DigitalOcean raises $50M more from Access Industries and a16z

Earlier today, DigitalOcean announced that it raised $50 million more from prior investors and Andreessen Horowitz. The capital comes after the SMB and developer-focused cloud infrastructure company raised nine-figures worth of debt back in February.

DigitalOcean is a large private company that generated revenue at a run rate of around $250 million towards the end of 2019. The company announced today that it has reached $300 million in annual recurring revenue, or ARR. (We recently added the company to our ARR club here.) That's growth of around 20% in less than half a year, though we don't know precisely when the company reached the $250 million mark, making it hard to calculate its true growth pace.

Critically, DigitalOcean is walking toward profitability while expanding.

DigitalOcean's CEO Yancey Spruill told TechCrunch earlier this year that his firm would reach free cash flow positivity in the next few years, a timeline that appears to have moved up (more on that shortly). Provided that the cloud company can keep its growth pace up over the same time period, it could be well positioned for an IPO.

The new $50 million values the company at $1.15 billion, meaning it was worth $1.1 billion pre-money. DigitalOcean is not being valued like a SaaS startup today in revenue multiple terms, then, though its new valuation is still nearly double its old Series B valuation (a company spokesperson confirmed the numbers on that page).

New capital

TechCrunch wanted to know why the company raised equity capital so quickly after it had added debt to its books. The capital was surely welcome given the world's economic condition, but the timing was worth digging into.

DigitalOcean was not “seeking additional funding,” according to Spruill, but after “reviewing our business performance and outlook with our investors at and a16z, they were interested in investing for our next phase of growth.” The company accepted, Spruill said.

Presumably, Digital Ocean's quick revenue growth from a $250 million run rate to $300 million ARR played a part in the investment decision. For DigitalOcean, receiving a new, higher valuation and a monetary top-off from well-known investors may even provide a brand boost (see this article, especially in light of recent coverage the firm has attracted).

Regarding its plans for the new capital, Spruill told TechCrunch that DigitalOcean can now “better support the increase in demand we've seen from entrepreneurs and SMBs around the world as more businesses are transitioning to the cloud, particularly as a result of COVID.” Mark DigitalOcean down as one of the world's companies that is seeing an uptick from the pandemic; most aren't, but the firms that are appear to be using the moment to put more capital onto their balance sheets.

TechCrunch also wanted to know if the new capital opened new ground for the firm, or if its priorities for the new capital were similar to its preceding goals. The CEO told TechCrunch that his firm's focus is the same, namely expanding its business.

“We remain committed to reaching $1 billion in revenue, achieving free cash flow profitability in the second half of this year and, ultimately, position DigitalOcean to be a public company,” Spruill said in an email.

That's clear enough.

By that measure we can expect to see a DigitalOcean S-1 in the first half of 2021, if markets recover. So a16z and Access (longtime investors in the company) could see a quick return for their most recent checks if current plans hold up.

The company's release made note of “accelerating growth,” which TechCrunch wanted to know more about. How quickly is the company growing? Spruill didn't share numbers to confirm or deny our rough math based on his firm's public revenue milestones, but did tell TechCrunch that the company is “actively working on a number of initiatives to accelerate our revenue growth rate,” adding that these are internally dubbed “Grow Faster” initiatives.

Finally, TechCrunch was curious about the impact that COVID-19 is having on DigitalOcean. The company told us that it has “seen a modest increase in churn as a result of COVID-19,” but nothing too bad, saying that the change was “not significant” when “compared with recent trends immediately prior to the pandemic.”

On the positive side of the ledger, DigitalOcean said that its “sign up of new customers has been accelerating” and that it is seeing “increased business from some existing customers.” Adding that up for the SaaS kids: A little bit more churn, good new logo addition, and some upsell tailwinds. Overall that adds up to growth.

More when we have it, but now we're at least set up to understand what the company does next.

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