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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 Digital

by 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.
- raiyu 7y ago
  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.
jammakerpro 7y ago
First,"original business". Second, there's no problem with the approach, it's literally validated as not having a problem in the wild. Right now.
gonational 7y ago
> raise capital or turn away customers 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...
- Dylan16807 7y ago
  Let's say a server costs $10000 and gives you $500 a month in profit. Borrowing money to buy that server is definitely not giving away free stuff. Nor is that pricing unsustainable. No matter how profitable a business is, there's a limit to how fast it can expand debt-free based on how fast the profits accrue.

by raiyu 7y ago

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.

raiyu 7y ago
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.

jammakerpro 7y ago

First,"original business". Second, there's no problem with the approach, it's literally validated as not having a problem in the wild. Right now.

gonational 7y ago

> raise capital or turn away customers 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...

Dylan16807 7y ago
Let's say a server costs $10000 and gives you $500 a month in profit. Borrowing money to buy that server is definitely not giving away free stuff. Nor is that pricing unsustainable. No matter how profitable a business is, there's a limit to how fast it can expand debt-free based on how fast the profits accrue.