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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

#51

Post by JumpCrisscross »

danesparza wrote: post #28
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,…

"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…

> What a sad indictment of modern accounting practices that its accepted practice to create 'noise' to prop up a P&L

Income statements include things like depreciation. That's real, in a sense. It's future CAPEX. But for the present health of a business, particularly a levered one, cash is king.

One way to think of it is in time frames. Cash flows are immediately relevant. If they're out of whack, it's an urgent problem. (They're also the most difficult to mess with.) Income statements are longer term. An unprofitable, cash-generating business may have structural issues with its PP&E, or it may be overleverd, or a bunch of options might have been issued or exercised. Balance sheets are the longest-term statement. (They're also the easiest to mess with.)

Keep in mind, too, that income statements for investors are different from those prepared for the IRS.

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

#52

Post by hinkley »

patio11 wrote: post #42
hinkley wrote: post #20

Earlier quoted context omitted.

Is there a hypothetical situation where I could broker a deal where some new investor with extremely deep pockets makes that loan go away and gives me extra money all in one transaction? 'default' means 'pay us back now or give us your collateral', right?

You might or might not be allowed to do that. US consumers generally expect there to be no pre-payment penalty. That isn’t a universal feature of all loans. As to particular features of particular loans ask the really expensive lawyers or investment bankers who negotiated them, but plausibly “I owe you $45M; here’s a new equity investor; we’re done after the wire clears right.” might lead to “We agree you owe us $60M…

I remember when I was just out of college, I was warned that there was such a thing as a mortgage that did not allow for extra payments, and that you should check for that when applying.

If you couldn't, or even if you did the payment incorrectly, anything extra would just be treated as if you sent your payment in for the subsequent month a little early. I've heard of the latter happening to friends, but I've never seen or heard of the former.

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

#53

Post by djsumdog »

capableweb wrote: post #23
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.

With all the mergers we've seen in the past 20 years, with Facebook literally buying all of its major competitors, I highly doubt the SEC would stop a buy out of Digital Ocean from any of these three providers.

I doubt any of those providers would want DO. Unless they just want to buy the developers, they're not going to get the customers unless they provide some type of automatic migration pattern where yesterday everything was a Digital Ocean Droplet and DO LoadBalancer and hosted database and today we've magically and transparently migrated all of that to EC2, ELBs and RDS.

It's easier to just market to the customer base and get them to migrate their stuff on their own.

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

#54

Post by timdorr »

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…

They're renting our resources, so there is an implied debt up front for that. Servers and datacenters are very expensive compared to the monthly revenue extracted from them. In order to expand to $1b ARR, you've got buy multiple billions of dollars worth of servers. Debt financing is how you do that.

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

#55

Post by thinkloop »

danesparza wrote: post #28
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,…

"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…

It's not really a "sad indictment", there's nothing shady about re-investing your money into the business. It just so happens that if you are a fast growth company doing that, it is no longer beneficial to use the same tools to compare to traditional large established slow growth companies. Amazon fairly and legally and morally (mostly) re-invested their positive cash flow back into their business, but looking at their P&L you can't tell if they are a year 0 startup or an amazing giant company - the cashflow, however, reveals a different story.

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

#56

Post by adventured »

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…

Most picks and shovels sellers fail and go bankrupt. That is absolutely not the way to make money during a gold rush.

There is an immense supply of picks and shovels sellers during gold rushes, which caps pricing power. That's why DigitalOcean's prices are low, they have no pricing power or lack of competition; it's also why they can't make a profit despite massive demand. You're selling a non-differentiated, low value product and only temporarily doing well because of extreme demand. The same exact thing happens to those people during oil rushes (stories abound in recent times in oil boom markets after the crash, most of the picks & shovels sellers get massacred every time). They get mauled when the tide goes out as most of them are heavy on inventory and often debt at the wrong time, and then stuck with huge amounts of low value inventory in products nobody wants. Few of them see the bust coming, they go down with the bust and rarely make enough money to get rich and walk away. They spend most of the short boom building up enough capital to afford to keep up with demand, which always overwhelms during the boom phase, then extremely rapidly deflates (the bust phase).

The people who get rich(er) during a gold rush, are the mine owners with existing capital and normal, profitable operations that are not dependent on the rush in the first place.

Amazon is the one getting rich during the gold rush (they own the mine), not DigitalOcean (the picks & shovels seller that will be forced into a sale to a larger party, IBM perhaps, as the boom fades / saturates / normalizes). DigitalOcean, Linode, Vultr, and 37 others like them, are future casualties (they'll sell, most won't literally go under) of the cloud boom in one form or another. And I say that as a customer and big fan of DigitalOcean.

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

#57

Post by cpach »

divbzero wrote: post #29
patio11 wrote: post #10

Earlier quoted context omitted.

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…

DO never struck me as a company that would go public. Do you think they will?

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

#58

Post by loldigitalocean »

djsumdog wrote: post #48
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…

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 them, too, despite Rackspace subsequently burying that business in their wandering-through-tech mass grave.

DigitalOcean, on the other hand, took a Sand Hill approach and is throwing money at becoming an AWS unicorn without realizing they are never going to be AWS. Read this carefully, DO: you will never, ever, ever be AWS. Full stop. You are not in the conversation, nor is Linode, nor is prgmr (but lsc knows that), nor is Vultr, and so on, and so on. Ask IBM about trying to take on AWS.

DigitalOcean is an incredible waste of capital and appears almost as if they didn’t bother to look at Linode’s story at all. The companies are nearly identical behind the scenes and are pursuing the exact same addressable market, but one is a VC darling intent on burning capital on a completely solved problem and therefore gets VC ecosystem attention and expands to fill that attention. Seriously, you can address this market with Excel and some Python scripts; I exaggerate, but not much. The amount of money DigitalOcean spends given my intimate familiarity with the problem space has been baffling to me for the last decade.

DigitalOcean should buy Linode with this debt so the Linode people can come in and fire the right people at DO and shed about seven hundred pounds of weight. When, not if, when DigitalOcean collapses, Linode will continue on and enjoy a sudden inflow of DO’s market share. Linode long predates DO and will postdate them, too.

I have a poor opinion of Linode in a lot of ways, by the way, so.

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

#59

Post by cortesoft »

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…

>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.

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

#60

Post by notyourday »

cdolan wrote: post #30
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,…

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 that's applicable to the vast majority of their assets.

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