CloudFlare unveils a secret 12-month-old $50M Series C round and its ensuing year of massive growth

By Michael Carney , written on December 17, 2013

From The News Desk

Behind the aesthetically pleasing Web design, crave-worthy ecommerce offerings, and thought-provoking content, the Internet is a war zone. Every Web publisher is constantly under attack. Among those companies attempting to stand between them and the attackers, CloudFlare may be the most formidable and, just a crucially, is certainly among the most trustworthy. Today the company is announcing a $50 million Series C round led by Union Square Ventures (USV), with participation from Greenspring and existing investors NEA, Pelion Venture Partners, and Venrock.

Unlike most funding announcements, CloudFlare’s latest round isn’t a reflection of where the Web optimization, security, and content delivery company is today. Rather, it’s a reflection of where it was more a year ago, in December 2012 – when this round actually closed.

In the 12 months since, all CloudFlare has done is grow its revenue by 450 percent and surpassed more than 1.5 million website customers, a year-over-year increase of more than 100 percent. Today, over 5 percent of all requests across the Web are powered by CloudFlare, according to CEO Matthew Prince, and the company now serves 1 trillion requests across its network each month.

The decision to hold off on announcing the most latest funding round was part of CloudFlare’s overarching philosophy of flying under the radar. “When we’re doing our job the right way, no one knows we exist – we just make the Internet better,” Prince says. He views calling attention to the company's growth and its value in the eyes of investors in much the same way. The three-year-old company hardly even advertises and just began building its sales team in the last three months, he notes.

CloudFlare is an evolution of Web security, according to both Prince and USV Managing Partner Brad Burnham. Previously, Web publishers and platform providers had to buy individual systems to stack on top of servers to address functions like DDOS mitigation, network security and performance, load balancing, and LAN optimization. Now, CloudFlare offers these tools as a service, acting as a proxy between the publisher and the open Internet and routing all content through its servers.

“Unless you’re Google, some 15 year old with a bone to pick can knock you offline,” Prince says. “If you’re a small company, its incredibly difficult to combat this on your own. And it’s basically impossible to make sure your content is available in China.”

But while other companies and publishers could duplicate this basic functionality, few have the scale and visibility across the Web to process and distill the volume of online behavior that CloudFlare can. And as such, few can offer anywhere near the effectiveness of threat detection. For example, the company regularly identifies patterns in the signatures of various attacks across the world, and in this way, can use learning from one set of customers to help better protect others.

The only other companies that have this level of visibility are Google and Amazon, Prince argues, and while both have similar Web optimization and security initiatives in place behind the scenes, neither have directly commercialized those toolsets. What’s more, Burnham believes that CloudFlare benefits by its role as a trusted independent party, rather than a giant platform that is often directly competitive with the companies whose content they seek to host.

“I don’t think Etsy would want Amazon to see all of its Web traffic data,” Burnham says. Prince adds that while Amazon kicked Wikileaks off its AWS network amid controversy over the company’s business practice, CloudFlare never interrupted its services.

CloudFlare has spent only a fraction of the $50 million it raised, and is “running a real risk of being profitable in January,” according to Prince. The company has more than quadrupled its network capacity across 23 global data centers over the last 12 months and yet has only grown its now 60 person team by a fraction of that rate.

Some of CloudFlare’s success can be traced back to lucky timing, Prince concedes. When the foudners started writing the initial code in mid-2009, three forces were at work that would enable a CloudFlare-like service for the first time in history. The first was the plummeting price of flash storage, in no small part due to the explosive impact of Apple’s iPod and iPhones. Secondly, the price of bandwidth had collapsed as a result of the emergence of online video services and competition among ISPs. Finally, software compilers began to mature around this time enabling engineers to extract the maximum benefit from the new massively multi core servers and the massive parallel processing that they enabled. The combination of these forces, in addition to an incredibly smart team and a vision for the market opportunity ahead set the stage for the path of the company over the last three-plus years.

Prince plans a dramatic increase in CloudFlare’s network infrastructure, including the addition of 50 new data centers over the next year as well as significant growth in his engineering and sales staffs. The first of these new data center facilities will open in Santiago, Chile before the end of 2013, with the next expected to open in Sao Paulo, Brazil in early January, he says. The rest of the year will include multiple centers opening across Africa and Asia, including the potential to open facilities in notoriously onerous China. In many cases, CloudFlare will be installing its hardware inside the last mile facilities of global ISPs, a proposition that Prince calls unthinkable just a year earlier.

In the lead up to raising its Series C, CloudFlare received numerous unsolicited term sheets from growth and private equity investors with what Prince calls “incredibly humbling valuations, as high as $1.2 billion.” But with those valuations, came expectations.

It quickly became clear during discussions with potential investors that the company would be expected push its monetization efforts as fast and hard as possible, even at the expense of its free product and its standing as the Web’s trusted and independent gatekeeper. The founders and their current board also feared that these new backers would force the company to make the same sort of integrity compromises we have now been revealed to occurred at other technology titans, including censorship and facilitating NSA surveillance efforts.

According to Prince, actions of this sort would be fundamentally contrary to the company’s culture and mission. He says:

We’re a reflection of the Internet, so there’s horrible, horrible stuff on our network. You can find someone to object to almost every issue. Part of our vision is that the Internet is open, anyone can put anything on there. It’s above my pay grade to decide what can go out on our network.

We’re a law abiding company and we follow due process, but we’re not law enforcement or judiciaries. There is a legal process, and we’ll comply with legal process. But, philosophically, we want to make sure that the job of law enforcement is made no more difficult or more easy by mere existence of CloudFlare. We’re a proxy to content, we’re a proxy to law enforcement.

The decision to accept USV as its lead investor in the latest round was a reflection of CloudFlare’s commitment to these belief. Prince’s co-founder, Michelle Zatlyn, first met USV’s Burnham while both were serving on the FCC’s Open Internet Advisory Committee. As the only representatives from the startup and venture capital communities serving on a committee that included the likes of Google, Comcast, and AT&T, Zatly and Burnham found in one another, kindred spirits. The mutual respect developed in that setting led to the subsequent funding, at a valuation that Prince notes was “less than $1.2 billion, but no less humbling.” He declined to provide further details.

“At Union Square Ventures we have always believed in the transformative power of the Internet,” Burnham said in a statement. “Until recently, we have naively believed that the Internet would always be there and always be available. We now know that the great strength of the Internet — its openness — also makes it vulnerable to malware, denial of service, and other forms of attack.

Other content delivery companies are moving into CloudFlare’s territory, as evidenced by Akamai’s recent acquisition of of Web security company Prolexic and Verizon’s acquisition of content delivery network EdgeCast. Both Google and Amazon currently have similar initiatives in place as well. But CloudFlare is well positioned both in terms of its scale and in its position as a trustworthy independent amid a sea of integrity-compromised platform giants.

Prince and Burnham both claim to be less concerned with competition than they are with CloudFlare keeping up with its torrid growth and market demand. The company has already faced scale issues, and is likely to continue to do so as it seeks to deploying additional points of presence around the world.

CloudFlare’s latest round brings the company to $72.1 million raised and, combined with the company’s current valuation, all but solidifies that the next step for this company is an IPO, according to Prince. Going forward, the Web is likely to grow more hostile and more dangerous for content publishers. In such a world, CloudFlare is a good friend to have. You can bet that there are a few early stage VCs feel the same way about having added the company to their portfolio.

[Image via Wallsfeed]