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!
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.
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.
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?
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.
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.
Amusingly, assuming the example company's pricing remained the same throughout rather than cutting prices each year, the client base ends up fixed, the clients get 5x better service by the 5th year, while accounting shows a decline in performance.
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...) :)
That’s exactly the story that YC darling DropBox has been telling over the last decade. They still aren’t profitable and according to their own disclosures, have no idea when they will become profitable.
Just as as microcosm, how many YC backed companies have reached profitability? Only two have gone public - DropBox and PagerDuty.
I'm not sure that I understand your scenario. If you actually need to replace the equipment after 5 years, the accounting approach seems like the most valid approach.
For my understanding, do you mean that cash flow would show $100 profit each year on the 5th year, whereas in the first year it would show $900 profit? Thanks.
The thing is that depreciation is not a cash expense, companies will push the depreciation to the highest reasonable amount to reduce the amount of tax on their profits.
A commonly used valuation technique (discounted cash flow or DCF) relies on projected free cash flows and adjusting for expected CAPEX.
Also there’s GAAP depreciation and tax depreciation, and firms will try and use different depreciation schedules between the two in order to create deferred tax liabilities which boost cash flow early on.
> 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.
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?
The asset will eventually have to be replaced. In the long term, it doesn’t make a difference - ignoring the time value of money.
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.
Also, taxes. If we were able to fully expense capital plants and equipment, there wouldn't a single company paying taxes, they would continually purchase more to offset profit, eliminate taxation, and accelerate growth.
Accounting was a decade ago for me, but as I recall if you sell an item you've depreciated to $0, you will incur a "Gain on Item Sold" which is taxable.
This might be different in various countries, but in general companies cannot play games with depreciation.
The financial audit is done according to certain rules and common practices.
In reality some of these investments might be hard to properly calculate and audit, but simply reporting them as zero is malicious.
EBITDA numbers should provide the insight into profitability without hiding anything.
It's generally fine to mark down your assets faster than they actually become obsolete, so you can take all the depreciation in year 0 if you want. Marking them down slower and overstating profitability is not so cool.
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.
Thanks. I am not a financial professional but do run a medium sized business and have a lot of respect for being cash flow positive.
I agree with depreciation and other non cash expenses obfuscating P&Ls, but can we agree that in an article focused on securing debt financing, which will incur real interest expense, the term “free cash flow profitability”, “loosely” meaning “profitability” is a little misleading?
Agreed that free cash flow can be misleading some cases, and digging a bit deeper helps us understand what those cases are.
Free cash flow and net profit should equal each other if summed up over the entire lifetime of a company.
The trickiness of course comes in the timing of when revenue and expenses are recognized. Whereas a large capital investment hits free cash flow the same year, it only impacts net profit over the course of its depreciation.
Free cash flow can be misleading for companies that require a disproportionately large capital investment upfront but negligible expenses thereafter. This can be illustrated by taking an edge case to the extreme: Let’s say a company required a $1,000,000 capital investment in Year 1, $0 in subsequent expenses, and brought in a piddling $1 in annual revenue until it shut down in Year 10. The company would have been free cash flow positive in Year 2 through Year 10, which would be misleading because in fact the company was never profitable and also had negative ($999,999) free cash flow in Year 1.
> 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.
Yeah, this was my first thought. Technically if you go back in time and model past Cash Flow Statements, you could layer on what you think the real go forward infrastructure cost is to their CFS.
If they are consistently laying out capex, it actually could be very reasonable to just use CFS and not opex.
Software is not typically depreciated though. DO is writing code now that will last for decades but they have to take the accounting hit for it in one year.
At least in my small European country, I believe you can use a deprecation schedule for software as long you buy it externally, instead of creating it in-house.
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.
This might go a long way towards explaining why company management in Europe often have some kind of mysterious love for vendor supplied software and doesn't see any in-house development as a competitive advantage or worth spending on maintaining.
I maintain some LOB PHP5 apps, that started as PHP3 - these internal systems are over 10yr old. Just chugging along, producing value for the business. But yeah, pretty rare stuff, and everything I see is small/internal.
> but can we agree that in an article focused on securing debt financing
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".
Almost all companies re-invest at the rate of depreciation, which is why depreciation rates are a good approximation of cash you are going to have to spend. Move on down to "investing activities" on your cash flow to see all that "non-cash" depreciation bleeding out. Better yet, check out a balance sheet. Net income = change in balance sheet YoY.
Which makes perfectly sense. A company can be cash positive and profitable, cash negative and profitable (worked at a place like that, didn't end well), cash positive and not profitable (at least that company would be by default alive, and if revenue is growing quite healthy IMHO) or cash negative and not profitable (in that case death could happen any moment).
I understood the OP that mixing cash and profitability in one term is wrong. So yeah, I agree that the CEO told BS.
The rules around deprecation and so on are at least intended to give a “better” picture about the health of some business, so it’s somewhat strange when we start going back the “lesser” data of cash flow.
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.
"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 or car loans.
This kind of debt in either a household or a company represents risk and shouldn't be overlooked, IMHO.
> 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.
"Income statements include things like depreciation. That's real, in a sense. It's future CAPEX."
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.)
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.
It's perhaps not nefarious. A lot of GAAP and the standards came about when manufacturing was a lot more prevalent. Concepts like depreciation make a lot more sense when you mentally place yourself in the 1920s.
Depreciation still makes plenty of sense today. A company with very little capital equipment will simply not have a lot of depreciation. Digital ocean as a cloud hoster has a lot of capital equipment (servers etc) to worry about as well.
Which makes a lot of sense, especially when it comes to compensation where not capitalizing end would lead to incentives to not invest in it even if it is profitable. It doesn't make sense to expense it right away when it's something that, like capex, is meant to essentially purchase assets that can pay off later. If those revenues fail to materialize, then the bottom line takes a hit then, just as a company would take a hit if expenditure on a factory proves to be worthless. The goal of this sort of accounting is to reflect economics better, we have statements of cash flows to keep a track of cash and you're more than free to use that in valuing a company (and many analysts do ignore everything but cash)
> this article had more detail and substance than I usually find on TC
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.
>> Using the word “raise” when talking about financing via debt seems inappropriate and very start-upy.
Why would it be inappropriate? It's common to describe both debt and equity rounds as a 'raise'.
My guess is you're operating under the assumption that debt is inferior to equity because you're forced to pay it back. But, in reality, when you raise an equity round, you also have to pay back the principal + "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).
> It's common to describe both debt and equity rounds as a 'raise'.
I disagree, I always interpret "raise" as equity.
> My guess is you're operating under the assumption that debt is inferior to equity because you're forced to pay it back. But, in reality, when you raise an equity round, you also have to pay back the principal + "interest"-- it just delays the repayment date til your liquidation event.
Debt and equity are two very different structures. Mainly due to whose cash moves where, and when.
Debt gets repaid from actual company cash flow on a pre-agreed timetable and at a specific interest rate. If debt isn't repaid, creditors can try and recover their debt in bankruptcy proceedings (usually second in line after unpaid wages).
Equity doesn't get "repaid" in any sense (aside from liquidation or share buy-backs, which almost never occur pre-IPO). Once raised, that money is the company's, and the equity you get in can only be bought and sold.
Raising equity means diluting your ownership stake (so its worth proportionately less of the entire value of the company). Once raised, it doesn't force the movement of cash in any direction. If there's no liquidity event, then equity holders can't force the company to cough up that money.
Note "liquidity event" is distinct from "liquidation" - the former means an opportunity for equity holders to sell down their shares, the latter means the company is bankrupt and i being dissolved, with assets sold/distributed.
I kind of agree, theres an obvious difference between a bank loan and typical startup equity seed round. However it does get very blurry in practice, eg:
- 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
> 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".
The positive spin was removed, and that's also why everyone reading can pick it up so fast. If it wasn't so well written, another author would had just said that DO has plans to be profitable.
When the CEO said "profitability" to the reporter, he challenged it by putting as "loosely". The reporters is informing us, but also making it a point that the CEO alleges something that is not consensus can be considered profitability, he is impartial in displaying the information, but making it clear it's sketchy. It's great writing actually!
Journalists tend to report on what they see, not editorialize. So no, they don't call people out... they just report the words that are said and rely on the reader to put in the critical thought, often giving them a lead in doing so with parentheticals like the one in this article. That is also why completely asinine quotes get shared frequently... not because the quote is good, but because it is not, and they want to give it to their readers at face value and let the readers draw their own conclusions.
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)?
It's interesting that debt finance has increasingly become a way mid-sized startups are funding expansion.
Debt is a way to leverage in finance that leads to more return on equity. It is very healthy to pursue debt at this level and will have a positive effect on free cash flow especially with negative interest rates.
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.
Actually, I ran into this just the other day with Alibaba's earnings [1]. From their definitions:
> 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.
Perhaps, but debt is real and you cannot be “profitable” if you are under a mountain of debt... in fact, you become insolvent if you can’t keep up with the interest payments and pay down the principal.
That’s all true. It really depends on how stable Digital Ocean’s cash flows are as well as likelihood of how they can grow. You don’t want to have to deleverage by paying down debt vs. lowering debt to cash flow/EBITDA ratios.
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.
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.
Simplicity and reliability are the biggest reasons I've stayed with DO for so many years. The combination of droplets, spaces and simple load balancing is the sweet-spot for me. Not to mention a simple, consistent bill each month that makes budgeting much easier. Thanks DO and keep up the amazing work!
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).
I just led a migration for my small team from Zeit Now to Render (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).
(Render founder) Glad to hear it, and I hope you've posted your feature requests on https://feedback.render.com. We're investing heavily in growing the team and putting a strong engineering foundation in place so we can keep adding new features quickly and reliably.
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).
Repobus (https://www.repobus.com/) yet to be launched will provide this functionality in DO or any other cloud. Simply add your nodes and that is it. It is a Heroku like platform on your VPS. Launching sometime in April.
What about hosted kafka or hosted message queues? Are there any plans (even tentative) in that regards? That’s the other missing piece that would make a huge difference to me.
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.
Yeah, I quite like the look of it. I’m still scared of actually running it myself though since the master node requirements are a few servers. I guess I need to look into it again.
Their documented "minimum requirements" are quite ridiculous TBH. I mean, officially Vault requires 6 Consul servers (dedicated to Vault, mind you) to be considered ready for production. I doubt most companies using Vault with Consul follows this.
You I think you could be fine with 3 of the smallest machine types.
That’s basically what put me off trying nomad. Nit just the minimum number, but also their stated hardware requirements. From their documentation:
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.
They ( and many others ) better pray central banks keep printing money by the ton, because once the crunch comes these IT SUVs will be the first to go.
Maybe there's some element of "geek macho" from their side here, but this is their recommendation for a supporting a "small" workload, where I suspect you find yourself on the very low end of that.
Like, you're not doing "big data" unless we're talking petabytes per day.
It really depends on how what your workload is though.
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.
I do love the simplicity, but I think the big thing that is missing is private networking. I'd love to be able to build my own network that connects droplets together and assign them IPs, and that would let me setup VPNs between datacenter.
Also, adding at least another US datacenter would be great.
On a somewhat related note, what is the best way for startups to work with DO to get free cloud computing? My product is a search and analytics engine for github and I would like to offer a free version for people to use and I would like them to use DO since I find it has the best bang for the buck.
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.
I've always believed that as cloud stacks mature and get commoditised various VPS providers will provide a decent alternative to being locked into the AWS or Azure ecosystem. I think the main drivers for people actually migrating will be cost and flexibility, where flexibility will be provided by software stacks that will be deployed on top of simple compute instances.
yeah I'm not sure about your last paragraph. when I interviewed at DO, the few business folks I spoke to were adamant on taking on AWS. I kind of scoffed but hey I'm not running DO.
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.
I don’t necessarily disagree with you, not sure I’d place a bet on DO taking on AWS realistically, but:
> So to think that DigitalOcean with a $300MM debt line and 250+ people in engineering is going to go after AWS just doesn't add up.
Lots of Money + Lots of People =/= Guaranteed Success
It’s more a matter of taking on the market from a slightly different angle.
One viable path I see is for DO to ramp up their 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).
> 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.
> Lots of Money + Lots of People =/= Guaranteed Success
I'll agree on that.
I won't agree with the rest though, I don't think DO can compete in an enterprise level.
Actually in the longrun I don't see DO ever being viable. AWS and google are going to become simpler as the time passes and they are going to take over that margin that is left on services like DO, ovh etc. I think the only viable business plan for them 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.
There are still MANY old style ISPs playing in the DO-like space. Hosting is HUGE. Plenty of room for many DO like players at .1-1% marketshare.
Google and AWS are NOT going to become simpler, to the contrary, that would defeat their entire proposition. To eliminate the traditional enterprise data center entirely, build sufficient lock-in moats, and then continue to innovate around costs and value requires tons of bespoke capabilities and complexities.
I agree I don't see AWS and Google becoming simpler, but instead becoming more complex. They are also catering to workloads that are completely different and they really need to have every single possible knob and dial and configuration possible to satisfy these enterprise customers.
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.
ye I agree, it feels impossible to penetrate that market unless you have many billions and the actual engineering knowledge behind it.
I think DO is good for the small/average player that doesn't wanna invest time into having his team learning the AWS quirks because his business isn't in heavy need of it.
If AWS or even google ever goes after the small/average user by creating an easier to understand/navigate service 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.
I disagree, you can't just tack on simplicity to an incredibly complex product. Elastic Beanstalk is not in the same class as Heroku (despite both running on AWS). When you look at AWS the strength is in breadth and loose coupling. This allows internal teams to push a massive set of products forward in parallel, but the tradeoff is that the seams show everywhere, which directly works against having a simple and cohesive product experience. Theoretically it is possible, but I think you'd need to brand it outside AWS and probably dedicate way more headcount than a beancounter would deem reasonable to compete with DO, and even then I'm not sure AWS or Google are structurally capable of producing such a thing.
>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.
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.
I'm a customer on DO as a small business (mobile game). I wanted some linux servers that I have control over, and I wanted a managed database where someone does backups for me. I also wanted simplicity and a nice UI. I didn't even compare prices, I just thought it was a good deal and didn't look back. At first I tried Heroku but it was too much adapting our application to their way of doing things. DO is just hyper-simple for me. So, thanks DO :)
AWS is infrastructure as a service (IaaS). You need to worry about load balancers, backup scripts, firewalls etc. Ie you need a plausible sysadmin to run it. Even Elastic Beanstalk requires some sysadmin.
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.
After failing with Heroku we migrated to using Dokku on DO. And yes it is more work to do it ourselves, I didn't want to do that but here we are :) It was not a lot of work, dokku is really nice, but it was/is some work. I was hoping for almost no sysadmin work but that didn't happen.
In my case I found it beneficial to just move everything to Hetzner. It offered everything I need at a lower price, and I foresee that for some of my projects I'll need to get 'proper' servers instead of the lowest-tier VPS offerings. It's easier to do that when it's all in the same ecosystem.
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.
I guess there is a niche, not every enterprise spends millions a year.
We're a pretty happy customer that spends maybe a few thousands every month, if there are enough of us it could already be a sustainable business?
DO's branding and a lot of their offering is pretty good, but their locations for non-US customers are much worse than many of their competitors. For instance (and a particular point for me), they still don't have any presence in Australia after over half a decade of it being marked as "under review" on their customer feedback page.
Having geographical locations to back up the quality of the offering is a step forward IMO.
Most likely Telstra (40% market share telco) charge too much for peering network traffic in Australia? Same as how Google Cloud free tier excludes only China and Australia.
Vultr has a POP in Sydney and seem to manage just fine, offering plans similar to DO. I like DO but as I'm based in New Zealand, it's a no brainer to go with Vultr due to their Sydney POP.
I thought their $5/mo machines are the cheapest on the internet for the specs available. Are there cheaper options? I’m hosting a low traffic page that gets maybe 500-1000 views a month and even at $5/mo it seems overkill IMO.
For static site hosting there are a ton of "good enough" free options these days like GitHub Pages, Netlify, etc.
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 $5.00/mo.
Digital Ocean does offer a ton of value in other ways - support, uptime SLA, and other managed products...
Very happy BuyVM customer. The unmetered bandwidth really is unmetered, and support from the founder has been remarkably transparent and often minutes when he's awake and working.
model name : Intel(R) Xeon(R) CPU E3-1270 v3 @ 3.50GHz
So yes, it's a 7 year old quad core, with maximum of 32 GB of RAM. You only get access to one core (technically thread); 512NB to 2GB nodes can burst to use the full thread, but are expected to not 100% it. The 4GB node (1/8th of the server) is allowed to fully peg their thread.
Some of the newer servers are powered by AMD Ryzens, which is a great thing (they are far better perf/$ now; they're on GCP, and Tencent is deploying tens of thousands of ryzens in their DC).
Pretty sure Linode is comparable price wise and in Europe there are cheaper options like OVH. Digital Ocean pricing becomes pretty comparable with GCP and others when you start specing up to a "production-grade" server i.e. the kind of server you actually want to run Postgres on.
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).
Just popping in to say that OVH is the cheapest option for a reason -- support/monitoring/any other features you might want are just not there like they might be on other providers.
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.
I suppose it depends on what OVH offering you buy. I have multiple servers at OVH with multiple years of uptime, but those are dedicated ones and not the cheapest Kimsufi offerings.
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.
For 500-1000 pageviews per month (maybe even per day?) I think you could get away with the free tiers of (if static: github pages, netlify), or (if dockerable: Google cloud run), or (if postgres required heroku) or now.sh or lamba. vultr offers a $2.50 VPS.
AWS Lightsail has a $3.50/month option that might work for you if you want a VM. You could even consider something like nearlyfreespeech.net if you dont need full control of the tech stack.
You can get OpenVZ or even KVM boxes for half the price or better. I have one running as a simple nginx webserver and OpenVPN server that I pay under $30 a year for
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?
"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 ...
If they had raised VC funding you wouldn’t have written this comment.
When the reality is raising debt instead of VC funding implies that capital providers think they are far more stable than the majority of VC funding is. Debt is cheaper capital precisely because the capital providers are convinced that you are a much safer bet.
I think a lot of people on HN (and Americans in general) don’t really understand debt and have just made debt = bad into a mantra, when in fact it’s one of the best ways to finance growing companies, and usually only available to profitable, or close to profitable companies.
It’s VC funding that is a sign of a lack of profitiability and no immediate possibility of profitability.
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.
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.
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.
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.
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.
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.
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...
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.
I don't disagree with you on your premise that AWS has an entirely different, and much larger size and scale than DO. And has a competitive advantage due to that. But your comment also seems to make the assumption that everybody should be content to let AWS (or Azure, etc, entities with very deep pockets) become a literal monopoly, and everybody should be totally fine with that.
Nope. I didn’t say anything like that at all. You just don’t best AWS by trying to replicate them, since they have enough capital to create four of you several times a year (and do, i.e., Lightsail).
Saying that, they themselves really need to look at Baidu, or Alibaba.
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.
Alibaba and Baidu have a totally other market segment, which is domestic Chinese companies that want and need to be fully compatible with Chinese law for domestic data hosting, retention, government compliance. There is a venn diagram overlap between the markets addressed by the (AWS, Azure, DO, etc) and the Chinese virtual machine providers, but it's nowhere near 100%.
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.
Fine, ask lsc. I have tremendous respect for Luke given that he had, thanklessly and for years, tried to compete in this exact market singlehandedly. Even competing against him at Linode, that was remarkable to me.
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?
No, most startups using either AWS or GCE (at least in the market I'm around in, Europe-based) is choosing them because they are giving away free credits and you can usually run the first year for free before starting to think about costs, and at that point you've reached market validation and can afford start thinking about costs.
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.
This is why I run anything online-gaming related on OVH (or SoYouStart and Kimsufi, their cheaper offshoots that still use the OVH network) - they are very good about handling the everyday DDoSes you get in that sector without taking the site offline or charging extra. I think they will disconnect a site that draws a very high rate attack, but they've soaked the kiddie DDoSes just fine.
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.
There are two levels of AWS Shield, "Standard" and "Advanced". You are correct that all instances receive "Standard" protection from Shield by default.
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."
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 discuss the terms, which will probably stay confidential until they file to go public.
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?
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.
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.
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.
Yes. But in this case that debt will be raised by selling bonds versus borrowing from an institution.
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.
Correct. However as you borrow more and more it often goes from a b2b lend-borrow transaction to syndicates etc where many people lend to a pool which gets borrowed — or a bond which gets marketed by a banker to bond buyers (lenders).
The more complicated borrows involving many parties are often referred to as “raising money”
maybe? sometimes (often?) a debt-raise at this level comes with options to convert to equity if it turns out to be desirable. So unlike a bank loan (where the bank most certainly doesn't want to be your partner) a debt raise might end up with someone like Warren Buffet owning a sizeable part of your company.
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.
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.
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)
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 :)
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.
I had a single server hosted at scaleway for a year or two, purely for "offsite" monitoring of services hosted elsewhere.
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 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.
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.
Last time I checked Vultr included a DDoS service [1] an DO did not.
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
* Etc...
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.
They have POPs in parts of the world DO doesn't have. E.g. they have a Sydney POP which attracts customers from Australia and New Zealand. Location was pretty much the main reason why I chose Vultr over DO as I found everything else was more or less on par.
Vultr allow running on bare metal and they also allow access to BGP. That's both niche needs, but that's also what you expect from a smaller player, to fill niche market.
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.
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 :)
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.
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]
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.
I prefer Linode. Same level of service, if not better and cheaper. Linode does 100 million in revenue and as far as I can tell they aren't borrowing against their future to get it.
My guess is that a company like Linode with 100 million in revenue is using lines of credit to make large purchases of servers that will pay off over time as their revenue grows. I'm not sure what's scary about D.O. borrowing 1/3 of this year's revenue to continue growing.
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 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.
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.
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.
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)
#1 buying #4 looks very different than #3 buying #4. (Think about AT&T & T-Mobile vs. T-Mobile & Sprint.) But I agree that DO has little or nothing to offer Google/MS.
Due to anti-trust issues, Amazon probably wants DO to stay independent. There are several dimensions in which you benefit from your competitors doing well, but not too well.
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.
Would likely be a private equity leveraged buy out transaction, someone who leans out the operation and squeezes the margins up.
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).
Thanks for your thoughts and prayers but no one is selling the business or nor are we looking for someone to buy it.
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.
Well the debt really acts like a line of credit, in that we are using it for hardware which is then immediately put into service and generating revenue, so the available debt and the drawn down debt are different terms and really there is no need to draw additional down additional debt if the company stopped growing tomorrow.
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.
Question do you lease or buy your servers? It isn't quite clear which you do. Can see in evaluations that a lot of the kit is getting a little bit long in the tooth which I read as your not buying as you're growing but a lease model is the only way I personally see you running up enough costs to warrant the line of credit
I hope this comment ages well also! People deserve compensation for the value they've created.
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.
Yeah - they just lump everything together. They even include employees selling secondary as "raised" capital and the same for debt which is inaccurate.
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.
You're bearish on profitable SAAS companies growing at 20%+ year with huge total addressable markets? D.O. is clearly not growing like DataDog and Zoom, but it has a nice niche, a good rep, and borrowing cheap money to grow should make everyone happy, including the common stock owners.
Can you expound on thoughts and prayers comment? wouldn't debt help equity holders? Or you think any value created by debt is going to be less than the cost of the debt?
debt holders are paid before stockholders, so their risk is smaller.
if DO's revenues goes down it will be common stockholders's equity that will be destroyed first.
let's say you have a mortgage on your house and your equity in it is roughly 10% of the house.
now imagine you take a second mortgage/HELOC to invest-renovate the house, buy new furniture, build a pool, etc. -
in good case your equity will be 10% of the 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.
Gotcha, I guess my assumption was that they were taking on debt to improve value not buy new furniture :) Joking aside, I wonder how this is different than say late stage investor preferential rights? Debt would seem better to the company since preferential equity is somewhat covered on the downside and partakes in the upside.
Yes that's correct. As long as you service the debt you are basically just paying an interest rate to use additional funds but retain future upside for shareholders.
Versus selling equity you can burn through the capital without repercussion however you are also giving away future upside.
Also the benefit to a debt is that banks want to be repaid. The last thing they want is for the company to go out of business so there is a much larger review of the financials of the company. This forces good accounting practices as well as good spending behavior.
Versus when you sell equity you don't really have those same financial controls and as has become more and more common especially in the last few years companies then go and spend that capital inefficiently to grow their revenue base but never get their costs under control.
Then you end up with a business model that doesn't work. The most recent example of which is Casper. Which raised well over $300MM in equity but is still losing $60-80MM a year and required an IPO to continue financing their suboptimal business model. The investors here got burned because the last private valuation was $1B and now that it is publicly traded it is $419MM.
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.
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!