You can listen to this Deep Dive here
In 1997, Matthew Prince, one of the co-founders of Cloudflare, called his father (who was a stockbroker at that time) and said, "I think I want to buy 1,000 shares of Apple stock." Split-adjusted, Prince paid ~13¢/share. That one investment basically paid for Prince's college and later his MBA at Harvard Business School (HBS) where he met Michelle Zatlyn, another co-founder of Cloudflare. Zatlyn, who grew up in Canada, almost didn't even apply to HBS and was only convinced to give it a shot after she met someone at a party who encouraged her to apply there. Lee Holloway, the other co-founder of Cloudflare, was the technical genius behind the company. Unfortunately, Holloway suffered from frontotemporal dementia (FTD) and had to leave the company in 2015. Wired did a sobering, melancholic, and a pretty poignant piece on his heartbreaking story which I encourage everyone to read.
Holloway and Prince knew each other for a long time even before co-founding Cloudflare; so when Prince reached out to him in 2009-10 to start the company, Holloway said, "I know why we need each other. But why do we need Michelle?" Prince asked him to wait for a month and see if he gets the answer to the question himself. After a month, Holloway understood why they clearly needed Michelle but quipped to Prince, "Now I see why we need Michelle. But I am not sure we need you." (paraphrasing)
In many ways, Prince might indeed be an unlikely person to start one of the most important internet infrastructure companies in the world. On his senior year in college, he wrote a thesis explaining why the internet is a fad. He found CS boring (mostly because he wasn't learning new things in classes) and majored in English Literature. After college, he went to law school but didn't survive there for too long. Then in 2002, Paul Graham wrote this essay titled "A plan for Spam" which became quite popular; later Graham organized "MIT Anti-Spam Conference" and invited Prince to give a talk. Prince worked on the problem of Spam on the internet and gave a talk on how to write anti-Spam laws. He ended up winning the best talk award. When Graham invited Prince again for the same talk next year, Prince was reluctant to give the same talk. So, he reached out to Holloway to see whether they could build a system to track how spammers operate and harvest email addresses. Holloway built the backend and Prince copied the LinkedIn UI to build the front end. They called this "Project Honeypot" which also became very popular in the anti-Spam conference. Despite the popularity, they sort of put it in the corner and moved on from it. But they kept getting questions from the community on whether they could build something that could not only track but also stop the spammers.
After his failing attempt in law, Prince changed his course and went to business school. As the market crashed during the Global Financial Crisis, his Apple shares also fell and he got margin called. Even on the verge of bankruptcy, he was still thinking of starting a company after HBS. As Zatlyn later recalled, Prince was essentially an idea printing machine; but they were intrigued by the persistent fragility of internet infrastructure, especially for small businesses who couldn't hire an army of IT staff to secure their websites.
There are, however, stories from that time that indicate just how unprepared the co-founders were for building a company such as Cloudflare. When Prince and Zatlyn explained what they wanted to solve for the internet during one of the meeting with an advisor, their advisor said "Oh, you want to build a CDN?" Not sure what to respond, they nervously nodded along. After the meeting, they looked at each other asking: "What exactly is a CDN?" (The real answer is Content Delivery Network which I'll explain later). Zatlyn, true to her Canadian roots, actually thought it must be something related to Canada.
Although not understanding the jargons or terminologies can make anyone feel dumb, they clearly did stumble onto a very real, persistent, and existential problem on the internet. In a way, not knowing the ins and outs of the existing solutions perhaps helped them think from first principles and solve the problem in a way that is efficient and elegant. Cloudflare participated in 2010 TechCrunch Disrupt and despite three minute of technical challenges in the beginning, Prince kept his cool and explained how Cloudflare can help build a better internet (Cloudflare was runner-up in TechCrunch Disrupt 2010):
Imagine for a second, you're one of the internet giants...you have two major concerns that you think about every single day. The first one you've gotta make sure that your website is really really fast because you know that for every hundred millisecond of extra page load time, you lose up to 2% of the visitors to your site. So what you do is either yourself or you hire a company like Akamai to literally distribute datacenters all around the world in order to make sure no matter where a visitor comes from, they get a great experience on your website. The second big concern you have if you're one of the internet giants is you've got to make sure your site is secure and so what you do is you hire a huge fraud and abuse team to make sure the spammers and hackers stay away from your site and stay away from its visitors. The problem is we're not internet giants and for the most part, if you're trying to run a website today, you're left alone without access to any of these tools but that changes today: introducing Cloudflare. Cloudflare is a performance and security solution that takes the tools of the biggest service providers and makes them available for anyone with a website online. But we couldn't just replicate as they were; we had to do something else: we had to make them ridiculously easy, so Cloudflare doesn't require a hardware, it doesn't require you to install a software. You don't have to change a single line of code anywhere on your site. Instead, all you do is make one change to your domain name servers and suddenly, you're on the Cloudflare network.
As intriguing and ambitious as it sounded, Cloudflare always insisted their mission is to help build better internet:
Cloudflare's mission is to "help build a better Internet." It's not to "build a better Internet." The word "help" is essential and something I'll always correct if I hear someone leave it out. The Internet is inherently a collection of networks, and also a collection of work from a number of people and organizations. Innovation doesn't happen in a vacuum but is catalyzed by collaboration and open standards.
Before we go further, we need to understand what exactly Cloudflare does and we also need to understand what some of those jargons such as CDN is. Here's the outline for this month's Deep Dive.
Section 1 What is Cloudflare? I discussed some basics related to Cloudflare to familiarize you with the business.
Section 2 Cloudflare's Economics: Following the basics, this section highlights Cloudflare's topline mix as well as cost structure of the business.
Section 3 Competitive Dynamics: While Cloudflare has dizzying set of competitors, this section clarifies Cloudflare's differentiation as well as its opportunities ahead of it.
Section 4 Management and Incentives: Cloudflare's management and incentive structure is discussed in this section.
Section 5 Valuation and Model Assumptions: Model/implied expectations are discussed here.
Section 6 Final Words: Concluding remarks on Cloudflare, and disclosure of my overall portfolio.