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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

#181

Post by dannyw »

scarface74 wrote: post #170
gruglife wrote: post #24

Earlier quoted context omitted.

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,…

Not counting depreciation as part of your loss in a business is about like all of the Uber drivers who don’t take into account the wear and tear on their cars when calculating how much money they are making. Depreciation is a real expense. If you depreciate an asset down from $1000 to $0 in 3 years, you’re accounting for the fact that in three years you are going to have to replace it. There is a reason we have GAAP,…

On a cashflow basis, you incur 100% of the depreciation at the moment you pay for it.

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

#182

Post by edoceo »

scarface74 wrote: post #171
treis wrote: post #163

Earlier quoted context omitted.

Software is not typically depreciated though. DO is writing code now that will last for decades but they have to take the accounting hit for it in one year.

Code rarely last decades without maintenance and complete rewrites over time - unless you’re the government.

I maintain some LOB PHP5 apps, that started as PHP3 - these internal systems are over 10yr old. Just chugging along, producing value for the business. But yeah, pretty rare stuff, and everything I see is small/internal.

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

#183

Post by nmfisher »

smallgovt wrote: post #80
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…

>> Using the word “raise” when talking about financing via debt seems inappropriate and very start-upy. Why would it be inappropriate? It's common to describe both debt and equity rounds as a 'raise'. My guess is you're operating under the assumption that debt is inferior to equity because you're forced to pay it back. But, in reality, when you raise an equity round, you also have to pay back the principal + "interes…

> It's common to describe both debt and equity rounds as a 'raise'.

I disagree, I always interpret "raise" as equity.

> My guess is you're operating under the assumption that debt is inferior to equity because you're forced to pay it back. But, in reality, when you raise an equity round, you also have to pay back the principal + "interest"-- it just delays the repayment date til your liquidation event.

Debt and equity are two very different structures. Mainly due to whose cash moves where, and when.

Debt gets repaid from actual company cash flow on a pre-agreed timetable and at a specific interest rate. If debt isn't repaid, creditors can try and recover their debt in bankruptcy proceedings (usually second in line after unpaid wages).

Equity doesn't get "repaid" in any sense (aside from liquidation or share buy-backs, which almost never occur pre-IPO). Once raised, that money is the company's, and the equity you get in can only be bought and sold.

Raising equity means diluting your ownership stake (so its worth proportionately less of the entire value of the company). Once raised, it doesn't force the movement of cash in any direction. If there's no liquidity event, then equity holders can't force the company to cough up that money.

Note "liquidity event" is distinct from "liquidation" - the former means an opportunity for equity holders to sell down their shares, the latter means the company is bankrupt and i being dissolved, with assets sold/distributed.

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

#184

Post by nine_k »

muse900 wrote: post #174
raiyu wrote: post #141

Earlier quoted context omitted.

"Business folks" :) But all kidding aside, the numbers just don't make sense. AWS is doing $30B in revenue and has tens of thousands of engineers. Google which many can argue has some of the best engineering on the planet is going after AWS investing billions in datacenters and again using thousands of engineers. So to think that DigitalOcean with a $300MM debt line and 250+ people in engineering is going to go after…

ye I agree, it feels impossible to penetrate that market unless you have many billions and the actual engineering knowledge behind it. I think DO is good for the small/average player that doesn't wanna invest time into having his team learning the AWS quirks because his business isn't in heavy need of it. If AWS or even google ever goes after the small/average user by creating an easier to understand/navigate service…

Two words: "egress cost".

Currently both AWS and GCE cost is multiple times more per gigabyte served, compared to DO. E.g. AWS S3 is $0.09 per gigabyte served, while Do Spaces is about $0.01.

For certain businesses, traffic is a major cost, and paying many tomes as much for it could make them unprofitable.

So no, a cloud provider of the DO class must be long-term viable, just in a different niche.

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

#185

Post by addicted »

rsync wrote: post #26

"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…

If they had raised VC funding you wouldn’t have written this comment.

When the reality is raising debt instead of VC funding implies that capital providers think they are far more stable than the majority of VC funding is. Debt is cheaper capital precisely because the capital providers are convinced that you are a much safer bet.

I think a lot of people on HN (and Americans in general) don’t really understand debt and have just made debt = bad into a mantra, when in fact it’s one of the best ways to finance growing companies, and usually only available to profitable, or close to profitable companies.

It’s VC funding that is a sign of a lack of profitiability and no immediate possibility of profitability.

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

#186

Post by kaetemi »

scarface74 wrote: post #170
gruglife wrote: post #24

Earlier quoted context omitted.

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,…

Not counting depreciation as part of your loss in a business is about like all of the Uber drivers who don’t take into account the wear and tear on their cars when calculating how much money they are making. Depreciation is a real expense. If you depreciate an asset down from $1000 to $0 in 3 years, you’re accounting for the fact that in three years you are going to have to replace it. There is a reason we have GAAP,…

Imagine you're a growing startup, and you have a yearly recurring investment (you're growing, after all!) of $1000 that's linearly depreciated over 5 years.

Let's say your income is 1100$ each year.

Your profit, according to accounting, would be 900$ for the first year, counting only $200 of the investment, then for the following years you'll see a profit of $700, $500, $300, and $100, as the investments accumulate. Oh no! A downward trend!

The cash flow, however, will simply show $100 profit each year.

Which one is more representative of the growing business with recurring investments?

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

#187

Post by scarface74 »

kaetemi wrote: post #186
scarface74 wrote: post #170

Earlier quoted context omitted.

Not counting depreciation as part of your loss in a business is about like all of the Uber drivers who don’t take into account the wear and tear on their cars when calculating how much money they are making. Depreciation is a real expense. If you depreciate an asset down from $1000 to $0 in 3 years, you’re accounting for the fact that in three years you are going to have to replace it. There is a reason we have GAAP,…

Imagine you're a growing startup, and you have a yearly recurring investment (you're growing, after all!) of $1000 that's linearly depreciated over 5 years. Let's say your income is 1100$ each year. Your profit, according to accounting, would be 900$ for the first year, counting only $200 of the investment, then for the following years you'll see a profit of $700, $500, $300, and $100, as the investments accumulate.…

That’s exactly the story that YC darling DropBox has been telling over the last decade. They still aren’t profitable and according to their own disclosures, have no idea when they will become profitable.

Just as as microcosm, how many YC backed companies have reached profitability? Only two have gone public - DropBox and PagerDuty.

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

#188

Post by jonahbenton »

muse900 wrote: post #176
cj wrote: post #168

Earlier quoted context omitted.

I don’t necessarily disagree with you, not sure I’d place a bet on DO taking on AWS realistically, but: > So to think that DigitalOcean with a $300MM debt line and 250+ people in engineering is going to go after AWS just doesn't add up. Lots of Money + Lots of People =/= Guaranteed Success It’s more a matter of taking on the market from a slightly different angle. One viable path I see is for DO to ramp up their ente…

> Lots of Money + Lots of People =/= Guaranteed Success I'll agree on that. I won't agree with the rest though, I don't think DO can compete in an enterprise level. Actually in the longrun I don't see DO ever being viable. AWS and google are going to become simpler as the time passes and they are going to take over that margin that is left on services like DO, ovh etc. I think the only viable business plan for them r…

There are still MANY old style ISPs playing in the DO-like space. Hosting is HUGE. Plenty of room for many DO like players at .1-1% marketshare.

Google and AWS are NOT going to become simpler, to the contrary, that would defeat their entire proposition. To eliminate the traditional enterprise data center entirely, build sufficient lock-in moats, and then continue to innovate around costs and value requires tons of bespoke capabilities and complexities.

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

#189

Post by apple4ever »

raiyu wrote: post #92
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…

You hit the nail on the head, we are best for SMBs and teams that want to get things done quickly and don't need the hyperscale and added complexity of AWS. Our focus has always been on simplicity and as our customer needs and our own internal needs have grown we've added additional products to continue to allow customers to scale with us. We launched with just Droplets in 2012 and have since added block storage, Spa…

I do love the simplicity, but I think the big thing that is missing is private networking. I'd love to be able to build my own network that connects droplets together and assign them IPs, and that would let me setup VPNs between datacenter.

Also, adding at least another US datacenter would be great.

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

#190

Post by apple4ever »

muse900 wrote: post #176
cj wrote: post #168

Earlier quoted context omitted.

I don’t necessarily disagree with you, not sure I’d place a bet on DO taking on AWS realistically, but: > So to think that DigitalOcean with a $300MM debt line and 250+ people in engineering is going to go after AWS just doesn't add up. Lots of Money + Lots of People =/= Guaranteed Success It’s more a matter of taking on the market from a slightly different angle. One viable path I see is for DO to ramp up their ente…

> Lots of Money + Lots of People =/= Guaranteed Success I'll agree on that. I won't agree with the rest though, I don't think DO can compete in an enterprise level. Actually in the longrun I don't see DO ever being viable. AWS and google are going to become simpler as the time passes and they are going to take over that margin that is left on services like DO, ovh etc. I think the only viable business plan for them r…

> AWS and google are going to become simpler as the time passes

Really? I see them becoming more complex as they add more services.

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