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No. of Recommendations: 174
BASIC OVERVIEW

Cloudflare is a company whose mission is to provide a better internet. By “better” they mean faster, safer, easier to use and more reliable. They are focused on helping customers convert more prospects to paying customers, improving the quality of engagement, giving insight into all activity and reducing costs.

This post is a deep-dive that is an 11-page Word Doc. It's about the story, people, culture and other intangibles. For analysis of the technology and financials I recommend this article by Muji ...

A Cloudflare (NET) Deep Dive
https://hhhypergrowth.substack.com/p/cloudflare-net-deep-div...

The TL:DR version is I own 11% of Cloudflare and my research has strengthened my conviction in the company's prospects. For me they check all the boxes.

Okay, onto business...

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CORPORATE PROFILE:

• Founded in 2010 by Matthew Prince (CEO), Michelle Zatlyn (COO) and Lee Holloway
• Went public on September 13, 2019
• Market Cap: 10.5 Billion
• Headquartered in San Francisco with offices in London, Lisbon, Singapore, Sydney and Beijing among others
• Employees: Roughly 1,300
• Their site states that when they “push code” it affects over 25,000,000 internet properties, that they “see” more than one billion IP addresses and serve data from 200 cities in over 100 countries around the world.
• The company’s overall rating on Glassdoor is 3.7 out of 5 stars, and CEO Matthew Prince has an exceptional 90% approval rating. 76% of employees have a Positive Business Outlook. Their overall rating has dropped from about 4.2, a drop likely due to rapid growth.


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THE ORIGIN STORY:

Matthew Prince graduated from Trinity College-Hartford where he studied English and Computer Science. He then had a stellar career at The University of Chicago, Law School where he was Editor-in-Chief of the Phoenix Legal Magazine and Managing Editor of The Legal Forum Topical Law Review. If you’re not familiar with the University of Chicago it’s one of top schools in the world. Of note, it has a reputation for leaning toward libertarianism as its most famous economist is Milton Friedman, who was an advisor to Ronald Reagan, among others, and is the author of the highly influential book, Capitalism and Freedom.

In 2001, Prince co-founded and served as Chairman of Unspam Technologies, a company that, as you can guess, combats spam. The company’s Chief Software Architect, who would go on to co-found Cloudflare is Lee Holloway. By all accounts Holloway was a brilliant computer engineer. (We’ll discuss his story below. It’s as sad as you’ll hear.)

As a spin-off, or side project, Holloway and Prince created “Project Honey Pot.” They install software on participating sites to help identify spammers and their spambots. The project has built a large and dedicated community. Prince also worked as a lawyer and ttaught law at Chicago’s John Marshall Law School.

In 2007, he takes a sabbatical from Unspam to attend Harvard Business School. There he meets Michelle Zatlyn. Zatlyn graduated from Montreal, Canada’s prestigious McGill University where she studied chemistry and business. Prior to attending Harvard Business School, she worked as a research analyst, in marketing and did product management at Toshiba.

Zatlyn and Prince discuss Project Honey Pot and Zatlyn is immediately inspired by the idea of taking it to the next level by not only tracking spammers but stopping them. The two work with faculty to develop a business plan with the working title, “Project Web Wall”. Realizing the name sucks, Prince takes the advice of another friend who pitches him the name, “Cloudflare” which nails the right feel for the company, whose mission is to create a “firewall in the cloud.”

The plan wins first place in Harvard Business School’s hyper-competitive business plan competition. Prince graduates as a Baker Scholar (top 5% of class) and heads out West with Zatlyn after graduation to join Holloway. They spend the Summer refining the software and secure Series A financing from two venture capital firms, Venrock and Pelion. Venrock is old school, having funded Intel and Apple (damn) and Pelion seems to have a much shorter history but a notable collection of high-tech start-ups they’re currently invested in.

Prince says his goal was to launch the company at the tech conference, Tech Crunch Disrupt and the three co-founders would go on to not only achieve that objective but place second in the conference’s award for “Most Innovative Company” which attracts over 1,000 applicants.

After formally launching Cloudflare, the founders collectively held their breath. The big fear was that their security features would harm performance, by increasing latency – delays in processing - but to their delight, customers noted increased speeds.

Since the IPO, Cloudflare has gone from a valuation of $4.4 billion to its market cap that, as of this post is 10. 5 billion.

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CORPORATE CULTURE:

(Author’s note: Cloudflare has been involved in notable controversies because they have hosted (and I assume continue to host) websites run by racists, terrorists and other nefarious actors. The reason I am not leading with this is I believe these emotionally charged issues cloud judgment. But I will try to put the concerns raised into context below, in the section, Trial by Fire: Navigating Crises and Overcoming Loss, where we’ll also discuss Lee Holloway.)

In the next section we’ll try to capture the flavor of the corporate culture as a whole.

***

I highly recommend you read the letter linked below to get a feel for their focus, clarity and what I believe to be authenticity.

A Letter from Mathew Prince and Michelle Zatlyn
https://blog.cloudflare.com/founders-letter/

What stands out is how cleanly they lay out their vision, their purpose (to create a better, faster, safer, more reliable internet), the rationale behind their pricing model and the respect they pay their co-founder, Lee Holloway.

They write in plain English, and Prince, in particular, uses effective analogies …

Like an Internet-wide immune system, we could learn from all the bits of traffic that flowed through our network. We could learn not only about bad actors and how to stop their attacks, but also about good actors and how to optimize their online experiences.

And …

For some it may be challenging to categorize our business because our platform includes an incredibly diverse set of capabilities. We provide security products like firewall and access management, performance products like intelligent routing, and reliability products like vendor-neutral load balancing — all as a service, without customers needing to install hardware or change their code.

I bolded the words they return to often to define “better” internet: security, performance, reliability. These are their guiding principles. And the letter radiates pure Foolishness here, under the header, Efficiency is in our DNA, with this line, “Being entrusted with investors’ capital is a privilege and we make investments in our business always with a mind toward being good stewards of that capital.”

***

The company has exceptional marketing and communication

While CrowdStrike is the undisputed heavyweight champ of marketing, and pureblooded cool factor among Saul stocks, Cloudflare takes the silver medal.

Now bear with me for a second on a mini rant. In a grossly overcrowded marketplace, with our hyper-fragmented media, marketing and effective messaging, is more essential than ever. The days of behemoth companies simply bombarding consumers with ads on TV channels that have 35% market share are long gone. Therefore, the companies that can leverage all the tools of modern communication to consistently gain mindshare and instill strong feelings in customers and prospects have a significant – and unquantifiable - competitive advantage.

On the most recent (#191) episode of Patrick O’Shaughnessy’s podcast, Invest Like the Best, he had on the Vice Chairman of the legendary ad agency, Ogilvy & Mather, Rory Sutherland. Around the six-minute mark, Sutherland talks about the difference between a product’s utility and how it makes you feel, using the term “Psychological moonshot.”

“The thing that distinguished Apple from other tech companies was other tech companies were asking what their technology could do. And Apple was the first to wonder what it feels like while you’re doing it. Which is a kind of second order consideration, which is much closer to being customer centric, than asking what functions you can perform for people.”

He talks about Silicon Valley’s engineering-based culture and its aversion to marketing.

“No person working in a software company wants to believe that the success of their app was due to its superior marketing. They don’t derive any status from that. They regard marketing, if you’re in that mentality, as essentially cheating.”

The point here is that great technology and great marketing are not mutually exclusive. It takes both to drive the growth, retention and lunatic margins that we greedy (expletive for born out of wedlock) demand here on the SID board.

So, with that said, Cloudflare’s marketing is exceptional, because it is clear, free from hyperbole and bull-poo and Prince’s brilliant legal mind is undoubtedly in play. Each communication is persuasive and backed with substantive information.

Their communications are consistently well-designed. Their color scheme of mostly black and white, a few oranges and blue accents are visually appealing. The name “Cloudflare” is cool. When we think of flares, we think of lights that help us navigate roads, fighter jets using them to throw off missiles, lost travelers using them to attract rescuers.

Though I know little about tech I completely understand the vast majority of posts on their blog.

The names of their events and products have that extra shot of adrenaline. In just browsing their site you see names like Wrangler, Workers Unbound, Flowtrackd, Speed Week, FLAREACT, Cloudflare Spectrum, Orange Clouding – all cool. Beyond cool there’s a human touch. The text on their emails subscription box neatly reads, “Thanks for being here, come back soon. Get notified of new posts:”

They get marketing/communication and how to use all media, even launching Cloudflare TV. You can get a good feel for Prince’s personality, intelligence and warmth here on the inaugural episode,

Conversation with Chris Young, Former CEO of McAfee
https://cloudflare.tv/best-of/1e2a560aba98d9de2d2d0cc2ef4066...

If you don’t believe this stuff is important, check out the rankings for cybersecurity in the cloud. CrowdStrike is one of many equally ranked in terms of technology. And large part of the bear case against them is the size of the crowded field. CrowdStrike is not winning because they’re objectively the best solution among the massive list of companies in that space. They’re winning, in large part, because of how they make prospects feel: empowered.

Don’t believe me? Follow CrowdStrike on Twitter. Get a load of this falcon image on their Falcon Complete product here…

https://twitter.com/CrowdStrike/status/1305619588718243840?s...

Human beings are tribal, ritualistic, narrative-driven creatures driven by primal needs, most notably in business to acquire and defend. The companies that get this win big. That falcon makes you want to tear the face off a hacker. Anyway …

Back to Cloudflare…

***

The company is innovative …

Here, in this July 31, 2020 post,

Cloudflare Serverless Week Unpacked
https://softwarestackinvesting.com/cloudflare-serverless-wee...

Tech analyst, Peter Offringa of the must-read blog, Software Stack Investing covered Cloudflare’s Serverless Week event and came away impressed, stating that enhancements included,

reduced cold start times, additional language support, improved developer tooling and lower price points. They also unveiled a new offering called Workers Unbound, which removes prior restrictions on CPU usage to allow for long running processes. These are all very exciting for serverless edge compute adoption and represent a step up in capabilities for Cloudflare.

Interestingly, in a recent post here entitled, “Observability and Infrastructure tools” by ethan1234, he talked of discussing our companies with his neighbor, a tech startup CEO, who said of Cloudflare,

“great products and marketing, doesn’t have the reputation for a great engineering culture.”

His take on their marketing is dead on. The concern about their engineering culture seems mitigated by the recent innovations that are impressing the likes of Muji and Offringa.

***

Cloudflare places a high value on transparency and candor …

In this May 2020 interview,

Smarter Cybersecurity – Michelle Zatlyn, Cloudflare
https://www.youtube.com/watch?v=ODsVvqtmvU4

At the one-minute mark, COO Zatlyn notes that attacks and setbacks are inevitable and says the cybersecurity industry has done a poor job of owning up to this. She convincingly argues that companies must be transparent and respond immediately, with candor, when events occur. This is not just lip service…

On July 27, 2020, the company suffered a major outage. Here’s the response posted to the blog by Cloudflare’s London-based Chief Technology Officer, John Graham-Cunning…

Cloudflare outage on July 27, 2020
https://blog.cloudflare.com/cloudflare-outage-on-july-17-202...

Today a configuration error in our backbone network caused an outage for Internet properties and Cloudflare services that lasted 27 minutes. We saw traffic drop by about 50% across our network. Because of the architecture of our backbone this outage didn’t affect the entire Cloudflare network and was localized to certain geographies.

The outage occurred because, while working on an unrelated issue with a segment of the backbone from Newark to Chicago, our network engineering team updated the configuration on a router in Atlanta to alleviate congestion…


Notice the first word, “Today…” This was a rapid, detailed response. And the comment section is not disabled. It includes comments by those who are critical of their response and those who appreciate the candor.

Of note, Graham-Cumming has a Doctor of Philosophy in Computer Science from Oxford and his 1992 thesis was entitled, The formal development of secure systems. To his credit, he successfully led a group that petitioned the British government to posthumously pardon and offer a formal apology to the famous computer scientist, Alan Turing, who was prosecuted and suffered horrors at the hands of the government due to his homosexuality, which was, at the time, illegal.

Recently, Matthew Prince, posted highly detailed information about an outage that was being falsely blamed on Cloudflare but was in fact the fault of another company…

August 30th 2020: Analysis of CenturyLink/Level(3) Outage
https://blog.cloudflare.com/analysis-of-todays-centurylink-l...

***

The Company has many passionate posts about diversity and inclusivity…
https://blog.cloudflare.com/commit-to-diversity-equity-and-i...

This too feels authentic and while some may bristle at perceived political correctness, it’s the smart move with today’s younger workers and for a company building a global workforce. It simply helps you build the best team you possibly can. I trust Prince/Zatlyn to get the balance between diversity and excellence right.

And don’t mistake the wokeness of the above for weakness. They are scrappy and may even fight dirty. Get a load of this…

Just the other day, on September 14, the one-year anniversary of the company going public, Michelle Zatyln posted a 10-Tweet thread, recounting the experience of founding the company…

https://twitter.com/zatlyn/status/1305539149190049799)

She mentions that they came in second in the noteworthy Tech Crunch Disrupt (2010) competition but issued a press release stating that they won it.

Here’s the press release…
https://www.globenewswire.com/news-release/2010/09/30/923517...

If I hadn’t seen this thread, I would have damaged my “journalistic” integrity by falsely posting here that they won the competition. The rule follower in me is taken back by this. The hockey fan in me, who realizes every team needs a troublemaker/enforcer likes it. I do think a company needs to break a few eggs to make the omelet to excel in our hypercompetitive world. So, for now, I’ll say this is more misdemeanor than felony.

And Muji has noted the thinly veiled two-by-four they cracked upside Fastly’s head with Matthew Prince’s blog post…

The Edge Computing Opportunity: It’s Not What You Think
https://blog.cloudflare.com/cloudflare-workers-serverless-we...

… we’ve learned by watching developers use Cloudflare Workers that there are a number of attributes to a development platform that are far more important than just speed. Speed is the icing on the cake, but it’s not, for most applications, an initial requirement. Focusing only on it is a mistake that will doom edge computing platforms to obscurity.

Of note, right after this Fastly acquired Signal Sciences and the crown jewel of the acquisition seems to be a product called, Security@Edge. The acquisition was covered on Software Stack Investing here…

Fastly and Signal Sciences
https://softwarestackinvesting.com/fastly-and-signal-science...

As someone heavily invested in both FSLY and NET, this feels like a win-win as both companies put some fire in each other’s bellies to drive innovation and execution. And with two top-tier upstarts and legacy providers like Akamai, it’s hard to imagine too many VC’s wanting to fund additional entrants into the network space.

Now let’s look at the darker side of our story…

***

Trial by Fire: Navigating Crises and Overcoming Loss

The Wired magazine article linked below details the cognitive decline of co-founder Lee Holloway, who by all accounts was a genius coder, fiercely dedicated coworker and kindhearted soul.

The Devastating Decline of a Brilliant Young Coder (April 15, 2020)
https://www.wired.com/story/lee-holloway-devastating-decline...

Basically, what happened is Holloway went from being an all-star coder, happily married, building a family and recently becoming extraordinarily wealthy to an unpredictable, emotionally unstable, unfocused, belligerent person. It would take many months for his family and co-founders to discover the problem. He suffers from frontotemporal dementia, a disease that is so devastating it can change people’s entire personalities even their political and religious affiliations.

Here’s a harrowing description of the fatal disease from the article …

FEW DISORDERS RAVAGE their victims' selfhood with the intensity of the behavioral variant of FTD. It takes all the things that define a person—hobbies and interests, the desire to connect with others, everyday habits—and shreds them. Over time, the disease transforms its victims into someone unrecognizable, a person with all the same memories but an alarming new set of behaviors. Then it hollows them out and shaves away their mobility, language, and recollections.

Prince and Zatyln had to watch helplessly as their close friend and partner deteriorated before their eyes to the point where . The cruelty of his fate is almost too much to bear. And one can only imagine the personal and professional toll this took on the company at its core. The article describes Prince, with tears streaming down his face, as he made his farewell speech to Holloway before the company.

And now to the controversies ...

***

The company is often in the news because of the inherent challenges of deciding which sites should be banned from their network.

Two high profile cases have included the Cloudflare Network being used by the Neo Nazi site, the Daily Stormer and the self-described “lawless” site, 8Chan, which was used by several young men who went on to commit mass casualty shootings. And there are many other nefarious actors that use their network, which includes low cost and free services. Prince, a legal scholar, has passionate opinions about this subject and feels it should not be up to him to make these decisions. These are complex ethical and legal issues that should be made by governments and regulators who are the ones that should be tasked with creating clear guidelines for all web service providers to make these decisions with cleanly defined criteria.

Here is an article about Prince’s handling of 8Chan from The Atlantic Monthly…

The Lawless Way to Disable 8Chan
The decision to disable an infamous message board fell to Matthew Prince, an internet executive who is deeply uncomfortable with his own power.

https://www.theatlantic.com/ideas/archive/2019/08/how-disabl...

And here is a blog post from Prince on it …

Terminating Service for 8Chan
https://blog.cloudflare.com/terminating-service-for-8chan/

In my recently released book, 27 Essential Principles of Story, Chapter 12 is called, Provoke Dilemma. The idea is that if you write a story, and present easy choices between good and evil, those don’t reveal anything. For example, if you’re on your way to work and see an old lady fall in the street of course you should help her. But what if, the day before, your new hard-edged boss vowed to fire anyone who is even one second late? Now you have a dilemma. In real-life and fiction, we discover true character by how people make impossible choices under intense pressure. The person who risks their job is a very different person from the one who pretends they didn’t see grandma hit the pavement.

Try to put yourself in Cloudflare’s shoes. If Prince and Zatyln aggressively censor their network, they effectively become the arbiters of speech. Prince feels it is not appropriate for corporate leaders to make such momentous decisions. If he censors speech he’ll be derided as a fascist censor. If he doesn’t, he’ll be derided as an accomplice to every sin promoted on the millions of sites that use his network. And he is, in fact, attacked viciously for his stance.

Here’s why I admire Prince’s handling of the issue. He is fiercely dedicated to the First Amendment and freedom of speech. He is a legal scholar who has passionately made his case for how he wants this issue to be handled. But he is not an extremist or absolutist. When his own moral compass was impossibly violated, he made the difficult decision to betray his own principles to mitigate what he believed a greater sin (promoting murder). For me, Prince has done the best he could in an impossible situation and showed conviction and ultimately, willingness to adjust his position as facts in reality changed. This to me defines elite leadership. We don’t live in a perfect, or theoretical world. We live in a brutally complicated reality and Prince is navigating it as transparently, ethically and intelligently as he can.

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Final Thoughts:
What we have here is an exceptionally well-run company operating in a space with a large TAM. They’re led by founders who are the elite of the elite – brilliant, empathic, resilient and loyal to each other. Both seem to be (of course only a guess) well-adjusted and committed to living relatively balanced lives. They have tech that racks up rave reviews and are world-class communicators.

The stock makes up 11% of my portfolio. And I consider myself a proud co-owner of shares. What they’ve accomplished, the tragedy they’ve suffered and the struggles they’ve overcome strongly suggest they are resilient, purpose-driven winners. They are in their early 50’s which is exactly how I like my founders – still young and hungry, but with decades of experience. Again, as I’ve said in other posts, the best and brightest only get better as they rack up the cash to play with the experience to learn from.

FWIW, on a personal note, I recently posted some kinds words to Twitter about my research on Cloudflare, and Matthew Prince responded to a Tweet with, “That’s kind of you to say. Hopefully we will continue to earn your trust.” And got a follow from Michelle Zatlyn. So I did what any self-respect author would do, I offered to send them my book. No word yet on their interest or lack thereof.

Lastly, please only respond if you have something to add to the investment thesis. If you email me I will happily discuss any of my finding off the board. And I would like to add that this post took me roughly 15 hours of research and time to write it. This board, and the life-changing returns we have had, is worth the effort, to say the least.

Fool On,

Broadway Dan


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Additional Links/Notes

Our Story, How Cloudflare Began
https://www.cloudflare.com/our-story/

Cloudflare Overview
https://www.cloudflare.com/about-overview/

***

How This Executive Balances Being a Mom and Building a Billion-Dollar Tech Company
https://www.inc.com/salvador-rodriguez/how-cloudflare-founde...

***

About Venrock
https://www.venrock.com/about-venrock/

About Pelion
https://pelionvp.com/about/

***

Is Cloudflare a privacy champion or a hate speech enabler? Depends who you ask,
https://www.fastcompany.com/90312063/how-cloudflare-straddle...

***

Maybe Fastly going after enterprise customers has helped save them innumerable headaches? But one would guess they should face them eventually as well.

*** ***

Cloudflare is obviously well-aware of Fastly's branding and their efforts to own the idea that they are the fastest edge network. To combat this Cloudflare has hosted an event called Speed Week and added a page to their customer's sites called, Speed Page.

Welcome to Speed Week!
https://blog.cloudflare.com/welcome-to-speed-week/

One more thing ... new Speed Page
https://blog.cloudflare.com/new-speed-page/
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