Linode competitor DigitalOcean goes public

Tom Paine

Update: I received this detailed response to my inquiry from Linode PR exec Mike Maney:

Both Linode and DigitalOcean occupy a space analysts have categorized as alternative cloud providers (check Liam Eagle’s definition here https://www.linode.com/blog/alternative-cloud/alternatives-to-hyperscale-choosing-the-right-public-cloud/).

At the top of the market, you find the hyperscale clouds — the Big 3 of Amazon, Microsoft, and Google. At the low end, you find a plethora of simple website hosters. The alternative cloud segment is where you find Linode, DigitalOcean, OVHcloud, Hetzner, and Equinix/Packet. It’s a thin sliver because the criteria to be included means you have to have a global footprint, run the latest industry standard hardware, provide an enterprise level of support, etc.

While alternative providers don’t directly compete against the hyperscalers, they are in a better position to serve individual developers and small businesses looking for the best price performance, simplicity, and support. We also see alternative providers engaged alongside the hyperscalers in larger enterprise multicloud strategies. It’s the Goldilocks layer of cloud provider for a significant part of the market.

On the DigitalOcean news specifically, it’s an exciting development for DigitalOcean and for the cloud industry as a whole. It reinforces the important role companies like DigitalOcean and Linode play in a hyperscale-dominated market. It’s also one of the reasons why Linode’s longevity and independence is increasingly a differentiator as developers and small business owners look for the best trusted fit for their cloud workloads. Ballpark numbers for Linode: Been around for 18 years (3 before AWS, actually), running at roughly $100m. 11 data centers located in strategic markets around the globe.

DigitalOcean, the New York-based virtual private server provider that probably is Linode’s closest competitor, completed its IPO on March 24, ending the day with a market cap of $4.5 billion, down almost 10% from its opening.

DigitalOcean had revenue in 2020 of $318 million, up 24% year-over-year. Founded in 2011, DigitalOcean grew with venture capital funding almost from the start.. It raised $455.6 miliion in outside funding before going public.

Chris Akers, Linode’s founder & CEO, has always taken an opposite path, avoiding equity financing. He may have sacrificed some growth. I don’t have a guesstimate for Linode revenue except to say its probably well in excess of $100 million per year now. Using the same revenue multiple as for Digital Ocean, that could easily put Linode’s implied valuation over $1 billion. That might be quite possible under current market conditions.

Also, DigitalOcean has been running a substantial loss each year, while Linode is at least self-funding and likely profitable. And obviously Akers has avoided the dilution and loss of control that comes with outside investors.

Linode did receive a $4 million PPP loan in April 2020 for payroll.

Its inevitable that Linode, Digital Ocean and others in this class will move slightly upmarket to push against the low-end of the hyperscaler market. I also see value in these vendors’ customer bases as a certain percentage of them, being developers, will grow over time. This may make them attractive to companies such as Salesforce, Oracle and the big three of the cloud vendors, who would like them to adopt their architectures. And they would be relatively inexpensive buys.

I noticed that DigitalOcean’s CFO is Bill Sorenson, who was King of Prussia-based Qlik’s CFO when it went public in 2010.

The VPS market is a worldwide market, and must be viewed globally.

Also, keep an eye out for IONOS, acquired by the German vendor 1&1 Ionos in 2018 , which has its US headquarters in Chesterbrook.

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