DigitalOcean acquires cloud computing startup Paperspace for $111 million in cash

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DigitalOcean, the cloud hosting company, announced today that it has agreed to acquire Paperspace, a New York-based cloud computing and AI development startup, for $111 million in cash.

Yancey Spruill, CEO of DigitalOcean, says Paperspaces infrastructure and tools, when integrated with DigitalOceans products, will enable customers to more easily test, develop and deploy AI applications. As for Paperspace customers, they will benefit from DigitalOceans’ cloud services, including databases, storage, app hosting, documentation, tutorials, and a robust support system.

For now, Paperspace will remain a self-contained business unit within DigitalOcean and Paperspace customers will see no immediate changes to their service.

We are excited to expand our portfolio tailored to the world’s small and medium-sized businesses and startups with streamlined AI and machine learning offerings, Spruill said in a press release. The combined offerings allow customers to focus more on building applications and growing their businesses and less on the infrastructure that powers them.

Paperspace was co-founded in 2014 by University of Michigan graduates Daniel Kobran and Dillon Erb. Backed by Y Combinator and Jeff Carr, one of the co-founders of DigitalOcean, the company runs its data centers with custom configured GPUs.

Paperspace initially focused on low-cost virtual machines, providing high-performance workstations for designing, viewing and gaming in the cloud. But as AI entered the mainstream, Paperspace leaned heavily into its AI offerings, launching a suite of tools designed for developing, training, deploying, and hosting AI models in the cloud .

Prior to the acquisition, Paperspace raised $35 million from investors including Battery Ventures, Intel Capital, SineWave Ventures and Sorenson Capital.

Erb sees the acquisition as a step toward a complete cloud computing offering for CPUs and GPUs to compete with other vendors in the public cloud market. The combined power of DigitalOcean and Paperspace, he says, will enable a new class of customers, especially those on a budget, to delve into AI and machine learning-powered apps such as generative media (e.g. OpenAIs DALL- And 2), large language models (e.g. ChatGPT), recommendation engines and image classifiers.

DigitalOcean is known for simplifying complex cloud technologies and making them more accessible to developers and enterprises alike, Erb said in a canned statement. We are thrilled to join forces with DigitalOcean, as we believe there is no better company to unlock the infinite possibilities of AI and machine learning for developers and enterprises alike.

The Paperspace acquisition is DigitalOceans’ first since 2022, when it bought Pakistani cloud hosting provider Cloudways for $350 million, and the fourth since its IPO in 2021.

From the outside looking in, it’s a wise move for DigitalOcean, which risks falling behind in the wave of cloud AI and machine learning solutions. While the company’s revenues increased in the first quarter of 2023, growing 29.7% to $165.13 million, earnings per share, return on equity and net margin fell short of expectations.

More and more Big Tech cloud providers like Microsoft, Amazon, and Google are turning to generative AI to grow revenues with some success. A recent CNBC survey found that AI is now the top expense for nearly 50% of top executives across the economy, indicating it’s a wise place to invest resources.

Spurred by enthusiasm for AI, Gartner expects cloud spending to grow 21.7% in 2023, to just under $600 billion this year from $491 billion last year.