CloudFlare Is In Talks to Raise Funding At Near A $1 Billion Valuation

CloudFlare, a San Francisco-based startup that protects websites from security threats and speeds up their load times, has been in talks to raise funding at a valuation that is around $1 billion, according to multiple sources familiar with the discussions.

Apparently on the back of the company’s growth, there was inbound interest during the last three to four months with at least one firm agreeing to north of a $1 billion valuation. A few other venture firms have given pushback, saying that a $1 billion post-money valuation is too high.

The company itself says it has no need to raise funding, with the majority of its last $20 million round still in the bank. (And no, they didn’t plant this story because I heard about it through other backchannel chatter about Sand Hill deal flow.)

“Cloudflare’s team is working to address some of the Internet’s hardest challenges. We’re literally building a faster, safer, smarter web,” the company’s chief executive Matthew Prince told me. “We’re in a fortunate position where we don’t need to raise capital and have no immediate plans to do so.”

CloudFlare is Prince’s third company after two anti-spam startups. He’s probably one of the more degree-laden founders around with an MBA, a law degree and a background in computer science. CloudFlare was a runner-up to Qwiki at TechCrunch Disrupt back in late 2010.

Why a $1 billion valuation? Here are the pros:

CloudFlare piqued investor interest after a presentation the company gave at an Allen & Co. retreat for late-stage companies and potential long-term IPO candidates.

It was the company’s growth numbers that had people talking. CloudFlare is serving more than 40 billion pageviews per month and is on track to do more pageviews than Yahoo by the end of the year (although this isn’t a direct comparison as I’ll explain later on).

CloudFlare is adding about 30,000 customers per week, primarily through word of mouth. Publishers use CloudFlare to speed up their load times and fend off attacks. During Russia’s presidential elections last month, several news agencies and bloggers used CloudFlare to hold off DDOS (or distributed denial of service) attacks that would’ve taken them down while they published reports on voting irregularities.

The most eye-catching slide in the deck was one that showed the time it took for different pioneering Internet companies to reach 400 million unique visitors. It took Google seven years to get there, 5 years and 7 months for Facebook to get there and 5 years and 2 months for Twitter to get there. CloudFlare got to this benchmark in 1 year and 3 months.

The company has a mixed revenue model with paid services and advertising. Publishers can either use CloudFlare for free, or pay at least $20 a month for it. Then there’s a forthcoming enterprise plan that’s presumably more expensive for bigger sites.

CloudFlare is also experimenting with serving advertising on error or 404 pages (the landing pages you end up on when you type in an incorrect URL). A little under 4 percent or about 1.5 billion pageviews in CloudFlare’s network are error pages. On these pages, they’ll show search ads that might redirect the user to where they really want to go. Since these are search ads and not display units, they would have a higher cost-per-click because they better match a user’s intent or are closer to a transaction point. Prince says there are several other publisher services and products that CloudFlare has yet to launch.

And why not?

Well, from what I hear (and Prince wouldn’t comment on this at all), is that the company did about $250,000 in revenue in 2011. This would be an extremely high trailing revenue multiple so it’s understandable why there are firms backing off at this valuation. Not that the lack of revenue has stopped anyone from valuing other companies at $1 billion if they have tens of millions of users and off-the-charts engagement metrics. Cough. Instagram. Cough. Pinterest.

Also, it’s not a totally accurate comparison to run CloudFlare’s monthly pageviews against those of consumer-facing companies like Tumblr or Yahoo, since CloudFlare’s business relationship is with the publisher, not the end-consumer. In both good ways and bad ways, that affects CloudFlare’s monetization strategy. On the one hand, CloudFlare can actually charge users for its product. On the other hand, any advertising solution CloudFlare that comes up with would have to be attractive to its publisher clients. And publishers can be very finicky.