The Interview

Cloudflare’s Michelle Zatlyn on going public in the wake of controversy

Cloudflare CEO Matthew Prince and COO Michelle Zatlyn ringing the opening bell at the New York Stock Exchange on Friday, Sept. 13, 2019. Cloudflare
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Ten years after starting Cloudflare with her Harvard Business School classmate Matthew Prince and his friend Lee Holloway, Saskatchewan native Michelle Zatlyn visited the New York Stock Exchange for the first time—to ring the opening bell. 

The San Francisco-based web security company—whose software helps websites drive traffic, run faster and block cyber attacks—went public Friday, selling 35 million shares at US$15 each. The company bucked this year’s tech IPO trend, beating its own expectations on its first day of trading. 

Two days before going public, it hiked its share price range; on the eve of the IPO, it bumped it again. Nonetheless, by the end of its first day on the public markets, the company’s stock was up 20 per cent, hitting US$18 per share to bring its valuation to over US$5 billion. 

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Talking Point

The San Francisco-based web security company increased its share price to US$15—from a range of US$12–US$14—and sold 35 million shares, raising US$525 million ahead of its Friday IPO. By the end of its first day on the New York Stock Exchange, the company’s stock was up to US$18, bringing its valuation to above US$5 billion. In an interview with The Logic on Friday, Michelle Zatlyn, the company’s Canadian co-founder, reflected on IPO day, on taking a moral stance against a “lawless” client and whether, if she were starting out today, she would build her company in Canada.

The better-than-expected showing comes just over a month following the company’s decision to drop 8chan as a client after a suspected shooter who killed 22 people in El Paso, Texas posted his plans to carry out the attack on the anonymous message board. In the prospectus it filed 10 days later, the company cited the move as a risk to its business. 

Reaction to the 8chan decision was mixed, Zatlyn told The Logic Friday. Some clients and academics have criticized the move as a moral judgment on a client, something they argue a website infrastructure company has no business doing. But so far investors haven’t been deterred, according to Zatlyn, who said they’re more focused on the company’s revenue and client growth. 

The company has 74,873 paying customers and counts about 10 per cent of the Fortune 1,000 among them. It posted US$129.2 million in revenue for the first half of 2019, a 48 per cent increase over the same period the year before. And, while losses were up 13 per cent in the first half of the year, reaching US$36.8 million, unlike in the cases of IPO upsets Uber and Lyft, those losses are shrinking relative to revenue, falling from from 37.3 per cent to 28.5 per cent. 

In an interview with The Logic, Zatlyn, the company’s chief operating officer, reflected on IPO day, on taking a moral stance against a “lawless” client, and whether, if she were starting out today, she would build her company in Canada. 

The interview has been edited for length and clarity. 

You raised the share price range a couple days ago—from between US$10–US$12 to US$12–US$14—and then you raised it again for the IPO. What gave you the confidence that investors were willing to pay more than what the company initially thought when it filed to go public in mid-August? 

It turns out when you’re getting ready to go public, your team really expands with a lot of advisers and partners to help shepherd you through this process. And over the last two weeks, Matthew [Prince, CEO], Thomas [Seifert, CFO] and I have been meeting with investors around the United States. At the end of the day, it was clear that we got a lot of great feedback like, “You guys built a really great company, and we’re excited to potentially be shareholders in it.” It’s this time with investors that gave us the confidence to say, “This is the right price to cover.” And, at the end of the day, it’ll let markets speak.

Cloudflare’s prospectus noted the decision to drop 8chan as a potential risk to your business. What kind of feedback did you get from investors, customers and other stakeholders on the decision? 

For the most part, people said, “Great job.” Some people were very upset—they said, “It’s not your place to decide what should content should be online, it’s not against the law, what are you doing?”

Was that something investors were saying?

No, no. Not investors. Just the broader community. People who have a point of view, people who are experts on policy topics and who have spent all day every day thinking about this and the implications of, “If an infrastructure company starts making these decisions, what will happen?” In this case, there were a lot of people who thought this was good, but then others said, “No, this sets a bad precedent.” 

Cloudflare has always been a law-abiding organization. When something is illegal, we take that off our network, and we have a long history of doing that. There are a lot of terrible things people say online here in the United States that actually are legal. And the question is: who should be the decider of what content stays online or not? In this case, the owners of that platform were essentially a lawless organization, so it fell to the infrastructure company to say enough is enough. 

I know that when you were starting to build this company, you had trouble getting your visa to work and stay in the United States. Did you consider moving back to Canada to build the company at that point? 

When we started Cloudflare, Matthew and I showed up in California in the summer of 2009. Ten years ago, I don’t think Canada would have been a realistic place for me to start Cloudflare, just given the client environment then, and [that] Matthew and I were entrepreneurs. I’m still very connected to Canada, and I will say that the entrepreneurship environment there today is much better than it was 10 years ago. That’s because of the hard work of a lot of people—from the financial community doing more investment, a lot of entrepreneurs building great companies, things like banks making it easy to set up bank accounts, the government making it easy for immigration. Whether it’s in Toronto or Vancouver or Montreal or even Saskatoon, where my parents live, all those decisions are adding up to this feeling that things are different. And so, while 10 years ago it just wasn’t an option for us, I think that today, if Matthew, Lee and I were starting all over, then maybe Canada would have been an option. 

Do you have any plans to list on the Toronto Stock Exchange? 

Not at the moment. Let’s just get through this listing first. 

Cloudflare’s prospectus also cautioned that it may not “achieve or sustain profitability in the near future.” We’re starting to see investors lose their appetite for companies that are far from becoming profitable—Uber and WeWork come to mind. Is that a concern for you?  

Matthew and I absolutely believe that companies should create revenue and ultimately drive positive [return-on-investment] for our shareholders. We’re very focused on that. We want to build a long-term, sustainable company and we definitely believe that building a profitable company is part of that. We’re going to get there, but we’re just not there yet. 

Do you have an aspirational timeline for when you plan to get there? 

Not one we’re ready to share.

This has been a big day, I’m sure. How are you feeling about it? 

It’s surreal. It’s just been an amazing, amazing experience. Nine years of a lot of blood, sweat and tears all of a sudden crystallizes, and it was all worth it: every line of code, every customer that we reached out to, every person we’ve hired—all that hard work just feels like it was all worth it.

What have the last 24 hours been like for you—how did you spend your night preparing? 

We landed in New York City yesterday just before noon and went straight to Goldman Sachs, who’s our lead banker. We spent a lot of time there yesterday afternoon with this extended group of advisers trying to say what should Cloudflare’s stock be priced at. We had lots of different input, trying to figure out what’s the right price and a fair price. Then our board dialled in to the meeting and we pitched them our price at US$15, above our initial range. The board agreed, and we all had a glass of champagne and a really awesome cake.