How DigitalOcean Won Over Investors VCs weren't initially sold on the startup, which is now one of the fastest-growing cloud hosting providers in the market.
By Alex Iskold Edited by Dan Bova
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The story of DigitalOcean is, like so many startup stories, a story about beating the odds.
If you said to someone in 2012 that a tiny startup from Brooklyn, N.Y., would soon become the second-largest hosting web provider in the world, you might be told you're crazy. That's exactly the reaction DigitalOcean initally received from the venture community.
What is Digital Ocean, in 140 characters?
DigitalOcean is a cloud infrastructure provider built for developers that is simplifying innovation by focusing on user experience. The new generation of startups leverage our infrastructure to rapidly deploy and scale their production environments and distributed applications.
Who gave you your very first check? What was that experience like?
We received our first meaningful check from IA Ventures in July of 2013. It's great to not only be supported financially, but to have business partners who believe in what you're building – we felt truly validated. Besides being excited, we became more focused than ever on our mission to be the infrastructure layer for software developers around the world.
What was your most recent round of funding, how much did you raise and who were your investors?
Last year in March we raised our Series A with Andreessen Horowitz. Additional funding came from IA Ventures and CrunchFund, totaling roughly $37 million.
How did you approach fundraising? How did you decide how much money to raise? What was your plan?
Approaching fundraising is first about building a financial model and having a deep understanding of what the requirements are for growing the business. We based our numbers on the amount of upfront financial investment we'd need to propel our growth over the following 12-18 months. We then married that with the idea of valuation in order to determine what our acceptable level of dilution was, and what value our company would need to support that level of dilution. Once we decided the amount we wanted to raise and a reasonable valuation of our business, that allowed us to determine the optimal market-acceptable deal structure.
In terms of a specific plan, every company will be different – the only constant is that you want to grow your business. In our case we required funds for two key components of the business: Opex and Capex. With a meaningful debt structure in place supporting our Capex needs, we were looking for equity only to support our Opex needs. This would include supporting operations, driving acquisition, and expanding our employee base.
Related: It's Every Entrepreneur's Responsibility to Invest in Other Startups
How did you go about getting investor introductions?
It's all about the network. Unsolicited approaches toward institutional investors are almost never fruitful. There are really only two ways to get to investor interest: either networking within their environment or using your network to get direct introductions. Generally, if an investor doesn't already know who you are, it's very difficult to establish a relationship. So focusing on the PR approach and building brand awareness will help you get the attention of the investor community more effectively. You can also continue to drive organic interest by hosting meetups and giving local talks.
By the time of our Series A round, we had already established our brand and had a passionate customer base. We were fortunate to have a good network from existing investors, as well as connections from our time at Techstars, which all helped make introductions with top-tier venture capital firms.
What was the hardest and the most unexpected part about fundraising?
The timing of it was probably the most difficult thing. We ultimately chose to fundraise through the Christmas period, realizing we'd need capital going into Q1 in order to sustain our growth. Ideally, the best time to start raising funds would be in February or September, as these lead into the longest periods of the year without major public holidays. The holiday season caused a lot of delayed responses and bottlenecked our options. Luckily, we were patient through the new year, and in January offers came flooding in: we ultimately secured the best partners we could have hoped for.
What was the dynamic of the round like? What was the difference between early and late commits?
The early commits are generally hungrier investors that have less access to great deals, so they'll move quicker. The later commits generally have more options on the table because they are more desirable, so they may take longer to get back to you. We were lucky to be in a position where we felt confident waiting for the offer we wanted, but that's always a risk – it's a delicate balance between holding out for the deal you think is right and losing the opportunity altogether. The best thing that you can do is try to spark enough interest to secure multiple options on the table.
Related: How This Platform Makes Raising Money Easier for All Involved
What mistakes have you made in retrospect? What would you do differently?
Luckily, we did not make any major mistakes in this process. We were able to leverage internal experience and did a good job at negotiating a solid term sheet and getting the right board structure. I would say as a piece of advice that the devil is often in the details; any entrepreneur should have a great lawyer, as their guidance will help you fully understand what you're agreeing to.
What is your advice to founders like yourself who are trying to raise financing?
I hope my previous answers are helpful to a young business out there. Really, a lot of it is common sense. You have to iterate and find the right product-market fit and just crush it from a product perspective, but you also have to demonstrate great vision for the future of your business. Build something you're proud of, put in the time to market-test it and spread awareness, then leverage your network and have the right people around you when it's time to go to the investment community.
What are your top 3 do's and top 3 don'ts on raising funding?
Do build your brand and develop your network before even thinking about speaking with investors.
Do time your investment against the calendar to make sure you have the most options.
Do focus on the details of an offer and not just valuation: the participation rights, the liquidation preferences, the size of the option pool, the board structure, etc. all affect the quality of the deal.
Don't aggressively solicit investor interest
Don't be too influenced by an offer based on value alone
Don't go to market when before you are ready
This interview was edited for clarity and brevity.
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