Talking Golden Mufflers with CloudFlare

All right, you guys are back. We're back. It was five years ago. You guys were on this. Well, not quite this stage, but you were on the TechCrunch battlefield stage and you lost. You came in second. I was furious that day because I wasn't even at TechCrunch. I was just thinking, these idiots. But let's relive that moment. I think we have the video of that moment. We can play that. Maybe. There we go.

Skip to about minute 22, I think.

Oh, my God, Heather, we have the.

Video in the wrong time. This is not you guys losing. This is pantomime something.

Yeah.

Not sure what's happening there.

And maybe, you know, what we. What. What ended up happening is, is Mike and Barrington came out and he said, you know, we have two finalists, one of which does this boring muffler repair kind of stuff, and the other is this hot, sexy Ferrari. And we were the boring muffler repair. And so what we wanted to do was actually we made a golden muffler and we really want to present it to Mike Arrington. So if Mike's backstage, Mike, we'd love to have you come out and present you the golden muffler for the second place team. So, Michael, thank you. Thank you for everything. This is boring muffler repair stuff from the boring muffler company like us.

Who are you guys?

Yeah.

So what do you guys do? There's a video you were going to humiliate me with.

Yeah. I don't know if we got it queued up, but here.

So I'm supposed to stand here and be humiliated now?

No, that was the plan.

Very different companies. Pinger has. So this is been around for quite a while and has raised quite a bit of money. They have a brand new product that I think is going to be hugely disruptive. Sort of an older company, old in our world. New product. Cloudflare is, as I like to put it, boring muffler stuff.

There you go. Boring muffler stuff.

Hey, if you want, you guys. I'm still not sure what they do. And Quickie is the sexy Ferrari. With absolutely no promises of launching. We've asked them in follow up. And so the judges come from different backgrounds. Some of them are product people, some of them are venture capitalists, and they all have their own opinion. But ultimately the decision was unanimous. And I am very proud to say that the winner of TechCrunch San Francisco's Disrupt cup is Quickie.

So we wanted to give you our first place.

We'll let Quicky get you The Ferrari?

Yeah.

Yeah. Well, I mean, clearly that was a bit of an embarrassment. I'm a good sport. I don't know what you guys do, but it's awesome. And this is, you know, this is cool. We're going to put this up in our office, so thank you very much.

Awesome. Thanks, Mike.

And congratulations on your fifth anniversary.

Thank you.

Thank you.

All right, that's all the time we had for this interview. Since that day, a lot of stuff has happened for you guys. You're spending a lot of money on mufflers right now, apparently, golden mufflers.

But you know, it's actually a fun, a fun story of how at 2:30 yesterday, I was walking down the street and I texted Michelle and I said, we need to get a muffler. And so I think it's actually a good story of how we interact because then Michelle just went off and helped make it happen.

Although I don't say that to all of his ideas, Matthew is definitely the idea person. He comes up with a lot of ideas. Some of them are good, some are less good, but this one was a great one and it was pretty fun to make it all happen. And now 20 hours later, we have a pretty cool looking golden muffler.

And we actually got the muffler to show you how scrappy we are. We got the muffler for free. So we just painted it gold. It wasn't really gold.

You could afford a muffler at this point. This morning you guys announced you raised 110 million. You actually raised it last December. I think I remember right. You just announced, saved it so that.

We could announce it in conjunction with Disrupt. That's how much actually we love this, this conference.

I appreciate that.

Not kidding, actually. Just sort of crazy.

But you know, I'm trying to get how to get. I'm trying to figure out how to get away from the muffler story. But you didn't spend money on the muffler. But you've got 182 million that you raised. What do you do with all of that money? Why did you decide to go out and raise again at this point you raised 110 million from Fidelity, Google, Microsoft, Baidu and Qualcomm, a pretty diverse group of investors. But why did you go out and do that?

You know, I think we both agree that celebrating raising money is. I like the CEO of Zendesk and, and the CEO of Qualtrics have sort of described it as being like celebrating getting a mortgage. It's not really something that we're ever really proud of. And oftentimes when you hear companies that have raised these really big rounds, you think, how could they possibly be worth that? So we've made it a habit to raise money quietly, as quietly as we can, and then try and deploy that in order to make our service better. So over the last nine months, Cloudflare has really been increasing the performance of our service by building data centers all around the world. We've got 65ish or maybe 66 as of this morning, data centers. We've been turning up a new data center a week. And what's been amazing about that is that when we stepped on stage and we announced Cloudflare five years ago, the goal for the company was to be for small businesses or startups. But today, some of the largest companies in the world rely on our network in order to be fast and safe and everywhere around the world.

And you know, as you're building companies, and we're really in this for the long run, we're building something really big and meaningful to help transform the way the Internet works. And that does take capital, whether it's building on our network, hiring the best and brightest people to come work at Cloudflare, doubling our team size every year. So yes, we are hiring for any person interested, get in touch. And having the resources and a strong balance sheet to be able to do that is really important to be successful in the future.

Yet you are a profitable company at this point and you told me earlier on you still have 160 million in the banks from your other rounds. So I'm going to press you on that a little bit. Why did you raise this time? Why did you decide to take the money if you didn't?

I think that it was the real story behind this was that we think that we're on a track to be independent, standalone, public company. And when we talked to public market investors, there were really five questions that they asked. They asked, what's your China strategy? What's your mobile strategy? How are you going to sell to bigger enterprises? What are you going to do when Google enters the market? That question doesn't go away even as you get older in a business and then is the public market going to take you seriously? And so we cared a lot less about the amount raised. In fact, we kept trying to make the amount smaller and we were so oversubscribed that it kept getting larger and larger. In fact, we had set a hundred million dollar cap and somehow we ended up raising 110. But we tried to answer that with the Investors that were involved. So what's our China strategy? Baidu. What's our mobile strategy? Qualcomm. How are we going to sell to big enterprises? Well, Microsoft's better at doing that than anyone else. What are we going to do when Google enters the market? Well, they're actually an investor in us and they exited the market with the competitive product that they had. And then our round was led by Fidelity, which is the largest public market investor. So we have always at every step, not maximized how to get the highest valuation, but instead tried to find the right partners. Whether that was Scott Sandel at nea, Carl Ledbetter at Pelion Ventures, that really understood how to build a great business and picked based on that. And that was no different. In this round.

Break that down a little bit. What is your mobile strategy? Because when you started out five years ago, it was all about the web. Nobody really cared about mobile. It's turned around almost completely at this point.

We've, you know, we do, we sit in behind the APIs and back ends of a significant percentage of the mobile applications on Android and iPhone. And what we realized in talking with Qualcomm was because Qualcomm makes the chipset that power a bunch of those mobile devices, if we know a Qualcomm chipset is connecting to our network, then we can enhance that and make sure that it has both additional performance that's available and also enhanced security. And so mobile is obviously a big part of the Internet in general. It's a big part of our strategy. And I think if you spin the film reel forward five years, we'll be in every cell phone tower, base station or one RF hop away from every mobile device on earth. And what we can do from there then is almost limitless.

What about enterprise? Because you guys, I think you're still mostly an engineering driven company at this point and the enterprise really wants a sales team. Wine and dine.

We have both. We have both. We're a very R and D driven company. We have a large engineering team and that's the core to who we are. But we also have a sales organization. So over the last two years we've built that out. We have well over 40 people on that team now. And if you look at our revenue, about 50% of our revenue come from the self serve market. So those are small businesses, bloggers, people with smaller balance sheets. And then the other 50% of our revenue come from large enterprises. And so it's something we've been doing the last two years and we've learned a lot in the process, but we have a lot of content using Cloudflare, whether it's Riot Games, League of Legends to Zendesk, as a customer to some government organizations. And so that's something that we'll continue to build out over the years. But you're absolutely right. As you go to larger and larger organizations, they want to be able to talk to somebody at Cloudflare and we strongly believe in that. What's been interesting is when you talk to our customers, the way they describe our team is smart and technical. And so this comes back to a really strong engineering driven environment where we want everyone at Cloudflare to be really technical and be in love with this mission of building a better Internet as well as those who can talk to the customers.

Sure. What did you learn from the enterprise? What did they teach you?

You know, I think the thing that's been interesting has been how many times the enterprises are just collections of individuals and how many times the buyer at the enterprise has been a cloudflare customer, often using the free version of our service for quite some time. Why did the New York Times sign up for us? Well, because the former CTO was a Cloudflare customer for his personal blog. Why did Salesforce sign up? Because a bunch of their senior executives for their blogs had been using us. And so I think that one of the unheralded. There are a lot of unheralded benefits of having an accessible version of the product. One of those is it helps you attract customers. Not because we take a free customer and get them to pay us someday, but because that free customer becomes an advocate who is either bringing us customers or bringing us employees or letting us test new features in a way that we can't do it with a large customer like Goldman Sachs.

Sure. Let's talk about your China strategy. Also, while we still have a little bit of time here, you guys announced a partnership with Baidu, also one of the companies in your funding round here. How did you. You've been trying to get into China for four or five years pretty much since you started. What has changed? Why are you able to go into China at this point?

The, you know, what was interesting about China was, I mean, I actually went to TechCrunch Beijing four years ago and that was really the start of what became the Baidu deal. And we were, I think one of the most surprising elements of launching Cloudflare was how international our company became almost instantaneously and China by traffic to our network and by the number of customers. Was our second largest market, behind only the United States. And I think what was amazing was even though there were a number of Chinese competitors and China specific companies that followed in our footsteps, and even though we hadn't localized for the China market, we were the largest and in fact we had more market share than all of the competitors combined in, in that region. And China today is 700 million active Internet users. It's a quarter of all the Internet population. And so for our large customers, companies like American Apparel or Gilt Group that really want to make sure that they can access that market, what we thought was important was building a global platform where you could have one solution and be fast, not only in San Francisco, not only in London, but also in Beijing.

And while we thought about it for the last four years, we've really actively working on it for the last two years, and that's how long these things take, you know, and we, when we announced the Baidu partnership last week, we went back and looked at some of the timelines and we were like, wow, it took us two years from start to finish to bring this, to be able to announce it. And you know, early on you make progress really, really quickly. And we still make progress really quickly. But there are some things that take a long time and, and I think that's been interesting to have to balance short term progress with some of these really long term things that really are game changers.

In the process of going into China, did you have to make any concessions to the Chinese government or, you know, just to be behind the firewall?

One of the things that was unique about how we structured the partnership was we said that we would run China. Cloudflare would have no operations inside China itself. And so what that means is if a Cloudflare customer signs up and wants to be in China, none of the data about that customer is shared inside the firewall. And we used actually some of the technology that we had, including keyless ssl, to make sure that even our SSL keys of our customers stay outside of the market. And the corollary is also true. While there are a lot of US companies that don't want their data to be exposed to the Chinese government, there are a lot of Chinese companies that don't want their data to be exposed to the US government. And so in that case, the China version of the service, which is called Yuanjiasu, is run by Baidu. They manage the data for those customers and it's never shared with us. And so that's kept us from having to compromise what we think of as our values. And I think it's a really unique structure that you'll see more and more Internet companies looking to adopt over time.

Definitely.

All right. You're trying to build a big public company. When is it going public?

Who knows? Not this year. Definitely not this year.

You raise every two years, it seems. So about two years from now.

I can definitely say with a high degree of certainty, not this year, but we can see it on the horizon at some point.

Cool. All right. We'll see you again at that point, I think.

All right.

Thank you. Thank you for having us.

Thank you.