SEC Form S-1 is the initial registration form for new securities required by the SEC for public companies that are based in the U.S. Any security that meets the criteria must have an S-1 filing before shares can be listed on a national exchange, such as the New York Stock Exchange. Companies usually file SEC Form S-1 in anticipation of their initial public offering (IPO). Form S-1 requires companies to provide information on the planned use of capital proceeds, detail the current business model and competition and provide a brief prospectus of the planned security itself, offering price methodology and any dilution that will occur to other listed securities.
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And in fact the S-1 shows that DigitalOcean plans its listing on the NYSE under the ticker symbol DOCN. The IPO date has not yet been set and we should assume a quiet period of 30-90days. S-1 submissions are particularly interesting for how the listing company sees the competitive marketplace, specifically in the Risk Factors section. While there is a lot of boilerplate text regarding general market conditions, past performance is not indicative of future performance, yada yada yada, there are a number of factors that should be pointed out:
We have a history of operating losses and may not achieve or sustain profitability in the future.
We have incurred significant losses since inception. We generated net losses attributable to common stockholders of $36.0 million, $40.4 million and $43.6 million for the years ended December 31, 2018, 2019 and 2020, respectively. As of December 31, 2020, we had an accumulated deficit of $167.0 million. While we have experienced significant revenue growth in recent periods, we are not certain whether or when we will obtain a high enough volume of sales to sustain or increase our growth or achieve or maintain profitability in the future. We also expect our costs and expenses will increase in future periods, which could negatively affect our future results of operations if our revenue does not increase. Our efforts to grow our business may be costlier than we expect, or the rate of our growth in revenue may be slower than we expect, and we may not be able to increase our revenue enough to offset our increased operating expenses. We may incur significant losses in the future for a number of reasons, including the other risks described herein, and unforeseen expenses, difficulties, complications or delays, and other unknown events. If we are unable to achieve and sustain profitability, the value of our business and common stock may significantly decrease.
These days people are particularly numb to operating losses of these sizes. How long did it take Amazon to be profitable? Amazon opened in 1994, went public in 1997, and finally reached profitability in 2001. Other successful companies have followed a similar formula using an IPO to increase market, and invest in infrastructure and research.
Our policies regarding user privacy could cause us to experience adverse business and reputational consequences with customers, employees, suppliers, government entities, users, and other third parties.
From time to time, government entities and law enforcement bodies may seek our assistance with obtaining information about our customers or users. Although we protect the privacy of our customers to the extent possible, we may be required from time to time to provide information about our customers to government entities and law enforcement bodies. In light of our privacy commitments, we may legally challenge law enforcement requests to provide access to our systems, customer Droplets, or other user content but may face complaints that we have provided information improperly to law enforcement or in response to third party abuse complaints. We may experience adverse political, business, and reputational consequences, to the extent that we (a) do not provide assistance to or comply with requests from government entities or challenge those requests publicly or in court or (b) provide, or are perceived as providing, assistance to government entities that exceeds our legal obligations. Any such disclosure could significantly and adversely impact our business and reputation.
We publish a transparency report on an annual basis to provide details of law enforcement and government requests we receive. Our transparency report also includes a list of certain actions we have taken in response to law enforcement requests, including disclosure of information in response to law enforcement requests, as well as our standard policies and procedures regarding any such requests. Both the publishing of our transparency report and, conversely, the actions we take or challenge in response to law enforcement requests could damage our business and reputation.
This is definitely an interesting earnings caveat – and how the world has changed in 20 years regarding the effects of privacy and transparency on the bottom line. At least enough that it is now a “risk.”
There is also a followup risk factor titled, We are subject to stringent and changing privacy laws, regulations and standards, information security policies and contractual obligations related to data privacy and security. Our actual or perceived failure to comply with such obligations could harm our business. It’s much longer and doesn’t need to be reprinted here.
And one more in the net neutrality realm.
The success of our business depends on our customers’ continued and unimpeded access to our platform on the internet and, as a result, also depends on internet providers and the related regulatory environment.
Our customers must have internet access in order to use our platform. Some internet providers may take measures that affect their customers’ ability to use our platform, such as degrading the quality of the content we transmit over their lines, giving that content lower priority, giving other content higher priority than ours, blocking our content entirely, or attempting to charge their customers more for using our platform.
In December 2010, the FCC adopted net neutrality rules barring internet providers from blocking or slowing down access to online content, thereby protecting services like ours from such interference. The FCC has repealed the net neutrality rules, and it is currently uncertain how the U.S. Congress will respond to this decision. To the extent network operators attempt to interfere with our platform, extract fees from us to deliver our platform or from customers for the use of our platform, or otherwise engage in discriminatory practices, our business could be adversely impacted. Within such a regulatory environment, we could experience discriminatory or anti-competitive practices that could impede our domestic and international growth, cause us to incur additional expense, or otherwise harm our business. The adoption of any new laws or regulations, or the application or interpretation of existing laws or regulations to the internet, could impact our customers’ continued and unimpeded access to our platform on the internet.
Access is a general theme among a number of the risk factors. Third party applications and integrations is another critical risk.
It should be obvious that this will be a huge injection of cash into the greater hosting industry. From Barron’s, DigitalOcean and Olo Are Joining the Tech IPO Parade: “Both companies have filed to go public and both are seeking to raise $100 million. (The $100 million is considered a placeholder and will likely change with future filings.) DigitalOcean is a cloud-computing company, while Olo provides restaurant software.” Even though the filing has a placeholder of $100 million there was revenue of $318.4 million in 2020 – so let’s be insanely conservative and call it a $1 billion+ valuation on launch day.
Companies like Automattic, and WP Engine are most definitely part of the greater hosting industry. This will no doubt have the boards of directors and CFOs at Automattic and WP Engine pondering the right time to head to the markets. With the unique business conditions generated by the Covid pandemic, and expectations that general business conditions will go gangbusters in the second half of 2021, I think there will be pressure from equity holders to IPO sooner rather than later. They are going to want to ride the wave of a booming economy with the market making huge profits for their holdings.
It’s going to be a race between Automattic and WP Engine IPOs to see who gets off the starting line first. Of course when that happens, WordPress dominance be will cemented for at least a decade, going from 40% to … who knows the limit. Pouring billions of dollars into multiple companies in the same industry would have profound changes for all parts of the ecosystem, which will have to wait for another day to get my head around.