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Newly public, DigitalOcean still wants to be a boutique cloud

With Wednesday's IPO, DigitalOcean raised $775 million to expand its developer-focused cloud infrastructure services for smaller customers around the world.

DigitalOcean CEO Yancey Spruill (center) rings the opening bell at the New York Stock Exchange on Wednesday, March 24, 2021.

DigitalOcean CEO Yancey Spruill (center) rings the opening bell at the New York Stock Exchange on Wednesday, March 24, 2021.

Photo: New York Stock Exchange

If you can't beat 'em, do something they can't.

That might as well be the mantra for DigitalOcean, which competes against enormous companies like AWS, Microsoft and Google in the lucrative market for cloud infrastructure services.

The company, which made its debut on the New York Stock Exchange Wednesday, emphasizes simplicity, affordability and customer support tailored to the needs of smaller organizations that can get lost inside enterprise-oriented cloud providers, said Yancey Spruill, CEO of DigitalOcean.

"Our founders ... nailed the fact that small businesses, startups [and] entrepreneurs have historically been underserved by big technology solutions," Spruill said in an interview with Protocol. "They need a simple, narrow and easy set of solutions."

That group doesn't have nearly as much money to spend on information technology as the large enterprise customers of the world, but Spruill said DigitalOcean generated cash in the fourth quarter of 2020 and should also generate cash from its operations every quarter in 2021. On a GAAP basis, the company lost $43.6 million in 2020 on revenue of $318.4 million, a 25% jump in revenue compared to 2019.

DigitalOcean CEO Yancey Spruill on the floor of the New York Stock Exchange. DigitalOcean CEO Yancey Spruill on the floor of the New York Stock Exchange on the day his company's shares started trading.Photo: New York Stock Exchange

DigitalOcean didn't see the big first-day pop in its stock price that other enterprise tech IPOs over the last six months have gotten. The company sold shares at $47, but trading started at $44.15 and stayed below the offering price all day, closing at $42.50. That left the company worth around $4.5 billion, including some unissued stock compensation — about 10% short of the value it would have held at the offering price.

Whereas companies like AWS offer hundreds of cloud services, including many that those providers manage for customers, DigitalOcean keeps it basic, with virtual machines running chips from Intel and AMD, block storage and networking. The company added a managed Kubernetes service in response to demand for the container orchestration technology, Spruill said, and also offers three managed open-source databases, but that's mostly it.

As a result, DigitalOcean doesn't have to invest nearly as much in hardware — servers, hard drives and networking equipment — to serve its customers. For comparison, DigitalOcean spent just $98 million in computer equipment during 2020, according to its S-1 filing. AWS spends billions each quarter on new computing equipment.

"Our investment is narrow in the sense that we don't have to invest for a broad set of use cases that you have to do in the enterprise," Spruill said.

AWS itself started out life as a small, developer-oriented service 15 years ago and ballooned into one of the biggest providers of information technology services on the planet, with Microsoft and Google following suit. Spruill and DigitalOcean believe that there is plenty of demand from companies that want to test new ideas or build new lines of business on the internet, but can't get the level of support the Big Three lavish on their largest clients.

"Early-stage businesses or two-person startups, they don't have the expertise or the time to spend figuring things out on their infrastructure on their application; it needs to work." Spruill said.

Still, the big cloud providers spend a lot of time and energy courting startups, dangling credits for limited amounts of free services and recounting the stories of now-massive companies that have scaled on the back of their infrastructure. DigitalOcean's long-term bet is that as the cloud matures, the customer and developer experience offered by cloud providers will become just as important as the hardware and the services.

"They recognize that the silicon, network, and other components are commodities, and it is their ability to provide a simplified developer experience that differentiates them," Peter Levine, a partner with Andreessen Horowitz and early investor in DigitalOcean, wrote in a blog post Wednesday.

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