Business Breakdowns
· Sam Eden
[00:00:00] S1: It's really important to understand the history of Cloudflare because if you can understand why they were successful in the start and how they got their initial foothold in the market, all of their new products build on top of that. So if you understand the history, then you can understand all of their new products. Cloudflare, they were founded in 2009 by Matthew Prince, Michelle Zatlyn, and Lee Holloway. They now have over $2 billion in revenue. One thing to always remember about the internet is that everything still runs on physical hardware. So there's cables that actually run across the oceans. They run through mountains and they physically connect server boxes that intercept and process all this internet traffic. Before Cloudflare was founded, let's use an example of someone based in New York. They want to visit a website in Australia. So to do that, you send a request all the way from New York to Australia. They process that and then send it all the way back through a cable across the Pacific Ocean back to the server. So that's slow. And it also costs your ISP, your internet service provider, some money because they have to pay some transfer fees to work with other ISPs across the world. So this is a bit of a lose-lose situation for the ISP. They have to pay transfer fees and it's a bad and slow customer experience. This is still before Cloudflare. Some of the early legacy companies, let's say Akamai – they provide what's called a CDN, Content Delivery Network. The Australian website can pay Akamai to store images or some of the other website assets in a server in New York. Anytime someone in New York visits the same Australian website, it's just pulling the data from New York across the city much faster. One thing that's important to understand because it sets up Cloudflare well, is that these legacy companies like Akamai – they split the network. Customers have to decide what to put on their CDN network and what to handle directly. To set this up, you need a sales engineer. It's a complex implementation. There's a lot of ongoing maintenance. And then if you buy a different service, then you have to administer that and set up a whole different network and decide what to get redirected where. Also, this website in Australia, for example, might want to only serve valid requests.
· Sam Eden, Matt Reustle
So they actually have to buy a physical firewall to intercept and check this traffic. All these services, they're what's called reverse proxies, which basically means they just intercept incoming traffic on behalf of the website. And that's part of the security piece that we talked about earlier. So that's the lay of the land before Cloudflare. This was all very difficult. It needed those sales engineers. This was only really accessible for larger enterprises and more sophisticated websites. And these legacy vendors didn't have a solution for the long tail of websites that Cloudflare started serving. If we want to just relate this back to the postal example, this legacy setup would be if that website in Australia – they would have to inform all of the different postal routing services all over the world. They'd have to tell them their different split rules. If the mail is directed to this department, use this address. If it's directed to this department, use this address. If it's a package, use this address. And that takes maintenance because if your rules change, you have to update that and it's a lot of work. That's a bit of a history of the pre-Cloudflare time. [00:00:00] S0: Feels very manually intensive and a bit of a traveling salesman problem in terms of optimizing for where things go.
· Sam Eden
[00:00:00] S1: So now we can get to Cloudflare. Matthew Prince, the co-founder and CEO of Cloudflare, a very interesting background. Tinkered with computers as a child, studied literature and became a lawyer, and you can see that with his storytelling abilities now. Here's an interesting background. He was set to take over his family business, which actually included running a Hooters. He didn't want that, so he went to HBS. But before and during that, he was working on a project called Project Honey Pot, and that eventually became Cloudflare. So he was working on Project Honey Pot with the technical co-founder, Lee Holloway, who was responsible for a lot of the early code and a lot of the early innovations. Unfortunately, Lee was diagnosed with frontotemporal dementia so he's no longer with the business, but his technical influence remains strong throughout Cloudflare today. Project Honey Pot, it's kind of as it sounds, it was a way to let hackers and spammers scrape email addresses from your website. But these email addresses were just trackers. You could see if someone tried to spam that email address, they would get put on effectively a big list of bad addresses. It was creating a big, bad list. It was effectively a do-not-call list for spammers. Hundreds of thousands of people were installing Honey Pot to help build out this list. And they're helping build out this list because they wanted to be protected from this list. So the more users, the better the service because the list got bigger. At HBS, this is where Matthew met Michelle Zatlyn. She's now the COO. She heard about this idea and wanted to be a part of it. They're a great pair. Matthew brings a real visionary, and Michelle brings a lot of the operational rigor. Now we can get into the technical side of Cloudflare and I'll keep a high level – but they have this Honey Pot list, a list of bad actors, but it's a tricky problem to solve because it's effectively a lookup table, right? You see an incoming address, you compare that to the list and see whether you want to accept the request or not. So one way would be to put it on all of your customers' servers and they can do the lookup, but that would slow the entire internet down because every single request now has to compare it. So what Cloudflare did, and this was the real innovation, was that they just intercepted everything.
· Sam Eden, Matt Reustle
You didn't need multiple reverse proxies to do different things. You just have one reverse proxy, that's Cloudflare, and that does many things. [00:00:00] S0: Were they getting paid to do that? [00:00:00] S1: No. And this is a story throughout Cloudflare. A lot of their products, they'll turn on and they have a very generous free program, but this helps build out their business moat, improve their products and create a business that's highly defensible. [00:00:00] S0: Network effect beneficiary, and getting the free service out there can lead to that.
· Matt Reustle, Sam Eden
[00:00:00] S0: Network effect beneficiary, and getting the free service out there can lead to that. [00:00:00] S1: Totally. That Project Honey Pot was the exact start of this. So all these customers could just redirect all of their traffic to Cloudflare and they would do the lookup. Now this is really hard to do. So Lee Holloway was able to build a technical solution on this. If we relate this back to our postal example, instead of splitting the network and all that, all you have to do now is just say, "My new mailing address is Cloudflare." No matter what the recipient is, no matter what the package type, Cloudflare will intercept it and decide what to do with it. What this allowed is because it's intercepting everything, if you want to add another service, whether it's a CDN or a DDoS protection, it doesn't matter. You can just really easily turn that on and off. You don't need that sales engineer that we mentioned before. Cloudflare is already in front of your traffic. You don't have to redirect anything. So that makes it simple. So this was the main breakthrough for Cloudflare. They could now serve that long tail of websites. And they were the first real product-led growth company for internet services. Anyone could sign up really quickly. They could serve all those weekend hobby projects, all the small websites, and start providing web protection services for them.
· Sam Eden, Matt Reustle
[00:00:00] S1: Totally. That Project Honey Pot was the exact start of this. So all these customers could just redirect all of their traffic to Cloudflare and they would do the lookup. Now this is really hard to do. So Lee Holloway was able to build a technical solution on this. If we relate this back to our postal example, instead of splitting the network and all that, all you have to do now is just say, "My new mailing address is Cloudflare." No matter what the recipient is, no matter what the package type, Cloudflare will intercept it and decide what to do with it. What this allowed is because it's intercepting everything, if you want to add another service, whether it's a CDN or a DDoS protection, it doesn't matter. You can just really easily turn that on and off. You don't need that sales engineer that we mentioned before. Cloudflare is already in front of your traffic. You don't have to redirect anything. So that makes it simple. So this was the main breakthrough for Cloudflare. They could now serve that long tail of websites. And they were the first real product-led growth company for internet services. Anyone could sign up really quickly. They could serve all those weekend hobby projects, all the small websites, and start providing web protection services for them. [00:00:00] S0: In terms of getting those users, were they just in front of the community of open source developers? Or was there anything that got the attention to where they got that initial user base going? Was there anything that stands out?