CloudFlare Delays IPO Plans

According to Gartner, worldwide spending on information security in 2015 was expected to reach $75.4 billion, up 4.7% over 2014 driven by government programs, increased legislation and high-profile data breaches. A MarketsandMarkets report expects the global cyber security market to grow at a CAGR of 9.8% to reach $170.21 billion by 2020. CloudFlare, which entered the Billion Dollar Club in 2012, expected to go public in 2017. But with the current turmoil in the market, it has delayed its plans.

CloudFlare’s Offerings

San Francisco-based CloudFlare was founded in 2009 by Harvard students Michelle Zatlyn, Matthew Prince, and their friend Lee Holloway. It is an online service that helps improve website performance while ensuring security. Web traffic for CloudFlare’s customers is routed through their intelligent global network that automatically optimizes the delivery of web pages so that visitors can get the fastest page load times and best performance.

Instead of following the traditional method of getting organizations to set up firewalls or intrusion-prevention hardware, CloudFlare offers less expensive solutions over the cloud. Today, CloudFlare has a team of 200 operating a network in over 60 cities and 30 countries. It delivers nearly 1 trillion page views per month across 4 million Internet properties. It recently entered the Chinese market through a partnership with Baidu and has a presence in over 15 Baidu data centers in China.

CloudFlare’s Financials

CloudFlare operates on a freemium subscription-based model. The basic package is available for free and comes with features such as a fast site performance, broad security protection and statistics about site visitors. For a professional, the service is available at $20 per month and offers additional features such as mobile optimization, real-time statistics and web application firewall. Organizations can opt for business packages which start at $200 per month and go up to $5,000 per month. The highest priced option comes with enhanced services such as an advanced denial of service attack mitigation, 100% uptime guarantee, dedicated solutions engineer, 24/7 phone support and multi-user access.

Within three years of releasing their product, the company was seeing growth of 450% annually and adding over 5,000 new clients a day. They were trending at revenues of $40 million for 2014 and nearly 5% of their 2 million websites are paying customers. They have been profitable since 2014 and have a gross margin of 75%. Their customers include Goldman Sachs, Wells Fargo, and even Cisco Systems.

They have been venture funded so far with $182 million in funding from investors including Greenspring Associates, New Enterprise Associates, Pelion Venture Partners, Union Square Ventures, Venrock, Baidu, Fidelity Management, Qualcomm Ventures, Microsoft, and Google Capital. Their last round of funding was held in September 2015 when they raised $110 million at an undisclosed valuation. An earlier round in December 2012 for $50 million valued them at over $1 billion.

In 2015, cyber security was considered one of the hottest sectors and received funding of $3.3 billion, up from $2 billion in 2014. However, the sector has cooled down now, and the valuations of several cloud and security companies has tumbled. The stock price of Rapid7, which went public in July 2015 has fallen by 50% to $13.73. Fidelity recently marked down CloudFlare’s valuation by 30.55%. Following these developments, CloudFlare says it is more likely to take 36 more months to go public.

Analysts say the cyber security sector is ripe for consolidation. Cyber security is a key concern for companies like Microsoft and IBM. IBM last month announced its plans to acquire Resilient Systems, which sells an incident response platform. Is CloudFlare an acquisition target for Microsoft, which incidentally is also one of its investors?