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In order to build a multi-billion dollar tech firm, history has proven you need to do two things:

  1. Set it up in Sillicon Valley with a bunch of equally-brainy friends (a la Mark Zuckerberg)
  2. Make sure the founder went to Harvard (a la Mark Zuckerberg and Bill Gates, although granted both dropped out)

This is exactly what Matthew Prince did. In 2009, the Harvard alumni founded the San Francisco-based tech company Cloudflare.

Starting off as a simple solution to combat email spam, the firm now boasts that it can “solve some of the biggest problems on the internet”.

Can it? Fast Company named Cloudflare one of the world’s most innovative companies, so it has some clout.

In the 10 years since its inception, the company, which protects websites from cyberattacks while simultaneously optimising performance, has grown rapidly.

More than 16 million internet properties pass through the company’s network, around 10% of the Fortune 1,000 are paying Cloudflare customers, and approximately 10% of the top million, 17% of the top 100,000, and 18% of the top 10,000 websites use at least one product on its platform.

Impressive stuff. That’s why Cloudflare’s imminent IPO is set to gain lots of investor attention.

The firm, which has raised $332m in funding as a private company, is eyeing up a $483m cash infusion as part of its New York Stock Exchange debut.

Last valued at $3.25bn, Cloudflare is offering 35 million shares to the public at between $10 and $12 per share.

Another big tech stock IPO

Cloudflare follows a number of other tech firms that took the IPO plunge this year.

Crowdstrike, another Sillicon Valley-based firm which specialises in cloud-based security protection, launched its IPO on the Nasdaq in June.

Its debut was a huge success, opening its first day of trading around the $60 mark, up considerably from its initial IPO price of $34. Since then, its share price has been slightly volatile, but has stayed above $60 for the most part – and even went as high as $90 last month before dipping down again.

While this is no indication of how Cloudflare will do, Prince’s firm certainly has a lot of hype surrounding it, making it an interesting one to watch.

Growth potential but still in the red

As with a lot of tech firms that have recently floated, Cloudflare is trying to entice investors with its big growth potential. And the growth does seem big. Its revenues have swelled to $129.2m in the first half of this year – up nearly 50% from the same period in 2018.

But, as with a lot of tech firms, it is currently operating in the red, with net losses of $36.8m in the first half of 2019. With its net losses being slightly lower than the same period last year, at $32.5m, the losses, for now, seem to be creeping up gradually.

Reputation

The company has also warned investors its decision to cut off certain customers could be an IPO risk.

Cloudflare has stopped services to white supremacist sites including 8chan and The Daily Stormer after coming under a lot of pressure for providing tech support to online hate groups. At the time, the company defended itself using the ‘free speech’ argument.

This poses two dilemmas for investors. On the one hand, providing services to controversial sites could cause reputational damage to the brand and put off potential customers. On the other, when the company takes a stand and cuts off these undesirable customers, that hits profits too.

It remains to be seen if this does affect Cloudflare’s stock exchange success.

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Michael Morton

Michael has worked within the Financial Industry for more than 20 years. Starting out as a financial analyst, he has extensive experience working with fund management groups and brokerages.

With an interest in Stocks and Shares, Funds, ETFs and Commodities, his investment focus is medium to long term gains, with the objective of financial security on retirement, and building wealth for his young children for their adult life. His broker of choice is Hargreaves Lansdown.

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