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 $1 billion in revenue in the next five years, and it will become free cash flow profitable (something the CEO also referred to, loosely, as profitability) in the next two.“
On point #2 - thats NOT profitability. Thats called “Cash Flow Positive”, and its an incredible achievement, but definitions matter. In my opinion, “cash flow profitable” isn’t a real thing (its “cash flow positive”), but the real issue is - cash flow positive ≠ profitability.
Edit: On why definitions matter, recall WeWork “Community Adjusted EBITDA”.
Edit #2: The Author knows that the CEO is making stuff up, which is why this bothers me. It’s evident by the parenthetical disclaimer, “...(something the CEO also referred to, loosely, as profitability)”.... Then call the CEO out, Alex Wilhelm (author), if you think its BS!
Whenever I look at the profitability of the company, I don't look at the P&L number but jump to the cash flow statement and look at Net Cash Flows from Operating Activities (the first of three). First, I look if this positive, and second, if it is growing over time.
Hope this helps
There is a reason we have GAAP, to keep crap like WeWork’s “Community Adjusted Ebitda” and Uber from saying that their financials really aren’t as bad as they look if you ignore a dozen expenses.
Let's say your income is 1100$ 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?
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.
(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.
External perception of business health (5x better service!) unintuitively is masking the the accounting reality here (worsening returns).
(Now look at all these cloud services giving better services and pricing every year, seemingly very healthy...) :)
Just as as microcosm, how many YC backed companies have reached profitability? Only two have gone public - DropBox and PagerDuty.
A commonly used valuation technique (discounted cash flow or DCF) relies on projected free cash flows and adjusting for expected CAPEX.
but does a company have to be "honest" about such depreciations? What if the asset isn't actually losing value at the stated depreciation rate? Then at the end of the depreciation period, the company may still extract the residual value by either selling or continue using the asset. Does that somehow then count as revenue? Or did they just magically managed to tax dodge using a fake depreciation schedule?
Theoretically, the only reason we have depreciation expenses at all instead of just expensing the entire cost at once (cash accounting) is that we decided that accrual accounting was more representative than cash based accounting.
I am not an accountant. I’m an MBA dropout after almost finishing.
We define Adjusted EBITDA as net income (loss), excluding (i) income (loss) from discontinued operations, net of income taxes, (ii) net income (loss) attributable to non-controlling interests, net of tax (iii) provision for (benefit from) income taxes, (iv) income (loss) from equity method investment, net of tax, (v) interest expense, (vi) other income (expense), net, (vii) depreciation and amortization, (viii) stock-based compensation expense, (ix) certain legal, tax, and regulatory reserve changes and settlements, (x) asset impairment/loss on sale of assets, (xi) acquisition and financing related expenses, (xii) restructuring charges and (xiii) other items not indicative of our ongoing operating performance.
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?
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.
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.
If they are consistently laying out capex, it actually could be very reasonable to just use CFS and not opex.
The same is true for other creative work/IP. The reasoning being, I believe, that it is hard to appreciate (as in: set a monetary value) for such work. If you buy, you’ve given the open market a chance to work its magic and the price is believed to be closer to something like truth.
Income statement, balance sheet and statement of cash flows together give you a pretty complete picture.
We could also agree that its a tech-blog article, which means 99% of the people reading it simply do not care about financials, other then "huge raise! wow, revenue! great profitability potential".
I understood the OP that mixing cash and profitability in one term is wrong. So yeah, I agree that the CEO told BS.
As just one example, if you pay for supplies in one accounting period, but only sell (and get paid) in the next, cash flow will fluctuate widely, even if your business is entirely stable.
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 or car loans.
This kind of debt in either a household or a company represents risk and shouldn't be overlooked, IMHO.
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.
Depreciation is past capex, not future capex. You could argue that the two are equivalent, because the assets being depreciated will need replacement in the future. But:
1. The assets' useful life may be longer (or shorter) than the depreciation schedule.
2. The future replacements may cost less (or more) or just not be needed at all.
Technically (from an accounting perspective), yes. Practically (from a financial/economic perspective), not quite.
Past capex is a sunk cost. Investors care about future cash flows. If you strip out depreciation, you’ll be surprised by the bill when your machine breaks down. (You may still be surprised. Life is unpredictable and depreciation schedules are an estimate. But that’s one of the problems the concept tries to solve.)
That's because Alex Wilhelm wrote it. He was previously the editor for Crunchbase (just joined in the last few months). I've known him for years, he does great reporting that makes me incredibly envious. TC is lucky to have gotten him, he deserves Financial Times-quality media exposure.
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 + "interest"-- it just delays the repayment date til your liquidation event.
>> This is a low cost of capital line of credit, is it not (due to their infrastructure and broad customer base)?
Based on the wording "secured $100 million in new debt from a group of investors", my guess is it's a term loan of sorts vs a LOC (since banks typically issue LOC's, and they're generally not referred to as investors).
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.
- Redemption rights & liquidation pref in preferred shares effectively turn it into a loan
- Convertible notes are debt instruments but most obviously should be described as "raising"
- Venture debt typically has upside in the form of share options in addition to the debt repayment mechanism
No one will read those words and think they are raising equity...
Edit: Also debt and equity are not always that straightforward, they are shades of grey. Convertible notes are debt that look like equity.
Right, but that just reinforces my point. Debt is different from equity, which is different from a note. Legally and commercially, outside investors (or acquirers) are going to treat them all differently. It's not as simple as "raising $X means you have to repay $X+Y, no matter whether its debt, equity or note".
Isn't that what the parenthetical is doing? Maybe subtly, but it seems pretty clear what the author is trying to convey.
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?
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!
It's interesting that debt finance has increasingly become a way mid-sized startups are funding expansion.
Headspace raised $53M VC funding and $40M debt the other day too: https://techcrunch.com/2020/02/12/headspace-raises-53-millio...
Congrats to Dropbox for being denied credit worthy. There is a parallel world at the top where money is free for the credit worthy, they are one step closer.
You can be making money and paying it all to Uncle Sam and your bank loans. 100 million is gonna be a lot of interest payments.
Have you both typo'd 'EBITDA' the same way, or is `EBITDA - Depreciation` a measure used too? (I searched, couldn't find anything.)
> Adjusted EBITDA represents net income before (i) interest and investment income, net, interest expense, other income or loss, net, income tax expenses and share of results of equity investees, (ii) certain non-cash expenses, consisting of share-based compensation expense, amortization, depreciation, operating lease cost relating to land use rights and impairment of goodwill, which we do not believe are reflective of our core operating performance during the periods presented.
> Adjusted EBITA represents net income before (i) interest and investment income, net, interest expense, other income or loss, net, income tax expenses and share of results of equity investees, (ii) certain non-cash expenses, consisting of share-based compensation expense, amortization and impairment of goodwill, which we do not believe are reflective of our core operating performance during the periods presented.
So yes, EBITDA - D!
They've been around for 9 years, they're just a company now.
How low cost? What interest rate, what fees, etc.?
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.
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.
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.
One final question: will spaces support proper static site hosting? There was a ticket about it stating it was planned for Q3 or Q4 last year. but there was no follow up.
You I think you could be fine with 3 of the smallest machine types.
Nomad servers may need to be run on large machine instances. We suggest having between 4-8+ cores, 16-32 GB+ of memory, 40-80 GB+ of fast disk and significant network bandwidth
Basically the cost if the Nomad masters would be much greater than the cost of what would run my actual applications. That’s a non-starter for me.
> You I think you could be fine with 3 of the smallest machine types.
Maybe, but if that’s their official stance, it would make me very nervous to run a production system with lower spec machines.
Like, you're not doing "big data" unless we're talking petabytes per day.
We have been running between 100 and 200 Jobs in Nomad, with the quantity of clients doubling then shrinking every day using 3 × t3.micro for the servers since years.
We have yet to see our Nomad usage increase enough to get rid of these machines.
Also, adding at least another US datacenter would be great.
I can see people that would like to use my solution to not need the bells and whistles of aws, azure, etc.
Does DO provide startup assistance like Microsoft, which gives free cloud computing? My goal would be to say something like try DO free for a week and if you like it, continue using them.
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 AWS just doesn't add up.
Certainly when you have 500+ people in a company everyone has different opinions and view points on where a company should be headed, or who it is competing with and so forth, but for me the priority has always been clear. Focus on the SMBs, and developer teams, that need the flexibility that AWS offers without the complexity because you aren't managing a $10MM hosting budget.
> 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 enterprise appeal by offering services on par with AWS, while cutting down the operational complexity of managing AWS services (using AWS = incredibly high overhead with configuration and everything else).
Absolutely. Getting into AWS, etc can be overwhelming. Getting into DO is incredibly easy.
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 right now would be to focus on their simplicity and continue building on it hoping they will get bought out by the big players.
Obviously thats not good for us -> amazon and google owning everything on the web but unless there is some crazy law that limits them from doing so, they are going to do it.
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.
Really? I see them becoming more complex as they add more services.
Doing what they do is complex and takes a certain skill set, but also doing simplicity right is it's own skill set.
I would say that I would be more worried in the past when AWS was more of a single player, but now that Google and Azure are firmly in the picture, AWS has some real competition in their core market which takes their focus away from us which is great.
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 for the user that doesn't need all that overhead and time investment of that bizarre learning curve just to setup a simple application, then its just gonna kill DO and other services like that out there.
Lightsail doesn't seem to have killed off DO:
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 $0.01.
For certain businesses, traffic is a major cost, and paying many tomes as much for it could make them unprofitable.
So no, a cloud provider of the DO class must be long-term viable, just in a different niche.
Heroku is platform as a service (PaaS). It abstracts away the complexity of AWS. The base cost is more expensive than raw AWS but you don't need to source and pay for a sysadmin.
AWS, Heroku and DO aren't "better" than each other, they serve different use cases.
With heroku you need to pay to keep things running, though sadly with DO you need to do a lot of sysadmin work to keep things running.
That said, it's only been barely worth the hassle. The difference in cost for the lowest tier, at least, is almost a rounding error in my finances.
Furthermore, it feels strange that I still often end up at DO pages for various tutorials or articles to help me set things up.
I guess mostly I still find myself fond of DO, have been helped immensely by their free articles and tutorials, and am immensely impressed that they haven't gone to shit like all the shared hosting providers I've churned through in the years before I moved to DO. and while it was ultimately worth it for me to move all my projects to Hetzner, I wouldn't particularly recommend that approach to anyone unless <10$ a month is something they are concerned about.
Having geographical locations to back up the quality of the offering is a step forward IMO.
For pure VPS, there are cheaper options, especially if you don't need a ton of customer support like DO offers.
For example, buyvm.net has a VPS with 1 vCPU, 1GB RAM, 20GB SSD, and unmetered bandwidth for $3.50/mo. DO's cheapest VPS is 1 vCPU, 1GB RAM, 25GB SSD, and 1TB bandwidth for $5.00/mo.
Digital Ocean does offer a ton of value in other ways - support, uptime SLA, and other managed products...
Edit: Check out https://lowendbox.com/ to find cheap VPS providers.
model name : Intel(R) Xeon(R) CPU E3-1270 v3 @ 3.50GHz
Some of the newer servers are powered by AMD Ryzens, which is a great thing (they are far better perf/$ now; they're on GCP, and Tencent is deploying tens of thousands of ryzens in their DC).
I have a 2GB node, and I've ran Geekbench 5 and got a score of 661. Here are the results: https://browser.geekbench.com/v5/cpu/1278946
For comparison, a Vultr 1GB ($5/m) has a geekbench score of 2413.
For most web server needs, BuyVM should suffice.
Yes, other providers are much faster; but other providers don't offer unmetered bandwidth. BuyVM is great for bandwidth heavy, compute-low loads.
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).
I host a single tiny website on OVH and they restart it randomly every ~4 months without warning (seriously). It was annoying at first until I set our services to run on system boot.
Some more discussion at discourse.org that's relevant: https://meta.discourse.org/t/migrate-from-digital-ocean-to-o...
Which pretty much is how things were always done, even in the PHP-CGI days.
Definitely. There is an entire ecosystem of small VPS providers below DO & co.
e.g. I'm currently paying 7 USD for a 4 core w/ 16gig ram. Modern hardware too - Ryzen & NVme.
Trade-off is you need to spend time hunting for once off deals & there is no guarantee the provider will still be around tomorrow & you never know whether it's oversold.
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?
They do more than just VPNs. They do object storage, containers and K8. They have command line an API based tooling.
A small enterprise could do a lot with that.
If you were talking a $100 million dollar budget and you needed bells and whistles like IAM Lambda or Glacier I could agree.
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 ...
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.
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.
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.
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.
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.
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.
If you have to borrow $100MM to provide the same basic service that you’ve been providing for 8 years, then aren’t these “customers” less customers and more recipients of free services?
Perhaps, that’s the point, no? Buy the remaining VPS market with unsustainable pricing, and then raise the price...
Borrowing money to buy that server is definitely not giving away free stuff. Nor is that pricing unsustainable.
No matter how profitable a business is, there's a limit to how fast it can expand debt-free based on how fast the profits accrue.
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.
In the approach of "throwing money on the problem until it works" few can beat them. Alibaba's losses were surreal when they tried to get even to the tenth of AWS scale, but they went way further, and now they are profitable.
People can of course challenge their bookkeeping, but still...
If not for China they wouldn't be where they are and wouldn't have succeeded. Having a large core market you are the most competitive in (due to government regulations) provides a massive upside that you can then leverage in other markets.
I have receipts for my Linode employment and I am unconcerned about the veracity of my analysis (I’m actually paid for said analysis IRL). Think about that bar you’ve set for a minute: “this person doesn’t actively court a reputation on Hacker News, therefore the information is suspect.” If that sounds good to you, we are unlikely to agree on anything, and I’ve little interest in defending my methods to someone who values speaker over spoken.
I have other gripes with Linode, but it’s not exactly par for a ‘disgruntled’ former to speak positively about a business, no?
The x86 virtualisation tech just wasn’t up to it back then.
That's one way to see it. Another is that they need money to expand the business.
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.
I'd like to know if anyone has experience there.
If they are, I don't know about it. I've never heard of AWS taking people's systems offline for being DDoSed.
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 . 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.)
 This is a polite way to say "They routinely were written to wipe out all common equityholders like e.g. employees and founders."
It’d be very interesting to learn what covenants are attached to DigitalOcean’s new credit facility. Their press release  lists the lenders but does not discuss the terms, which will probably stay confidential until they file to go public.
'default' means 'pay us back now or give us your collateral', right?
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.”
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.
So 'going into default' just means that you've triggered a default clause in the contract, usually when you fail your side of the bargain.
So it's not necessary collateral you have to give up when you go into default. It could be, but it's going to be specific to that particular loan contract. It could be collateral, or extra fines, or you agree to sell off your assets and give a percentage back to the lending bank.
I don't know the standard details in these types of clauses that are used in big loans like this, but the vast majority of the time the bank is going to want to sit down and send in advisers and consultants and that sort of thing to help bring your company back into profitability.
So when you go into default the first thing that happens is that you are going to lose a lot of autonomy as the bank is going to want to start to take a more active role in managing the company so that they can recover their money.
Look at it this way:
If a bank makes a 10,000 dollar loan to you and you fail to pay it back... That's your problem.
However if a bank makes a 100,000,000 dollar loan and you fail to pay it back... That's THEIR problem.
This points to the major difference in consumer debt (credit cards, mortgages, student loans, car loans) vs business debt.
With business debt there is a shared liability. It's a business arrangement in which both parties.. the lender and the borrower face significant risks. So when 'shit hits the fan' they will try to work together to figure something out. They can't depend on the government to step in and try to force the other party to assume all the liability.
This is why for large businesses it's kinda silly NOT to be in debt as long as risk is carefully managed. As long as they make more money from the capital investment then the interest rates they need to pay on that laon then it's a win-win situation.
Consumer debt is vastly different. When you get a personal loan or other type of consumer loan then you have almost 100% of the liability. The banks have arranged the loan details, monitor activity via credit reporting agencies, and influenced the laws regarding personal debt so they face almost no risk.
The goods you buy with the loan don't increase in value (only common exception is home mortgages)... instead they depreciate. You are going into debt to buy future landfill.
There is very little shared liability. Because of the lack of risk on the side of the lenders then consumer debt is much more predatory.. much more dangerous to the borrower.
When it comes to student loans there is NO shared liability. You assume 100% of the risk. The banks that lend the money usually make MORE money the worse you are at paying them back.
So you can't really apply your personal experience with credit cards and car loans try to apply it to business logic.
Edit - read it closer, it seems they are borrowing from commercial lenders. In which case I have no idea why they used the word 'raised', as it usually implies bond sales.
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.
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.
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)
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 :)
I only had one complaint; using their online control-panel it was impossible to set reverse DNS for IPv6 addresses - something that you need if you want to send email.
Otherwise the service was stable, reliable, and cheap. I retired the instance last month, but that was due to practical reasons rather than unhappiness with their services.
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.
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.
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
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.
According to multiple HN users, a more unreliable (internal) network.
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.
Having options is good, and there are many reasons someone would prefer them over AWS, GCP or Azure.
What are the consequences as a customer?
Does all your data just evaporate into the aether?
Typically what happens in the low-end hosting world is that smaller providers get bought out by larger ones, (though large in this sense might mean a 4-person company with 200-1000 virtual machines gets acquired by a company 2-5 times larger). At that point you'll probably have your stuff running and you'll be "invited" to migrate.
But in short you should always assume your stuff is going to disappear; take (offsite) backups, have (offsite) monitoring, and design applications to cope with rebalancing/relocation/redeployments easily.
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.
Getting funding as a startup is another. If you are alone in your vertical nobody wants to talk to you. If you have competition, well, then you must be doing something interesting.
Anyone with tech chops has their own cloud, and DO isn’t even cash flow positive yet. Thoughts and prayers to anyone with common stock (which isn’t looking too good at an exit).
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 capital lease obligations and there are quite a few write-ups that detail how much exposure they have, but it's in the billions.
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 able to generate (I'm not debating the present value already inherent in the business, that's already obvious and proven based on revenue).
The argument breaks down when you compare DO to AWS; DO isn't in the same class as AWS, Azure, or GCP. These are top tier cloud providers; not only do they have access to capital markets (or firehoses of profit from other business lines) at terms most startups could only dream about, they have world class sales, account management, and technology teams. They are able to generate an immense amount of value from the leverage they're obtaining with their available capital resources. I agree there is growth left for DO, but not at the same rate as the cloud providers I mentioned, and the growth remaining is the value up for discussion when considering 1) what DO has already raised in equity and debt and 2) current and forward looking revenue.
It's kind of a moot point: if I'm wrong, you still end up wealthy. If I'm right, I get...internet points with no value. I hope your common shareholders are able to realize upside from the value they've created (I have friends who worked at DO), but I'm not optimistic based on how common shareholders make out, historically, in venture backed orgs. This is my chief concern: common shareholders (who put their most precious resource, their time, into the business) getting blown away because an org overextends itself attempting to reach an unattainable target.
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 =]
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.
I'd be happy to tell them that, but I'm a little annoyed with them because they used to list everything publicly and then put a bunch of stuff behind a paywall. Doubt, that it would matter much to them regardless plus we are one of the few startups that raises both equity and debt, so I don't think it something that happens often enough for them to really change how things operate on their end.
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 higher price of the house due to renovations, so your equity will increase in dollars. But what if you will never find a buyer? and the house price will stay the same, if not lower.
then your equity in your house will be wiped out and the mortgage will become underwater.
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.
They seem to have some regions running at near capacity already.