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"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 t

• outworlder 7y ago
  > Here is a pick and shovel seller that can't make a profit and is going into debt ... That's one way to see it. Another is that they need money to expand the business.
• djsumdog 7y ago
  Did they miss their window? Would this business make more sense during the 2001 dot-com craze? Are startups currently afraid to go with anyone who isn't AWS/GCE/Azure because they understand the cost of moving platforms is high?
  • loldigitalocean 7y ago
    No. Compare Linode and DigitalOcean. Linode bootstrapped, took very few financial instruments to aid the journey, had a few missteps along the way, completely reinvented the entire business more than once, and still serves a niche that makes them a successful (and profitable, as in real profitable, not imaginary profitable) company. Their margins are quite good. Slicehost had a solid business when Rackspace bought them, too, despite Rackspace subsequently burying that business in their wandering-through-tech mass grave. DigitalOcean, on the other hand, took a Sand Hill approach and is throwing money at becoming an AWS unicorn without realizing they are never going to be AWS. Read this carefully, DO: you will never, ever, ever be AWS. Full stop. You are not in the conversation, nor is Linode, nor is prgmr (but lsc knows that), nor is Vultr, and so on, and so on. Ask IBM about trying to take on AWS. DigitalOcean is an incredible waste of capital and appears almost as if they didn’t bother to look at Linode’s story at all. The companies are nearly identical behind the scenes and are pursuing the exact same addressable market, but one is a VC darling intent on burning capital on a completely solved problem and therefore gets VC ecosystem attention and expands to fill that attention. Seriously, you can address this market with Excel and some Python scripts; I exaggerate, but not much. The amount of money DigitalOcean spends given my intimate familiarity with the problem space has been baffling to me for the last decade. DigitalOcean should buy Linode with this debt so the Linode people can come in and fire the right people at DO and shed about seven hundred pounds of weight. When, not if, when DigitalOcean collapses, Linode will continue on and enjoy a sudden inflow of DO’s market share. Linode long predates DO and will postdate them, too. I have a poor opinion of Linode in a lot of ways, by the way, so.
    • raiyu 7y ago
      Our original business was bootstrapped with no outside investment so we know that growth model very well. In fact that bootstrapping allowed us to build DigitalOcean when no VCs were interested in funding us by self-funding through the profits from our original business. The problem with the approach you detailed is that it is based on growth rate. If you have more customers coming to you than you have cash on hand to buy servers, you will be forced to turn customers away. So if you are growing rapidly you will need outside investment, whether equity or debt, in order to grow the business. In our case we raised equity that helped us to secure additional debt terms and also due to our high growth after product market fit we also needed additional cash to continue to build out our operations. I'm a fan of bootstrapping businesses and not raising outside capital unless it is necessary, but in our case the choice was to raise capital or turn away customers.
      • loldigitalocean 7y ago
        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.
  • icedchai 7y ago
    I think it's really two different markets. DO is for lower end sites that need little more than a VPS or two.
  • capableweb 7y ago
    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.
  • mr_toad 7y ago
    > during the 2001 dot-com craze? The x86 virtualisation tech just wasn’t up to it back then.
• timdorr 7y ago
  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.
• adventured 7y ago
  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.
• mc3 7y ago
  It's not 1999 anymore. There will be increasing demand for cloud services going forward. It's more of a bread and butter rush than a gold rush.
• addicted 7y ago
  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.
• juped 7y ago
  It's an amazing (good) achievement that they were able to debt finance, and really improves their credibility as a business in my estimation.