“Developer-first is a great model” -- How DigitalOcean raised a $37M Series A led by Andreessen Horowitz

By Michael Carney , written on March 6, 2014

From The News Desk

Some startups are simply more ambitious than others. DigitalOcean is one of them. Far from the triviality of a "box of the month" club or a celebrity-endorsed mobile game, the two-and-a-half-year-old New York-based company is tackling one of the most challenging and incumbent-dominated categories anywhere: infrastructure as a service (IaaS). That means DigitalOcean is looking to unseat Amazon, as well as Microsoft, Google, IBM, and Rackspace as the cloud-hosting platforms du jour.

As crazy as it sounds, the plan isn’t just working, it’s been an absolute home run. By focusing on delivering a simple and affordable service geared toward developers, and using the latest hardware and software technologies not yet (fully) adopted by its competition, DigitalOcean has grown to serve nearly 180,000 customers – up from 150,000 one month ago. Moreover, the company is highly profitable, with 60 percent margins according to co-founder and CEO Ben Uretsky. In many ways, it’s a nod to the Stripe-playbook that has made the payments upstart a Silicon Valley darling.

Today, DigitalOcean announced the kind of financing that only this type of massive growth can attract: A $37.2 million Series A round led by Andreessen Horowitz* (A16Z) with follow-on participation from IA Ventures. [Update: TechCrunch reports the round's valuation as being $153 million] The TechStars Boulder grad previously raised just $3.2 million in a Seed round that included IA and CrunchFund*.

“Perhaps it’s better to call it a first institutional financing, because they’re well beyond the traditional Series A based on revenue, growth, and overall size,” says A16Z’s Peter Levine. “What they were able to accomplish from a standing start just two years ago is absolutely remarkable. And they’ve built this community of loyal and engaged developers. It’s a huge market that’s only getting bigger.”

“We talked to a lot of firms, and it was hard,” says Uretsky of his pre-holidays Silicon Valley roadshow. “Everyone was asking how we were possibly going to compete and differentiate ourselves in this market. We’re catering to developers – this community is growing astronomically. The guys at Andreessen just got it. They’re a very technical team.”

DigitalOcean has been adding hardware infrastructure and engineering manpower as fast as possible over the last year, in an effort to keep up with increasing demand. The company recently opened its first Asian data center in Singapore, joining existing facilities in New York City (2), San Francisco (1), and Amsterdam (2).

In many ways, the company's late arrival to the IaaS market has worked to its advantage. DigitalOcean is able to offer developers access to state of the art hardware and software stacks at a level that incumbent providers simply can’t offer today. That means using only solid-state storage and the latest silicon and networking gear. While Amazon, et al are constantly installing new hardware, they’re certainly not sunsetting en masse three year old components that, while still functional, are growing more and more obsolete. It may be a short-term advantage, but it's one DigitalOcean is happy to exploit while available.

A year ago, DigitalOcean struggled just to purchase additional server racks at the speed it was growing. But a special manufacturing partnership with Dell and a new credit-facility have enabled the company to get down to 48 hours the time from placing an order to having the hardware online and operational.

“It’s been a game changer,” Uretsky says.

“For us, the advantage of using modern hardware is nice, but it's the least interesting aspect of what they’ve got – hardware always gets commoditized” Levine says. “It’s the software tying together the hardware that is most interesting and will be harder for others to duplicate. Amazon can’t just go back and recreate its software stack [without majorly disrupting itself.] “

It’s not about who has the most features, Levine adds. Rather, he says, it’s about delivering customer-centric, purpose-built products. Levine points to DigitalOcean’s trove of white papers and reference manuals that cater to the developer community as examples of the things it’s doing differently and doing well.

Despite its early success, DigitalOcean still has a challenging road ahead. The burden of high demand in the infrastructure game is that, unlike a typical software startup that can quickly call up more server capacity from its hosting provider, DigitalOcean is the hosting provider. When new customers sign up for the service it needs to order and deploy physical hardware, as well as the hire and train personnel to manage that infrastructure. It’s a costly and time-consuming proposition.

One thing DigitalOcean won’t have to worry about is capital. This round, coupled with its existing hardware credit-lines should be enough to finance the company’s admittedly ambitious plans according to both Uretsky and Levine. DigitalOcean’s biggest challenge over the next 12 months will be hiring, its CEO says.

“Engineers are difficult to find, especially in New York," Uretsky says. "We’re more open to remote employees than ever." It’s a model the company hopes to borrow from GitHub, another developer-first company backed by A16Z’s Levine.

"The developer first is a great model – you love that model being a former developer,” Levine says. “This is simply a huge market and one that will continue to grow. Every person on the planet is a tech consumer. We love projects like this."

(* Andreessen Horowitz Partners Marc Andreessen, Jeff Jordan, and Chris Dixon are individual investors in PandoDaily, as is CrunchFund.)

[Image via Thinkstock]