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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

#121

Post by wtvanhest »

notyourday wrote: post #60
cdolan wrote: post #30

Earlier quoted context omitted.

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?

> 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 It depends on the industry. DO is in the capex heavy industry so depreciation is not a funky accounting cost, it is actually something t…

Yeah, this was my first thought. Technically if you go back in time and model past Cash Flow Statements, you could layer on what you think the real go forward infrastructure cost is to their CFS.

If they are consistently laying out capex, it actually could be very reasonable to just use CFS and not opex.

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

#122

Post by ksec »

loldigitalocean wrote: post #58
djsumdog wrote: post #48

Earlier quoted context omitted.

Did they miss their window? Would this business make more sense during the 2001 dot-com craze? Are startups currently afraid to go with anyone who isn't AWS/GCE/Azure because they understand the cost of moving platforms is high?

No. Compare Linode and DigitalOcean. Linode bootstrapped, took very few financial instruments to aid the journey, had a few missteps along the way, completely reinvented the entire business more than once, and still serves a niche that makes them a successful (and profitable, as in real profitable, not imaginary profitable) company. Their margins are quite good. Slicehost had a solid business when Rackspace bought th…

>realizing they are never going to be AWS

I mean not real AWS, but I think there is a market between, say good old VPS ( which is what DO and Linode are before everyone are "Cloud" ) and AWS. Managed solution like Database, Object Storage, Backup, Simple CDN. Which is certainly what DO AND Linode are going into.

There is another trend I spotted, good old Bare Metal is coming back. Useful for base load.

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

#123

Post by tmpz22 »

numbers wrote: post #118
dcchambers wrote: post #87

I have some personal stuff hosted on DO. I really like their options, service, their branding, UX/UI, etc...but they are kind of in a weird spot. Halfway between being good for cheap personal projets, and being good for enterprise. If I want a simple VPS there are cheaper options. If I am an enterprise spending millions/year on cloud infra I am probably only looking at AWS, Azure, GCP, etc. How does DO get out of thi…

I thought their $5/mo machines are the cheapest on the internet for the specs available. Are there cheaper options? I’m hosting a low traffic page that gets maybe 500-1000 views a month and even at $5/mo it seems overkill IMO.

Pretty sure Linode is comparable price wise and in Europe there are cheaper options like OVH. Digital Ocean pricing becomes pretty comparable with GCP and others when you start specing up to a "production-grade" server i.e. the kind of server you actually want to run Postgres on.

Their K8s offering I think is the cheapest of all major providers but you lose out of secondary benefits like GKE's fantastic log analysis tools (I think its called stackdriver or something).

Their database offerings are in about the same range as other providers (not comparing it to Google Cloud $panner).

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

#124

Post by humbfool2 »

I host my websites on DO. Their UI and API is really cool. Linode and Scaleway both lost my data. DO is far more reliable than Linode and scale way. It's always good to have options to choose from. I hope they succeed.

Companies like Netlify, Zeit and Heroku are also doing good but I don't see any Enterprise applications for such services.

One thing I especially like about DO is that they are not stagnant in terms of features. They continuously keep adding new features.

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

#125

Post by toohotatopic »

dcchambers wrote: post #87

I have some personal stuff hosted on DO. I really like their options, service, their branding, UX/UI, etc...but they are kind of in a weird spot. Halfway between being good for cheap personal projets, and being good for enterprise. If I want a simple VPS there are cheaper options. If I am an enterprise spending millions/year on cloud infra I am probably only looking at AWS, Azure, GCP, etc. How does DO get out of thi…

>How does DO get out of this spot?

What if they package the available open source versions of AWS and GCP services and allow people to move off amazon and google? Have DO as one region and at first sell it as a backup. Then, make it enticing for people to scale it up so that they shift some work over.

DO could become the place where people can run infrastructure that mixes AWS and GCP. After some acquisitions, companies will have services in both worlds. Why not unite them in one place?

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

#126

Post by WrtCdEvrydy »

jdance wrote: post #119
dcchambers wrote: post #87

I have some personal stuff hosted on DO. I really like their options, service, their branding, UX/UI, etc...but they are kind of in a weird spot. Halfway between being good for cheap personal projets, and being good for enterprise. If I want a simple VPS there are cheaper options. If I am an enterprise spending millions/year on cloud infra I am probably only looking at AWS, Azure, GCP, etc. How does DO get out of thi…

I'm a customer on DO as a small business (mobile game). I wanted some linux servers that I have control over, and I wanted a managed database where someone does backups for me. I also wanted simplicity and a nice UI. I didn't even compare prices, I just thought it was a good deal and didn't look back. At first I tried Heroku but it was too much adapting our application to their way of doing things. DO is just hyper-s…

Heroku was really built for Web Apps (especially Rails)

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

#127

Post by emmanueloga_ »

Dirlewanger wrote: post #61
djsumdog wrote: post #50

Earlier quoted context omitted.

I wonder if they would have if they didn't have to cut prices to compete with Vultr.

First time I'm hearing of Vultr...they look like a carbon copy of DO. What does Vultr have that they don't?

Last time I checked Vultr included a DDoS service [1] an DO did not.

Caveat: I don't really know much about this service, maybe someone here can chime in?

* I don't know how reliable it is

* I don't know if a small/medium app really needs it

* I don't know if you would be better off using something like cloudflare anyway

* Etc...

What I do know is that a long time ago I used to host some stuff on a VPS (Linode I think) and I would routinely run out of bandwidth because of traffic coming most of the time from random AWS IPs, which seemed like shady bot networks or something. Ergo having a DDoS service like this seems useful even if you are hosting a small site.

1: https://www.vultr.com/products/ddos-protection/

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

#128

Post by raiyu »

toomuchtodo wrote: post #115
raiyu wrote: post #97

Earlier quoted context omitted.

Thanks for your thoughts and prayers but no one is selling the business or nor are we looking for someone to buy it. Debt is a normal way to fund a high growth up front capital intensive business and it is cheaper than equity because you aren't giving away parts of your company to do so. If you look at AWS which is many times larger than we are they are also using debt to fund their continued expansion. It's under ca…

Appreciate the reply Moisey. I don't disagree that debt is a normal way to fund a business; arguably, it is the best way to fund a business once the business has been derisked. As you mention, you're not suffering dilution to get access to the capital, and as long as you're able to generate a multiple of value using that debt, you should take it on. My comment communicates pessimism about the value that debt will be…

Well the debt really acts like a line of credit, in that we are using it for hardware which is then immediately put into service and generating revenue, so the available debt and the drawn down debt are different terms and really there is no need to draw additional down additional debt if the company stopped growing tomorrow.

That aside on the equity side we only raised $123MM. Assuming that the acquiring entity sees the debt as a line of credit that is backed by a revenue generating asset (servers with customers on them) then the company would need to be acquired for $123MM for common shareholders to end up with nothing.

Given that we are already over $250MM in revenue that seems very unlikely.

PS> I hope this comment ages well =]

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

#129

Post by raiyu »

loldigitalocean wrote: post #108
raiyu wrote: post #99

Earlier quoted context omitted.

Our original business was bootstrapped with no outside investment so we know that growth model very well. In fact that bootstrapping allowed us to build DigitalOcean when no VCs were interested in funding us by self-funding through the profits from our original business. The problem with the approach you detailed is that it is based on growth rate. If you have more customers coming to you than you have cash on hand t…

I’ll reiterate the margins. Based on your account, my suspicion is only reinforced, actually: if you had big enough capacity problems to need a $3 million round to buy gear at the size you were in 2013, I’m mystified that your margins were that low. Was that the $10/month decision biting you (notice Linode waited) or the far bigger headcount? How far Linode got on basically two technical employees, including the foun…

I apologize. I'm confused - is the point that we should have raised less debt? Or not used debt?

Linode was founded in 2003 and grew to $100MM in revenue in 16 years.

DigitalOcean was founded in 2011 and launched in 2012 and grew to $250MM in revenue in 7 years.

Stands to reason we would need more money over a shorter period of time to achieve that.

The $3MM seed round wasn't used to buy equipment but to fund the business. It improved our balance sheet which allowed us to obtain more leases from vendors which were getting worried about how much exposure they had to us without much of a financial history.

Secondly, we went from signing up 5 customers a day to 250 customers a day after product market fit. When we signed up 5 customers a day I could do most of the customer support myself along with one employee and some backstop from our original company. But at 250 customers signing up every day we obviously needed a dedicated support team, so there were immediate necessities to hiring more people as we went from an "idea/product" to a complete company. We didn't need to hire one more support person, we needed to hire an entire support team over night so that we could have 24/7/365 coverage. Again hard to do that if you don't have capital available to pay salaries. And that's just one team/function of the company that underwent tremendous stress pre and post product market fit.

As for the financial health of the business:

The debt terms require repayment as you yourself know. Whether you use leases or have a single larger structure like debt, either way this isn't "burn" money. You need to repay it with interest.

With an equity raise you can "burn" the money because you never have to repay it, as investors received stock in exchange for the funds.

When you look at the equity side of the business we have raised a total of $123MM to date and the last raise was in July 2015. We haven't raised any outside equity capital to fund the business since then.

Meaning that we are capital efficient and not losing $50MM/yr or some outrageous amount. Otherwise we would have been forced to raise an additional round of funding.

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

#130

Post by toomuchtodo »

raiyu wrote: post #128
toomuchtodo wrote: post #115

Earlier quoted context omitted.

Appreciate the reply Moisey. I don't disagree that debt is a normal way to fund a business; arguably, it is the best way to fund a business once the business has been derisked. As you mention, you're not suffering dilution to get access to the capital, and as long as you're able to generate a multiple of value using that debt, you should take it on. My comment communicates pessimism about the value that debt will be…

Well the debt really acts like a line of credit, in that we are using it for hardware which is then immediately put into service and generating revenue, so the available debt and the drawn down debt are different terms and really there is no need to draw additional down additional debt if the company stopped growing tomorrow. That aside on the equity side we only raised $123MM. Assuming that the acquiring entity sees…

I hope this comment ages well also! People deserve compensation for the value they've created.

I appreciate that you took the time to reply; you might have Crunchbase update their info, as my comments are based off them showing >$300MM in equity funding. Your numbers make the scenario look much better.

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