit includes a lot of "noise" (probably not the best word to use but can't think of how to phrase this). For example,…

Thanks. I am not a financial professional but do run a medium sized business and have a lot of respect for being cash flow positive.

I agree with depreciation and other non cash expenses obfuscating P&Ls, but can we agree that in an article focused on securing debt financing, which will incur real interest expense, the term “free cash flow profitability”, “loosely” meaning “profitability” is a little misleading?

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