
DigitalOcean raises $100M in debt as it scales toward revenue of $300M - drchiu
https://techcrunch.com/2020/02/20/digitalocean-raises-100m-in-debt-as-it-scales-towards-revenue-of-300m-profitability/
======
cdolan
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 statements like this not met with scorn? _“... 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.“_

On point #2 - thats NOT profitability. Thats called “Cash Flow Positive”, and
its an incredible achievement, but definitions matter. In my opinion, “cash
flow profitable” isn’t a real thing (its “cash flow positive”), but the real
issue is - cash flow positive ≠ profitability.

 _Edit: On why definitions matter, recall WeWork “Community Adjusted EBITDA”._

 _Edit #2: The Author knows that the CEO is making stuff up, which is why this
bothers me. It’s evident by the parenthetical disclaimer, “...(something the
CEO also referred to, loosely, as profitability)”.... Then call the CEO out,
Alex Wilhelm (author), if you think its BS!_

~~~
gruglife
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

~~~
scarface74
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, to keep crap like WeWork’s “Community Adjusted
Ebitda” and Uber from saying that their financials _really_ aren’t as bad as
they look if you ignore a dozen expenses.

~~~
kaetemi
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?

~~~
amscanne
In year one, you’re generating $1100 of income with $1000 of capital invested
(that will last 5 years).

By year five, you’re generating $1100 of income with $5000 of capital invested
(that will require $1000 each year to keep up).

You’re _way_ better off in year one here, so it seems the GAAP approach is
actually showing the decline accurately. This isn’t a growing startup, it’s a
startup needing more equipment to make the same money each year.

~~~
kaetemi
You're right, growing capital but not growing income... I made a poor example.

(Imagining a bottom pricing scenario, while keeping a positive cashflow.)

Good point. At year 6 this logic breaks down. (Then again, no longer a
'startup' at that point.) Better hope the replacement equipment is double
worth it's money. :)

Should make some spreadsheets with more scenarios.

------
dcchambers
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 this spot? I want them to succeed and I will continue
to support them as the big guys need the competition, but I fail to see how
they compete against the likes of Amazon without undercutting
significantly...and that won't bring profits. I think the margins on cloud
infra is already pretty thin.

~~~
raiyu
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, Spaces object storage, load balancing, kubernetes,
managed databases, firewalls, and more.

Our goal isn't to be bigger than AWS or Google, but simply to provide a great
service to our customers and to continue to expand our offering as those needs
grow.

~~~
dkersten
What I really wish for is a simple way of running docker containers (like AWS
Fargate, or at least ECS), because I want to run docker containers across
multiple droplets, but I don't want the full complexity of Kubernetes. Also
something akin to auto-scaling groups. If DO had those, I'd use it a whole lot
more than I do (currently I only spend use approx. $140/month on DO).

~~~
mattste
I just led a migration for my small team from Zeit Now to Render
([https://render.com/](https://render.com/)). It has filled this need pretty
well. There are some features that I wish existed but overall the simplicity
has been great for our use case. They do not have auto-scaling but it's
planned
([https://feedback.render.com/features/p/autoscaling](https://feedback.render.com/features/p/autoscaling)).

~~~
Kkoala
How is Render different from Heroku? It seems like a slightly more expensive
than Heroku with slightly fewer features?

~~~
anurag
Render is more flexible than Heroku: you can host apps that rely on disks
(like Elasticsearch and MySQL), private services, cron jobs, and of course
free static sites. You also get automatic zero downtime deploys, health checks
and small but handy features like HTTP/2 and automatic HTTP->HTTPS redirects.

It's considerably less expensive as your application scales: a webapp that
needs 3GB RAM costs $50/month on Render; on Heroku you'll pay $250/month for
2.5GB RAM, and $500/month for the next tier (14GB RAM).

And you get free chat support.

------
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 ...

~~~
djsumdog
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?

~~~
loldigitalocean
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.

~~~
raiyu
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 to buy
servers, you will be forced to turn customers away.

So if you are growing rapidly you will need outside investment, whether equity
or debt, in order to grow the business.

In our case we raised equity that helped us to secure additional debt terms
and also due to our high growth after product market fit we also needed
additional cash to continue to build out our operations.

I'm a fan of bootstrapping businesses and not raising outside capital unless
it is necessary, but in our case the choice was to raise capital or turn away
customers.

~~~
loldigitalocean
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.

~~~
raiyu
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.

------
Sohcahtoa82
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.

~~~
staller
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.

~~~
realmod
All instances use shield by default IIRC.

~~~
jerryoftheyear
There are two levels of AWS Shield, "Standard" and "Advanced". You are correct
that all instances receive "Standard" protection from Shield by default.

[https://aws.amazon.com/shield/](https://aws.amazon.com/shield/)

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

~~~
patio11
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 ability to do
things you'd otherwise want to do or may cause those things to become more
costly than you'd otherwise expect them to be.

A few trivial examples of covenants: "Here's $50 million, but if you ever have
less than $5 million in the bank, you're in default." or "Here's $50 million,
but if your net cash burn ever exceeds $5 million in a quarter, you're in
default." or "Here's $50 million, but if you need any more money, it has to
come from us at whatever pricing we decide to make available. If you issue
debt or equity elsewhere, you're in default."

You very urgently do not want to default.

One can imagine other features. Historically, the downside protections for
debt investors in startups were _extremely_ toothy [0]. This is one reason
startups have been askance about raising debt historically. (Another reason is
that VCs, who invest to get equity, tell founders "Please don't get money from
my competitors", generally not in exactly those words.)

[0] This is a polite way to say "They routinely were written to wipe out all
common equityholders like e.g. employees and founders."

~~~
hinkley
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?

~~~
patio11
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.”

~~~
hinkley
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.

~~~
bluedino
Many loans you have to be careful that you don't pay them like that. If you
don't specify that you're paying down principal with the extra, it just goes
toward next month's payment. So next month you might only owe $50 instead of
$500.

------
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.

~~~
brandon272
How did Linode and Scaleway lose your data?

------
nknealk
To raise a material amount of debt, lenders generally require there to be
collateralized physical assets against that debt. Compare that to equity
financing which firms can use on literally anything (eg. marketing spend,
hiring, etc).

So my guess is the $100M is going to go towards expanding their data centers
in some way. We might see new regions from DO in the coming years or
additional server types/services that run on top of those new servers.

~~~
cdolan
The first part of your comment I’d say is accurate, but why would they have to
spend a meaningful part of the $100 mil debt on infrastructure?

DO likely collateralized their existing infrastructure to get the $100 mil
line of credit/debt, but will spend the $100 mil on other things in addition
to some infrastructure (as the article suggested)

------
GekkePrutser
I used them for my private VPSes but they became too big and business-like.

I moved to Scaleway now, it's still in a much earlier stage, cheaper and with
unlimited bandwidth. I like the way you can still talk directly to their guys
on slack to ask questions. However they're becoming big too. I hope they'll
still love us and I don't have to move again soon :)

~~~
chrysoprace
What's your experience with the service? I'm with Linode at the moment,
primarily because DO doesn't have an Aussie region. Seems like Scaleway is
much better value for money; however reviews on Reddit don't seem favourable.

~~~
termau
Try binarylane if you're in aus

~~~
PixyMisa
BinaryLane are amazing.

------
polote
A lot of complains here but I don't understand why is that worse than raising
the same amount of money from VC ?

~~~
dwild
A VC does the deal in exchange of a part of the company. They will make their
money once you exit, either by becoming public, or by an acquisition. The deal
can be different and could certainly include some kind of repayment, but
that's not the norm for a VC deal.

A loan has to be repaid though, whether the company exit or not. The terms are
fixed and you need to pay them. This can be quite hard when you get a few bad
months, while a VC will just get sad if that happens.

~~~
icedchai
Assuming a successful outcome, VC deals are actually more expensive. They cost
founders and common holders much more in potential returns. Don't forget about
the dividends associated with preferred shares. Those shares are basically
earning interest, just like debt.

Given that nobody expects to fail, why wouldn't a company do debt _if_ they
can afford it and are credit worthy?

And the bad outcome for both is the same: the company goes broke.

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

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

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

~~~
porker
> What does Vultr have that they don't?

According to multiple HN users, a more unreliable (internal) network.

~~~
bluedino
Ironically I moved from DO to Vultr because their network was more reliable

------
gexla
Echoing a lot of other comments here. I don't get why DigitalOcean exists. I
would never use them over AWS, GCP, or Azure. They can't beat anyone on cost
or functionality. I'm not convinced on simplicity. The other platforms aren't
that difficult to use and for some you have to deal with regardless. For
example, if you want to use Google Maps, then you need to use GCP to get
access to the API. Since you're already in there, it's not much further to
setup a VPS.

~~~
jdance
I'm a DO customer. I tried to figure out what running a windows server would
cost on Azure once (since DO doesn't provide windows). I didn't manage to
figure it out after like 20 minutes, and the complexity was just mind blowing.
I literally got a bit of a shock, and felt pretty stupid that I couldn't
figure out such a simple thing. The thought going through my head was
something like "does people actually use this?". So that's a radically
different perspective for you :)

~~~
gexla
I haven't used Azure much. But because it's Microsoft, it's going to be a
default option for a lot of customers who are entrenched in the MS world.

AWS is complex also, but I remember when you're only option to launch an EC2
instance was through the command line. And it's still easier to figure out
than most of my tech stack. Not that I need to be adding anything with
needless complexity.

I do actually like DigitalOcean, but in an AWS / GCP / Azure world I feel it's
best to learn one of those well.

------
BonoboIO
DigitalOcean has raised a total of $305.4M in funding over 11 rounds. Their
latest funding was raised on Dec 27, 2018 from a Secondary Market round. [1]

[1]
[https://www.crunchbase.com/organization/digitalocean#section...](https://www.crunchbase.com/organization/digitalocean#section-
funding-rounds)

~~~
raiyu
Crunchbase lumps together everything including debt as funding. DigitalOcean
raised $123MM in equity and the last raise was an $83MM Series B led by Access
in 2015. There hasn't been a need since to raise equity investment and instead
debt is being used to continue to grow the business and expand our
infrastructure footprint.

------
chrshawkes
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.

~~~
bklyn11201
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.

------
reedwolf
What happens when one of these mini-cloud providers like DO, Linode, and Vultr
folds?

What are the consequences as a customer?

Does all your data just evaporate into the aether?

~~~
drewnick
Yes, which is why no matter who your provider is, you should have an off-site
backup.

------
Elect2
What stopped me from using DO is that they will null your server IP address if
the server got DDOS. I never heart aws/gcp did this.

------
chirau
I was at fireside chat with the DigitalOcean CEO. Not once did he mention
this. Very interesting though. I have always thought that debt would be the
only way they grow and remain relevant in a crowded cloud space.

------
Tokkemon
My company recently moved all their hosting to DO and we couldn't be happier.
It's some of the best hosting we've ever had, especially their Spaces product.

------
brianbreslin
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.

~~~
capableweb
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.

~~~
toast0
Google and Microsoft don't have a dominant market position in cloud hosting;
and their other dominant positions don't seem to be impacting the cloud
marketplace (well, maybe Microsoft is doing some tying)

~~~
wu_187
Google and Microsoft actually do have dominant positions in cloud hosting,
just not in the "traditional" sense of webhosting.

------
luord
I was reminded about the "debt is coming" post that was shared a couple of
weeks back. This is a good example of that, I think.

~~~
steve_adams_86
It seems from what I've read here that digitalocean has always carried
relatively higher debt than other, similar companies. It might not be a good
example.

------
captncraig
Didn't they just have layoffs recently?

~~~
Tokkemon
For restructuring purposes.

~~~
almost_usual
Isn’t that every layoff?

------
markus_zhang
I don't see anything about the structure of the debt. Wish we could see more
details.

------
spicyramen
I love DO justo no GPUs

------
floatinglotus
This company has always been a joke.

~~~
Tokkemon
No.

