While Amazon and Microsoft battle in the cloud wars, this startup quietly built a $175 million business by picking up their slack (AMZN, MSFT, GOOG, GOOGL)

DigitalOcean is a cloud computing startup based in New York, competing with Amazon Web Services and Microsoft Azure by focusing on smaller developers and startups.
The company exclusively reveals to BI that it's on a $175 million annualized run rate (ARR) for 2017.
An IPO isn't necessarily in the cards, but the company says it's well-positioned should it choose to do so.

There's a war raging in the cloud as the leader, Amazon Web Services, defends its $16 billion business from the rise of Microsoft Azure and Google Cloud. The battleground: Lucrative customer deals with Fortune 500 companies.

That battle has created opportunity for DigitalOcean — a New York-based cloud computing startup, founded by guys who met on Craigslist and backed by Andreessen Horowitz, that caters to the individual programmers or startups that value simplicity and flexibility above the business-grade technology offered by Amazon and Microsoft.

And today, DigitalOcean tells Business Insider that it's on track to generate $175 million in revenue this year, in a measure termed annualized run rate, or ARR. That puts DigitalOcean on track for 48% more revenue than the $118 million it generated in 2015.

"We're approaching the cloud market from a totally different angle," says DigitalOcean CEO and cofounder Ben Uretsky. "No one is really paying attention to the smaller market."

To that end, Uretsky says that the company isn't necessarily planning on an IPO soon, and could raise more funding. He does say, however, that he believes the company is well-positioned should it choose to go public.

Here are the other fast facts on DigitalOcean's business, some of which had been reported previously:

The company claims revenue of $118 million in 2016, up from $77 million in 2015.
DigitalOcean says that it's been profitable on an EBITDA (earnings before interest, taxes, depreciation, and amortization) basis since 2015.
The company says that spending and costs have stayed flat, even as revenue increases, leading to widening margins "well north of 20%," says Uretsky.
Uretsky says that the company still has the entirety of its $83 million Series B investment from 2015 in the bank — the money was used as leverage to obtain a $130 million line of credit in early 2016.
DigitalOcean has 400 employees today, up from 209 at the end of 2015.

'That's not really our sweet spot'

Competing in the cloud is hard. The whole business model hinges on offering companies access to fundamentally unlimited supercomputing power, rented at a rate of pennies per hour. To achieve the kind of scale to make that profitable, a provider needs lots and lots of servers, plus the land, electricity, and manpower to keep them running.

Indeed Uretsky says that it costs "tens of millions" of dollars annually to keep DigitalOcean's cloud running. That's why DigitalOcean opened that $130 million line of credit: It needed to lease out more data centers, and buy the servers to stock them up, just to scale up. Debt was preferable to additional investment, says Uretsky, because it doesn't dilute the equity of existing investors.

digitalocean cmo mitch wainer

In terms of product strategy, co-founder and CMO Mitch Wainer says that DigitalOcean is taking a "different approach" to the likes of Amazon and Microsoft, who make a point of catering their offerings to the needs of large businesses. That's borne out by Dave Bartoletti, Principal Analyst at Forrester Research, who tells us that DigitalOcean is very popular among startups, but rarely spotted in the enterprise.

"That's not really our sweet spot," agrees Urestsky.

Instead, as DigitalOcean builds its product, the company is thinking more about simplicity and flexibility. Not every developer needs that whole range of business-class services, he says — they just want something they can use to get coding, simply and easily. Uretsky attributes that approach to the growth of the business: As small customers grow into big companies, Uretsky says, they only accelerate how much they spend with DigitalOcean.

"In the long term, [growth] is because it's easier to build on DigitalOcean than on one of the more complex providers," Uretsky says.

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