Harnessing Down Market Constraints for Up Market Success

Michael Grinich (00:02):

Welcome to Crossing the Enterprise Chasm, a podcast about software startups and their journey moving upmarket to serving enterprise customers. I'm your host, Michael Grinich. I'm the founder of WorkOS, which is a platform that helps developers quickly ship common enterprise features like Single Sign-On. On this podcast, you'll hear directly from founders, product leaders and early stage operators who have navigated building great products for enterprise customers. In every episode, you'll find strategies, tactics and real world advice for ways to make your app enterprise ready and take your business to the next level.

Today I'm joined by Michelle Zatlyn, the co-founder, president and COO of Cloudflare. Cloudflare likely needs no introduction with this audience. The internet infrastructure and security company is designed to make applications of websites secure, private, fast and reliable. Their vision is to build a better internet, and it's estimated that today over 20% of all traffic goes through Cloudflare. Since its inception in 2010, Cloudflare has grown to over 3,000 employees and now is also a publicly traded company with a market cap near $20 billion.

In Q4 of last year, they had over 2,000 customers paying over $100,000 each and signed a record number of deals over $500K. Names like Walmart, IBM, and even MIT are customers. We'll dig into all this and more as we talk about how Cloudflare moved upmarket to cross the enterprise chasm. Michelle, welcome to the podcast.

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Michelle Zatlyn (01:30):

Thanks so much for having me. I'm thrilled to be here.

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Michael Grinich (01:32):

So let's go back in time a little bit. Take us back to when you started Cloudflare 13 years ago. What was the problem you were trying to solve and what kind of company did you set out to build?

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Michelle Zatlyn (01:41):

The origin story of Cloudflare sounds very similar to what we do today. We set out to build a service that helps protect websites and apps and APIs from online attackers. We set out to build a service that help make all the connections connecting to these websites, apps and APIs faster. The third part was to make it easy to add third party services. So today we do the first two very, very well, and we've added reliability and privacy to that description and other suite of services, which is really important as these organizations that are listening are scaling.

But really the foundation of what we started with is what we do today plus more. So we're not one of those companies that pivoted along the way. There's a lot that exist, which is totally fine, but we were one that kind of had a pretty strong point of view of what problem we were solving early on and we kept solving it really well, and over time the opportunity expanded to what else we could do for our customers.

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Michael Grinich (02:38):

I remember Cloudflare early on really focusing on startups growing, like early stage companies that started using it. Can you talk about that as kind of the first market segment and how you grew from there into more broader, more diverse, larger customers?

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Michelle Zatlyn (02:52):

This podcast is so apropos because I think when you start as a founder, you're just trying to build something and prove that you can get it to work. But then as soon as you do, you’ve got to build a business around it, and that's actually very different than the first step. I have a lot of scar tissue and more gray hair than when I started, but it’s also so proud and amazing. So for us when we started, if you said “okay, we were providing cybersecurity performance reliability to websites and apps and APIs”, we started by servicing our initial customer segments [which] were developers, small businesses. This part of the market that had no options.

It was interesting when we first started, we weren't competing really against... We were kind of competing against nothing. Because it was a part of the market where up until that point there were no good solutions and everyone was kind of these IT administrators or people running these websites were doing it themselves. Developers were doing it themselves. All of a sudden we had a free service, a $25 a month service, a $250 a month service that made it really accessible. So there's a famous Harvard Business School professor, his name's Clay Christensen. He's since passed on, but he has this book called The Innovator's Dilemma, this idea, theory of disruption. So many ways, the way that Cloudflare went to market was an example of disruption where we started to service a part of the market where there was no competitors, where other people hadn't focused.

We used that to build our products and our capabilities, and over time, now we've gone up into the mid-market and the enterprise and the government where it's different capabilities needed, but a lot of the base we can use for that segment, which is super interesting how we went to market. It's a really effective go-to-market strategy for a subset of companies. It doesn't work for all of them, but it is a really effective go-to-market strategy for the right set of companies.

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Michael Grinich (04:36):

So you folks have customers paying you half a million dollars a year, or more, millions of dollars a year, some really large organizations powering a huge amount of their infrastructure. You can also sign up on Cloudflare today with just a credit card and pay you guys 30 bucks a month or something. How do you have those two motions in tandem? Talk about kind of how they interplay and how they grew out together.

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Michelle Zatlyn (04:56):

It's interesting, when you think about when we go back to the beginning what I was saying, when we first started helping the small businesses and the developers and the nonprofits who had no other alternatives at the time. To do that, there's a couple things. First, you have to have the right price point and so free and $25 a month and $250 a month, those are good price points for that segment of the market, which was great, and you have to make it really easy to use because you can't afford to have people on the phone troubleshooting when someone's paying $25 a month. The economics just don't work in that sort of business.

So it forced us to be very easy to use. It's interesting, early on we obsessed over how long did it take to sign up for our service and it was always less than five minutes. We still have a stopwatch where we would time the average customer signing up to make it so easy. We're really technical. We help provide cybersecurity, performance, reliability. We build infrastructure for the internet to make it better for all these websites and apps and entrepreneurs building what they're doing, and businesses. We're super technical, but we made it really simple for anybody to sign up.

We even used simple language, Michael. We used things like “Give us five minutes and we'll supercharge your site”. We used that for over five years, that tagline, that was on our landing page. We didn't even talk about cybersecurity on our landing page. We just said, "And we'll supercharge your site or app or APIs, whatever you're using." That worked extremely well. As we went up market, today, you're right, we do have a lot of multimillion dollar customers and it's interesting, there were lots of competitors in that part of the market, which is why we started with this other part to build up our product set and now we have feature parity and more because we've learned.

Today, when I talked to our enterprise customers, they all, in the top three reasons why they love Cloudflare, say because it's so much easier to use than our competitors. It's only easy to use because we had to service all of the free and $25 a month and $250 a month customers, which were big numbers and we had to make it easy to use. It was interesting for all our competitors who started in the enterprise, they didn't have that constraint. If you can do that, it's magic. Because now, today, Cloudflare does service this wide set of customers. We have over four million accounts using our service, over 21% of the web using our service. It's a lot.

It's huge scale and all of a sudden it helps become this flywheel that gives us better data so we can build better cybersecurity products and better performance products and better privacy products. Guess what? That drives more customers to sign up and then your revenue grows and it just becomes a slight flywheel. Oh by the way, it's easier to recruit because now you're winning in the marketplace. All these things become easier if you can do it. But this ease of use for having to service what sometimes people describe as a long tail, that constraint ended up becoming a superpower.

We went to the enterprise because they were used to having to call professional services team to do something and now all of a sudden the engineers that work in these companies are like I can just do an API call or I can click a button in the dashboard and just works instantly without having to call someone and taking hours or days. So I think that ease of use became really, really powerful as we went upmarket.

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Michael Grinich (08:00):

I want to ask you more about sales. So Cloudflare is probably one of the most technical products out there and it's not just one product. There's a bunch of different pieces to it that you can buy or kind of put together in different ways. How does your sales process work in this regard with such a technical buyer in such a technical experience? Most salespeople are not that technical. How have you navigated that and what is your sales motion like today?

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Michelle Zatlyn (08:21):

Okay, I'm going to answer your question, but first I'm going to make another point, which is so important. I did not understand this. If you work at a company that is doing anything less than 200 million in revenue, the really important thing is you're solving some problem for our customer and it's great. If you have real revenue of 50, 60, 70, 80, 100 million, anything north of 100 million, you have that too. I mean, that just doesn't happen. But the key is if you want to build something truly iconic, and companies want different outcomes. If you want to do something truly iconic, you got to figure out what your second act is.

You got to expand your product set because you will run out of market in that first thing where you found fit. The whole point is you got to keep growing your revenue and growing what you can do for customers. So the best companies in the world, you take somebody like a Salesforce, they do 30 billion in revenue. People think of them as Salesforce CRM and they do do that, but they also have four other revenue streams. Now, that Salesforce CRM where it's like managing sales teams, sales forces, that's only like 17% of their overall revenue. They get revenue from all these other places, commerce cloud and all these other places.

So that's how they went from a billion dollar business to 30 billion, they kind of expanded what they did for their customers. So as we went from 100 million to a billion, we added a lot of capabilities. Of course we protect websites and apps and APIs from cybersecurity threats and reliability. But we also now do something called zero trust, which is employees and protecting them. That is a bigger market than the first thing that we've set out to do. By the way, we have to build all the features to be able to compete there. We have a whole set of developer services that run on this global network that we run, which is an even bigger market than the first two combined.

What is interesting is you don't get all that market on day one, but all of a sudden you can say, "Hey look, we have a plan, we have a strategy of we're going to keep winning the hearts and minds of our current customers, expand what they do with us, adopt other areas, and over time we will be able to grow into a really large, repeatable, scalable business." That's very sexy to be able to say if you are at a company that's less than 500 million in revenue to have that.

The companies that get into trouble, and there's many, is where they don't know what to do next and they kind of get to this 1 billion revenue, maybe 2 billion revenue, but they don't know what to build next, and then they run out of runway to go win in the market. Often those companies end up getting acquired or taken private because they just can't stand alone as an independent company and that's okay, but that's a risk if you go that way. So it's really important. It makes it hard. It makes it hard if you're running products.

Because all of a sudden you're like, "Okay, well, I have all these product features to go solve our current customers' problems." Especially if you're going up to the enterprise. They have lots of demands or speaking really loudly, you're like, "Okay, I know there's revenue tied to this." But then also investing in, okay, what's the next act for our business? I think really for anybody, and this is not just like the CEO, it's anybody working in a company that's between 100 and 500 million in revenue, these are those sorts of things and priorities you’ve got to make internally.

But if you can do that really well, you will blow past that billion dollar in revenue run rate and grow for a long time and that's really good. So you kind of want to cross that chasm. It's hard to do, it's easy to say. You’d rather be doing more and making progress on both acts than being the best in the world at act one and not knowing what to do next. Having seen lots of data points on both sides, I'd take the first camp any day of the week versus the second camp. So there's that.

So then you asked about the sales process. Well, it's interesting. We started out as a company where customers came to our website and signed up and we never talked to them because it just worked. We had a support team, we helped answer problems, but they just worked. But over time, when you start to sign a $500,000 deal or a $10 million deal, unfortunately customers just don't show up with a credit card and pay $10 million. It just doesn't work like that. They want to talk to people, they want to run pilots, they want to know you Michael as the CEO, they want to know me. It's a very different sort of thing.

So you got to bring in that capability in-house, and the question to ask yourself if you find yourself in a business going upmarket to the enterprise is the rate at which you layer that in and it doesn't happen overnight. You can't do it overnight. You got to keep layering, keep gaining ground, and over two years you look back, you're like, "Wow, we've come such a long way." Then you keep investing behind it as you have success versus building an enterprise ready organization and then saying, "Hey, we're open for business." That's not, in my experience, how it works.

It's you start to work with them, you start to build up the materials, you start to bring in more DNA, you start to bring in more salespeople who have real existing relationships with these accounts you're trying to go after and it becomes more of an iterative evolution of what you're doing versus you build it all and you kind of unveil it one day and you hope people show up for business.

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Michael Grinich (13:07):

I want to go back to something you said about multiple products. You kind of nailed this thing. I think it's really important. You mentioned Clay Christensen and The Innovator's Dilemma, that kind of classic situation of needing to build your second act where companies stumble in that way. Cloudflare has done this really well. You have a bunch of different products, you've made a bunch of different bets. How do you balance that? How do you think about where to make new bets and really how to create that culture of innovation inside the organization when your first chapter is still doing well?

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Michelle Zatlyn (13:34):

Yeah, we're very proud of that and I think now we get a lot of credit for it. A few years ago, I remember we have a senior leadership team as all of you do or will, and one of our senior leaders came into our weekly [Senior Leadership Team] SLT meeting and said, "Hey, this weekend someone said to me, Cloudflare is a mile wide and an inch deep." It was interesting. Someone said, "Was that a compliment or a slight?" I think today it seems really smart that we do a lot of things. When we were doing it five years ago, first of all, it wasn't clear it was the right thing to do to the outside. So we were getting no external validation. So it's lonely sometimes making good decisions.

People are saying we just look like crazy people shipping features all the time. We had a strategy, we were very deliberate saying, "Act one, make it as great as possible while also investing in act two and act three." Part of that was we have a culture where we ship internally at Cloudflare and ship is not just an engineering or product term.. It's like ship, start something, middle, end it, ship it, start, middle, end, ship it. It feels really good to be on a team that's shipping. It feels really good to say, "Oh wow, that person's doing something really cool."

What I found is when we were, I don't know, 100 people at a company, you know everything going on, so you're kind of part of everything shipping, you cheer. As you get to 1,000 people, all of a sudden you can't keep track of everything going on. But you want to trust your colleagues internally that they're shipping their part of the business and instead of being like, "I need to understand everything," cheering them, being like, "This is amazing that I get to work on these things, start, middle, end, ship it, and that I have colleagues working on totally different things that all add up to something bigger than myself." That is real, the magic if you can make that work.

So we had this real culture of start, middle, end, ship, ship, ship. We still do. We ship a lot of stuff, always with a strategy of what we're doing. Then the second thing we did, which is really interesting, was we brought down the cost of innovation. Where we had two engineers come to Matthew, who's my business partner, our CEO, and said, "Hey, we have this idea, we want to launch a consumer DNS service." Matthew's first reaction was like, "We sell to businesses, no one even knows Cloudflare, no one's going use this thing." And they said, "Hey look, it'll take us two weeks."

He was like, "Okay, fine. If it only takes you two weeks, sure." It did take them two weeks. That ended up, that conversation and that pilot ended up being something called 1.1.1.1, which is a consumer DNS resolver that is now the second largest in the world. So lots of people have signed up around the world and it took us longer to negotiate the IP address than actually build the service. But the whole point was two engineers with an idea could go do it in two weeks and kind of get a working model. Then it was like, "Whoa, this is actually really..." It was fast or was better and there's lots of other strategic reasons why we were going to do it. It was like, "Yeah, let's go and launch that."

So if you can bring down the cost versus not everything taking nine months or all these people. That's really, really powerful. Actually, it's interesting, back to what was a secret weapon is because we started by servicing free and small business owners and developers and nonprofits around the world, we have a lot of people who want to try these new things and they're fine if we break their websites because they're like, "We want to opt into the beta early stuff."

So we actually can build stuff and find an early audience to try it and give us feedback and see if it works. So we're not just in our own little bubble. So I think it's those two things where it's, hey, we had a strategy, empower your team to get things done and ship it, version one. You go from version one to two really quickly, two to three really quickly, and then lower the cost of innovation within your company. That's how you can get a lot more done with the same sort of budget envelope or same number of people that you have anywhere else.

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Michael Grinich (17:17):

Can you talk a little bit more about building for those enterprise customers? As you started getting pulled upmarket, how did the pace of innovation or the things you focused on change for those larger organizations that you were looking to serve?

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Michelle Zatlyn (17:29):

It was interesting. Again, I'm going to say some very obvious things, but maybe I wish someone had told me when we were about 300 or 400 million in revenue. Enterprises actually don't care about the latest and greatest feature. They really don't. They want stability and control. So it's things like access control, of how you manage the accounts become very attractive to a large enterprise, whereas a small business really doesn't care about that. So it’s these sorts of things that are never going to make it on the cover of Hacker News. No one's going to write in Hacker News about your amazing access policy from the enterprise product. Turns out to be really important.

Logs, audit logs so that enterprises can audit people making changes and are there good versioning and control, super important, not flashy and they're not going to be on the cover of Hacker News, but really important. So you want to take that seriously and the sooner you start the better it is. Because it just gets baked into the foundation of what you're doing. I think what was interesting is what some of the things we said internally, which may resonate with the group here is you want to keep easy to use and you want to have control. You don't want to co-mingle those things.

Everything needs to be easy to use and we need to have tons more control for large organizations, big teams that need it. Those are two humps on a camel, not one hump. If you merge the two you can really end up, I think, with a mess. So try to keep those separate. So that's one thing. The other thing that I wish I had known earlier, which I'm going to share with everyone else so you can learn from some of our mistakes, is when you are figuring out your second act and third act, even if it's not feature complete, go into these large enterprises because you do have a relationship with them, and if you don't, you should.

They want to know you. When a contract size is $100,000, maybe you don't need to know them, but if you want it to be a million dollar plus, they're going to want to know you, right? Some procurement or C level exec there is going to be like, "You're spending over a million dollars with this company, do you know them? What's their plan? I want to meet them." Again, a million dollars is a lot of money compared to $80,000 a year. Just very different levels. It's interesting, what you can do is when you know what else you're building next and you have these relationships, you should go in into the enterprise and sit down and say, "Hey, here's what we're doing today. Here's what we do for you today. Here's what’s on our roadmap to build. So as you are thinking about this next area internally, we'd love to be in the consideration set," even if you haven't built it yet.

Because what happens is at large enterprises, for them fast is 9 months or 12 months. At a startup, you've built a lot of things in nine months usually or at any scale or growth company. For some of them like that, nine months is really like two years. What you want is you want them to know where you're going, where the puck is going. I'm a Canadian, I love hockey. So that quote, “skate where the puck is going”. You want to share with them here's what we're building. So that as that consideration comes up internally, they look to you versus a new vendor and you having to displace a competitor even if you're not feature complete today. So I guess, have the confidence to share that with your customers because then you get the slot or first bite at the apple versus having to displace somebody who's already in the market and have to displace them in the long run.

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Michael Grinich (20:43):

So you've been running Cloudflare for 13 years. Looking back, what surprised you? I'm curious what you might have done differently or what advice you would give your past self?

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Michelle Zatlyn (20:53):

The best part: people, teams, the people you work with. It's amazing. It's amazing what a group of people who are smart rowing the same direction can accomplish. That's both internally, that's with partners, that's with customers, that's with your board, that's with your investors. I think early on, I took some of that for granted and if someone looked at me the wrong way, I was like, "Oh fine." But that probably was immature on my side. At the end of the day, it's a very connected world and if you can have more people rooting for your success over time and rowing in the same direction and helping you out and even if they're full-time employees or partners or customers or just champions on the sidelines, that's better than not.

So I think that that is something that I cannot emphasize enough. Even people that work for you, they probably are not going to stay as long as you are. You are going to outlive a lot of folks. I remember early on I used to take that really personally. It's hard. You're like, "We're not done yet. What do you mean you're leaving? We're not done." Now you realize those folks sometimes end up going to work and they end up becoming your customers or they refer people to come work for you or they end up coming back and working because they realize, "Hey, I went and tried something else and I missed this place and I'm coming back." Those are all good outcomes too.

So I think that the people side is so important. So value your relationships both at work and in your personal life. I'm 13 years in, I'm married, I have two kids. I'm really proud of that. Matthew and I are co-founders. We still get along. There are way more stories of people not having that than having that. I really am very proud of that. I think it's made us, allow us to go attack the opportunity and the problems and dream big and be ambitious with very little drama internally. I think that is just something that I can't say enough.

The second thing I'll just say is when you're at these growth companies, it's amazing. So exciting. It's just like the hearts and souls and what you can accomplish and you're going to have some sacred cows that will change over time. So they don't change very often, but there's certain things that will get you to 400 or 500 million in revenue that actually will slow you down if you keep that sacred cow from 500 million to a billion. So you shouldn't be revisiting sacred cows every year because they're there for a reason. But your greatest strengths end up becoming your greatest weaknesses if you don't evolve it.

So I think that's maybe a big lesson learned going from kind of 100 million to a billion in revenue. Because otherwise what happens is you end up with 3,000 people at your company all thinking that is a truth and it was three years ago, but it no longer is. So you have to give people the permission to say, "Okay, that used to be the case, but should it still be the case today? Because you've hired all these great people in and to unlock the next second act or the next set of customers, maybe that can no longer be a sacred cow." I think that that for founder-led businesses is a hard thing to do.

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Michael Grinich (23:47):

I think that's a really great point to end on. Michelle, thanks so much for joining us.

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Michelle Zatlyn (23:51):

Thanks so much for having me. Good luck everyone.

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Michael Grinich (23:58):

You just listened to Crossing the Enterprise Chasm, a podcast about software startups and their journey moving upmarket to serving enterprise customers. Want to learn more about becoming enterprise ready? The WorkOS blog is full of tons of articles and guides outlining best practices for adding features like Single Sign-On, SCIM provisioning and more to your app. Also, make sure to subscribe to this podcast so you're first to hear about new episodes with more founders and product leads of fast growing startups. I'm Michael Grinich, founder of WorkOS. Thanks so much for listening and see you next time.

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