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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

by cdolan 7y ago

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!

MuffinFlavored 7y ago
> This is a low cost of capital line of credit, is it not (due to their infrastructure and broad customer base)? How low cost? What interest rate, what fees, etc.?
- formercoder 7y ago
  Low as in much cheaper than equity no matter what.
hinkley 7y ago
Am I correct in thinking this is an EBITA situation? 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.
- cdolan 7y ago
  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.
  - pmart123 7y ago
    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.
- OJFord 7y ago
  > EBITA Have you both typo'd 'EBITDA' the same way, or is `EBITDA - Depreciation` a measure used too? (I searched, couldn't find anything.)
  - cdolan 7y ago
    Usually EBIT or EBITDA, I’ve never seen EBITA
    - OJFord 7y ago
      Ah, typo it is then. I first saw it in your comment up-thread ;)
      - cdolan 7y ago
        I didnt even notice, sorry for the confusion!
  - boulos 7y ago
    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. So yes, EBITDA - D! [1] https://www.alibabagroup.com/en/news/article?news=p200213 https://www.alibabagroup.com/en/news/article?news=p200213
gruglife 7y ago
Regarding point #2, many in the finance world (which I work in) consider cash flow positive a better representation of actual profitability than the actual net profit/loss reported on the P&L. In short, cash flow shows if the actual core business is bringing in money or losing money, while the net profit includes a lot of "noise" (probably not the best word to use but can't think of how to phrase this). For example, depreciation is an expense reported on the P&L but the company isn't actually moving money out of their accounts to pay someone for depreciation. This is known as a non-cash expense and effects the overall net profit reported on the P&L. Also, companies can be motivated to show 0 or negative profit on the P&L to avoid paying corporate tax. Amazon was notorious for this as any profit they had, they would re-invest back into the business. Whenever I look at the profitability of the company, I don't look at the P&L number but jump to the cash flow statement and look at Net Cash Flows from Operating Activities (the first of three). First, I look if this positive, and second, if it is growing over time. Hope this helps
- fleetside72 7y ago
  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.
- danesparza 7y ago
  "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.
  - JumpCrisscross 7y ago
    > 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.
drannex 7y ago
> 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.
- cdolan 7y ago
  Thanks for the background I’ll try to follow Alex more closely
cortesoft 7y ago
>Then call the CEO out, Alex Wilhelm (author), if you think its BS! Isn't that what the parenthetical is doing? Maybe subtly, but it seems pretty clear what the author is trying to convey.
- cdolan 7y ago
  I see what you are saying but I dont agree - the author is knowledgeable in financial terms and business, but is still parroting the CEO. I suppose I’m just triggered on what feels like years of news-pieces being marketing pieces for established companies. I would think if the author is well versed in financial speak, they would challenge (or omit) the positive spin the CEO is trying to push here?
  - larosalia 7y ago
    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!
    - MiroF 7y ago
      Thank you!
  - codingdave 7y ago
    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.
smallgovt 7y ago
>> 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).
- nmfisher 7y ago
  > 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.
  - formercoder 7y ago
    Raising debt is a very common phrase in my world. Edit: Also debt and equity are not always that straightforward, they are shades of grey. Convertible notes are debt that look like equity.
rolltiide 7y ago
Non dilutive financing is great. 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.
mxschumacher 7y ago
"raising funds" is used for large companies and debt, see this article as an example "Apple raises €2bn in green bonds" in the Financial Times: https://www.ft.com/content/918c648c-01ae-11ea-b7bc-f3fa4e77dd47 https://www.ft.com/content/918c648c-01ae-11ea-b7bc-f3fa4e77d...
flukus 7y ago
> Using the word “raise” when talking about financing via debt seems inappropriate and very start-upy. They've been around for 9 years, they're just a company now.
nl 7y ago
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. Headspace raised $53M VC funding and $40M debt the other day too: https://techcrunch.com/2020/02/12/headspace-raises-53-million-and-40-million-in-debt-as-it-pursues-clinical-validation-for-mindfulness/ https://techcrunch.com/2020/02/12/headspace-raises-53-millio...
lowdose 7y ago
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.
- cdolan 7y ago
  Sorry but how does this relate to my comment?

by cdolan 7y ago

MuffinFlavored 7y ago

> This is a low cost of capital line of credit, is it not (due to their infrastructure and broad customer base)? How low cost? What interest rate, what fees, etc.?

formercoder 7y ago
Low as in much cheaper than equity no matter what.

hinkley 7y ago

Am I correct in thinking this is an EBITA situation? 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.

cdolan 7y ago
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.
- pmart123 7y ago
  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.
OJFord 7y ago
> EBITA Have you both typo'd 'EBITDA' the same way, or is `EBITDA - Depreciation` a measure used too? (I searched, couldn't find anything.)
- cdolan 7y ago
  Usually EBIT or EBITDA, I’ve never seen EBITA
  - OJFord 7y ago
    Ah, typo it is then. I first saw it in your comment up-thread ;)
    - cdolan 7y ago
      I didnt even notice, sorry for the confusion!
- boulos 7y ago
  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. So yes, EBITDA - D! [1] https://www.alibabagroup.com/en/news/article?news=p200213 https://www.alibabagroup.com/en/news/article?news=p200213

gruglife 7y ago

Regarding point #2, many in the finance world (which I work in) consider cash flow positive a better representation of actual profitability than the actual net profit/loss reported on the P&L. In short, cash flow shows if the actual core business is bringing in money or losing money, while the net profit includes a lot of "noise" (probably not the best word to use but can't think of how to phrase this). For example, depreciation is an expense reported on the P&L but the company isn't actually moving money out of their accounts to pay someone for depreciation. This is known as a non-cash expense and effects the overall net profit reported on the P&L. Also, companies can be motivated to show 0 or negative profit on the P&L to avoid paying corporate tax. Amazon was notorious for this as any profit they had, they would re-invest back into the business. Whenever I look at the profitability of the company, I don't look at the P&L number but jump to the cash flow statement and look at Net Cash Flows from Operating Activities (the first of three). First, I look if this positive, and second, if it is growing over time. Hope this helps

fleetside72 7y ago
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.
danesparza 7y ago
"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.
- JumpCrisscross 7y ago
  > 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.

drannex 7y ago

> 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.

cdolan 7y ago
Thanks for the background I’ll try to follow Alex more closely

cortesoft 7y ago

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

cdolan 7y ago
I see what you are saying but I dont agree - the author is knowledgeable in financial terms and business, but is still parroting the CEO. I suppose I’m just triggered on what feels like years of news-pieces being marketing pieces for established companies. I would think if the author is well versed in financial speak, they would challenge (or omit) the positive spin the CEO is trying to push here?
- larosalia 7y ago
  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!
  - MiroF 7y ago
    Thank you!
- codingdave 7y ago
  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.

smallgovt 7y ago

>> 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).

nmfisher 7y ago
> 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.
- formercoder 7y ago
  Raising debt is a very common phrase in my world. Edit: Also debt and equity are not always that straightforward, they are shades of grey. Convertible notes are debt that look like equity.

rolltiide 7y ago

Non dilutive financing is great. 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.

mxschumacher 7y ago

"raising funds" is used for large companies and debt, see this article as an example "Apple raises €2bn in green bonds" in the Financial Times: https://www.ft.com/content/918c648c-01ae-11ea-b7bc-f3fa4e77dd47 https://www.ft.com/content/918c648c-01ae-11ea-b7bc-f3fa4e77d...

flukus 7y ago

> Using the word “raise” when talking about financing via debt seems inappropriate and very start-upy. They've been around for 9 years, they're just a company now.

nl 7y ago

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. Headspace raised $53M VC funding and $40M debt the other day too: https://techcrunch.com/2020/02/12/headspace-raises-53-million-and-40-million-in-debt-as-it-pursues-clinical-validation-for-mindfulness/ https://techcrunch.com/2020/02/12/headspace-raises-53-millio...

lowdose 7y ago

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.

cdolan 7y ago
Sorry but how does this relate to my comment?