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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

#101
Does DO still disconnect your droplet from the Internet for three hours if you get DDoSed?

That's what made me switch from DO to AWS a few years ago. I used my droplet as an IRC bouncer to hide my home IP address. I'm an op in an IRC channel and someone started spamming racial slurs, so I banned them. They responded with a DDoS. I could tell my connection was a bit slow, but nothing crashed, but then it dropped offline and I got an e-mail from DO saying they're taking my droplet offline to protect their network.

Made me realize that I could never use them for any sort of game server, since the skids love to fire up LOIC whenever they get upset.

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

#102

I prefer Linode. Same level of service, if not better and cheaper. Linode does 100 million in revenue and as far as I can tell they aren't borrowing against their future to get it.

My guess is that a company like Linode with 100 million in revenue is using lines of credit to make large purchases of servers that will pay off over time as their revenue grows. I'm not sure what's scary about D.O. borrowing 1/3 of this year's revenue to continue growing.

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

#103

Earlier quoted context omitted.

It's perhaps not nefarious. A lot of GAAP and the standards came about when manufacturing was a lot more prevalent. Concepts like depreciation make a lot more sense when you mentally place yourself in the 1920s.

Depreciation still makes plenty of sense today. A company with very little capital equipment will simply not have a lot of depreciation. Digital ocean as a cloud hoster has a lot of capital equipment (servers etc) to worry about as well.

Do they run their own servers? I thought they were wrapping t other big cloud providers.

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

#104

Does DO still disconnect your droplet from the Internet for three hours if you get DDoSed? That's what made me switch from DO to AWS a few years ago. I used my droplet as an IRC bouncer to hide my home IP address. I'm an op in an IRC channel and someone started spamming racial slurs, so I banned them. They responded with a DDoS. I could tell my connection was a bit slow, but nothing crashed, but then it dropped offli…

Did you continue to get DDoS after moving to AWS? I figure that AWS would take similar steps if you are not using Shield or one of their other products that would help mitigation.

I'd like to know if anyone has experience there.

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

#105
post #84

Earlier quoted context omitted.

>Then call the CEO out, Alex Wilhelm (author), if you think its BS! Isn't that what the parenthetical is doing? Maybe subtly, but it seems pretty clear what the author is trying to convey.

I see what you are saying but I dont agree - the author is knowledgeable in financial terms and business, but is still parroting the CEO. I suppose I’m just triggered on what feels like years of news-pieces being marketing pieces for established companies. I would think if the author is well versed in financial speak, they would challenge (or omit) the positive spin the CEO is trying to push here?

The positive spin was removed, and that's also why everyone reading can pick it up so fast. If it wasn't so well written, another author would had just said that DO has plans to be profitable.

When the CEO said "profitability" to the reporter, he challenged it by putting as "loosely". The reporters is informing us, but also making it a point that the CEO alleges something that is not consensus can be considered profitability, he is impartial in displaying the information, but making it clear it's sketchy. It's great writing actually!

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

#106
post #34

DigitalOcean has always had loads of debt, it's how you build such a capex heavy business, you use lease lines and credit.

Agree completely. I've been an exec for multiple low 9 figure hosts and always imagined they were larger by a wide margin.

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

#107

Earlier quoted context omitted.

debt holders are paid before stockholders, so their risk is smaller. if DO's revenues goes down it will be common stockholders's equity that will be destroyed first. let's say you have a mortgage on your house and your equity in it is roughly 10% of the house. now imagine you take a second mortgage/HELOC to invest-renovate the house, buy new furniture, build a pool, etc. - in good case your equity will be 10% of the…

Gotcha, I guess my assumption was that they were taking on debt to improve value not buy new furniture :) Joking aside, I wonder how this is different than say late stage investor preferential rights? Debt would seem better to the company since preferential equity is somewhat covered on the downside and partakes in the upside.

Yes that's correct. As long as you service the debt you are basically just paying an interest rate to use additional funds but retain future upside for shareholders.

Versus selling equity you can burn through the capital without repercussion however you are also giving away future upside.

Also the benefit to a debt is that banks want to be repaid. The last thing they want is for the company to go out of business so there is a much larger review of the financials of the company. This forces good accounting practices as well as good spending behavior.

Versus when you sell equity you don't really have those same financial controls and as has become more and more common especially in the last few years companies then go and spend that capital inefficiently to grow their revenue base but never get their costs under control.

Then you end up with a business model that doesn't work. The most recent example of which is Casper. Which raised well over $300MM in equity but is still losing $60-80MM a year and required an IPO to continue financing their suboptimal business model. The investors here got burned because the last private valuation was $1B and now that it is publicly traded it is $419MM.

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

#108
post #99

Earlier quoted context omitted.

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…

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 founder driving gear to the datacenter in the back of his Ridgeline, would seemingly surprise you, as would when the revenue was sufficient to sustain ongoing server spend. Linode ran out of capacity ALL THE TIME. It’s a HUGE market. Turning away a customer is not fatal in the slightest.

One server, three months, paid off. Two months profit, next server. Linode leased in the beginning! I’m not arrogant enough to assume I could do it better, but I do know the technical side very well, and with an American Express and a decent funnel of people you know you can be profitable in under a year at this. The fundamentals of what is basically a rack-and-stack game, and what is possible with $400 million of capital... it just doesn’t align with how I’d expect a VPS provider to operate, but you’ve convinced the checkbooks to keep it going, I guess.

I actually compare DO and Linode’s approach all the time as an example of VC methodology versus patience. The $400 million raise game is not appropriate for the VPS space. It’s a market literally defined by bootstrappers.

If you hit $1 billion ARR in that market, by the way, I’ll shut up. Knowing what I know about the market, that sounds about as likely as DigitalOcean colonizing Mars, but I’ll applaud you if you do it.

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

#109
post #30

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,…

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?

Agreed that free cash flow can be misleading some cases, and digging a bit deeper helps us understand what those cases are.

Free cash flow and net profit should equal each other if summed up over the entire lifetime of a company.

The trickiness of course comes in the timing of when revenue and expenses are recognized. Whereas a large capital investment hits free cash flow the same year, it only impacts net profit over the course of its depreciation.

Free cash flow can be misleading for companies that require a disproportionately large capital investment upfront but negligible expenses thereafter. This can be illustrated by taking an edge case to the extreme: Let’s say a company required a $1,000,000 capital investment in Year 1, $0 in subsequent expenses, and brought in a piddling $1 in annual revenue until it shut down in Year 10. The company would have been free cash flow positive in Year 2 through Year 10, which would be misleading because in fact the company was never profitable and also had negative ($999,999) free cash flow in Year 1.

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

#110

Earlier quoted context omitted.

Depreciation still makes plenty of sense today. A company with very little capital equipment will simply not have a lot of depreciation. Digital ocean as a cloud hoster has a lot of capital equipment (servers etc) to worry about as well.

Do they run their own servers? I thought they were wrapping t other big cloud providers.

DigitalOcean owns their own servers and networking infrastructure inside existing datacenters.

https://www.quora.com/Does-DigitalOcean-have-its-own-datacen...

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