20VC: The Two Biggest Mistakes Every Founder Makes, Why Founders Are Not Ambitious Enough Today, Why Having a Narrow Target Customer is Dangerous & The Three Possible Outcomes in Company Building with Matthew Prince, Co-Founder @ Cloudflare

24:44You know, have professional investors. So we were mess with, like at Clubfoot, we never raised like angel money. We never raised from friends and family. Literally until we were going public, I know we let folks like that invest the IPO, but we didn't do it otherwise. In large part because we're like, listen, we were gonna be a one or a zero. And most likely we were gonna be a zero. And if we were a zero, like yeah, it's not if we lost lost Ben Rock's money, but that's their job. And it was good. So I actually think the quick failure is it. It's a good outcome. The worst outcome by far is the slog, where you have these companies that are growing just enough that it feels like success is just over the next hill and so they can't stop but nobody cares about them anymore and their investors are tuned out and dread every board meeting and and you've got I would guess a bunch of slok and I've got a bunch of friends who I love and admire and respect they're in the slok and you can wake up very very quickly and 10 years of your life has gone like that.

25:44And you look back and again, you can talk about this from it, you get diluted, you get all this, but the real thing is like you just aren't proud of anything that you've done and you've stopped learning about interesting things. That's the really bad outcome and that's the outcome to try and avoid. Again, as a framework, does that sound like it kind of makes sense? We are totally aligned on that. 100 % agree. So then you start to look at, okay, what is the path to doing this? And I think that the number one most important thing that you can do as a founder, to try to get to success is higher and recruit incredible people.

26:22Companies are just collections of people. The hardest thing by far that you do early on is recruiting. It is so incredibly difficult. So now the question is, and maybe again, this is gonna get down to somewhat semantics. But now the question is, Let's say that you're Toby and you're starting Shopify and you have two different options. You can be like, I'm going to build software that's really good for snowboard shops in Ottawa, Canada to sell snowboards. That's again, that's the impossibly small audience, the impossibly niche product. And now you got to go out and recruit people to do that. Versus, I'm going to build the thing that is the replacement for Amazon.

27:06but allow anyone to have control over their brand and their identity and give them the power to do that. Which of those pitches gets you better engineers? Honestly, I don't see it in that way. I think you have to show a journey from one to the other. But I think if you have an engineer that just sees a fluffy vision of what we're gonna take on Amazon, they go, yeah, good luck. You live in London, right? Yeah. Yeah, and you know, it's one of the really interesting things. It's like, why is the Bay Area still the best place to start companies? Oh, the unbridled optimism and the view that you can change the world.

27:43When we were starting, and by the way, it's why the best place to start companies, but it's a terrible place to scale companies. Early on, we were like, we're going to run the internet. I'd give you a new watch, the TechCrush pitch. There's a judge at the end of it. And he asked, what's your vision? And I was like, our vision is to run the internet. Mike dropped, right? And it didn't seem absurd, right? Early on, we would ask questions, like if Cloudflare ran the entire internet, what would the right thing be? Technically, from a policy perspective, from a product perspective, and because of that, we were able to attract incredible people.

28:22If we had said that what we were going to do was help protect small business websites from cyber -text, which is even that's a pretty big vision. We would not have gotten the people that we got early on. My point is that only it's binary Matthew, which is like you can say we're starting here. And when we do this, this, and this, that leads to this unlocking. And we then have the greatest ones to make it. Then you're still pitching them the big piece. And I would say also, it's really hard to know that you think is going to work initially. So for instance, when Klafly launched, we had a problem.

28:57We knew in order for this to be a big business. We needed to sell to really big banks and governments and financials, hospitals. We needed to sell like multi -million dollar contracts on our regular basis. That's what we do today. But in order to do that, we had to build models to give them some level of security. In order to do that, we needed to have data. In order to do that, we needed to have customers. So in order to get customers, we had to have data in order to get data. We had to have customers. We had this chicken and egg problem. And so we set out and we said we're going to launch with a free version of the service and we're going to you know just make it available to everyone.

29:36We didn't target who it was but in the back of our mind we thought that who would side up for the free version of the service was going to be a bunch of startups and you know individual developers and things like that and that's not what happened at all and if we had really said we're going to focus on this and start there and And you know, constraint like and marketing copies that you know, Cloudflow as a service for startups, small businesses and ended all those things. You know, if we started with the narrow funnel, then we would have figured out what happened, which is we made it and the reason why the way why that worked is if you imagine that's why access and the x -axis is budget and the y -axis is how many cyber threats you face.

30:17There's almost a perfect line that is the smaller your budget is, the less cyber threats you face, the bigger your budget, the bigger the cyber threats you face. with one notable exception, which is civil society and human rights organizations. We would have never thought to go talk to civil society and human rights organizations. And yet, when we open it up, civil society and human rights organizations have no more snow budget, but they have chew, chew, chew security risks. And so when this company came along and said, hey, where are you with this free version of the service, all of a sudden they flocked to what we were doing.

30:47Because again, we started with a really big vision, and we hadn't known who would initially sign up, but it was open anyway. I mean Yahoo could have signed up for maybe it would just be crazy, but they didn't because it didn't make sense We really had no no specific that was what allowed us to find the market in a way Which was very different than you would that he would otherwise I think that's a very specific example related to cloud five for being on in stifling No, it's even the examples you gave so the eBay example you're like eBay start with beanie babies So I've talked to the founders of eBay about that.

31:19That's complete and utter PR retrospective BS. And the reason that a lot of stories look like that is because almost nobody wants to tell the story of hugely ambitious entrepreneur sets out on hugely ambitious tasks and succeeds. What they like is the story of cute thing started small and then turned really big. So the beanie baby story is a complete and total made up PR. But I'm not saying you're conflating things if we're being honest, Matthew. I'm not saying I'm against hugely ambitious founders. I'm just saying that having a very targeted ICP to find your first 1000 true fans is a core tenant to what it takes to build a successful business.

32:09And that's all you're saying, fine, but that's a very, very, very narrow claim. And the risk of it is again, if you start out with, we're gonna build the snowboard, power, shop, and auto up. If you don't get that right, it could be that it's actually people selling teapots where you find that initial task. As soon, if all you're saying is cast a wide net, but then appreciate your early customers and double down and focus and really understand them, then that's fine. In our case, the first thousand customers were all over the place. I can't tell any discernible pattern between them, except for that they were crazy enough to sign up for us.

32:50We spent a ton of time getting to know them and focusing on them, but it was always to just learn and improve the product. What we were trying to solve was still pretty ambitious for them, but if all you're trying to claim is, focus on your initial customers and really love and respect them, that's great. But where it runs a risk is if you start to say we've got to do X, first of all, you'll attract people that think X is even though you say the journey is much longer that they'll think that that's the end state. And then secondly, it might be that you start to optimize for that end state where you're like, yeah, we're going to have the snowboard wax module and the bindings module and we're going to focus on those very nichey things which turn out to actually then hamper you in terms of building towards that generic larger vision.

33:40So again, if your claim is small as it's sounding like, then yeah, but then it's impossible to disagree with. But I think that it is very hard to find an actual startup founder that started out saying, we're gonna do this small, nichey thing, and then it grew into this big task almost everyone early on. You know, it's why founders can come across as so crazy is because of the fact that they do have these wild big visions. I get you, but they start off with a very specific ICP, which is what I'm saying, which is a thousand tree fans. The bigger challenge that I see, typically, founders actually like set the box that they're shooting for, much too small.

34:19Where, you know, you, I just got a pitch from, from someone who I have a ton of respect for, you know, is building something. Even if you're wildly successful at this, it's still just not that big a market. Does it unlock something else? Does it open the door for them to be able to do another product? Maybe, but it is Ray Rothrup is one of the early investors in Cloudflare. He said, you know, usually you start a company that he backs. Usually you start with this big vision and it just gets narrower and narrower and narrower and you end up in this smaller box. I think it's actually very hard. I spent some time this morning trying to think of an example.

34:57I think it's really hard to find the counter example of you start with what is a more limited vision and what you're going to say is, well, your vision and where you start, those are different things. I think you have to be careful though, because it turns out where you start, people start to optimize for that and you can find just local minimums and you can spend a whole bunch time on that local minimum. I think you really do have to articulate what that bigger vision is. And in doing so, I think it's very rare to find someone who said, I started out just trying to build, you know, the platform for people to sell snowboards and I ended up building Shopify or I started out, you know, building that small thing.

35:36I think that's a very, very, very rare case. We're aligned then. Yeah. When you were fundraising, you have to present in the big picture. You have to present why. You're really raising up to the present every picture. When you're recruiting, you have to present a big picture. Even when you're just trying to keep your mental health of why is this so hard, you have to believe in that big vision, the curse is that founders try and do all the things they try to understand all four corners of the problem that they're trying to solve. But I'm totally with you there, but you do have to show a tie back to where you are today and the proof points and milestones that you think you unlock over time that will get you there and just put just wrong with me on this one.

36:18And on the customer acquisition side, we talked about funding and acquisition and talent acquisition. Cuffing with us, generally, they do care where you're going long -term, but they do also want to know about the efficiency that you've driven for existing customers, they want to resonate with your messaging today. If you're super horizontal product messaging, it's much harder to resonate with people. They want to resonate with you, go to market. It's got to be a channel fit with them and how they engage with their product buying. And so, actually, the here and now does matter that. Yeah. But again, I think that if your claim is as narrow as you're making it, then, yeah, sure you're right.

36:49But then just any entrepreneur who's just saying this, recognize that Harry's claim is extremely narrow and that really, again, that VCs want you to shoot for very big outcomes. They want you to take on tasks that if they're successful, you know, can get you sanctioned by Russia, find you in incredibly world -changing opportunities and sure there's a journey along the way. And it is very rare that you build the small thing and then it's like, wow, and then we realize we could build this bigger thing after that. When Zuckerberg starts Facebook, you know, it was like, well, he was just trying to build something for Harvard.

37:24You know, again, I mean, he asked to be on your bingo card of, I don't know, you don't play bingo in London, but you do know how that game works. Yeah. Um, they, it has to be on the bingo card of people that you have on the show simply to ask, like, okay, you know, sure you were building the thing for Facebook. Well, what was in the back of your mind? How early on did you think, wow, someday we could connect everyone online? And my hunch is, it was within the first week. I didn't disagree with that. Cool, but you agree. It's really important again when VCs say something like you need to focus.

37:56People can mishear that as it's important to start with a small thing and be very successful in that that small thing and then from that and you stay within the four corners of what you do. A biggest mistake that entrepreneurs make is picking bad co -founders. The second biggest mistake that they make is not setting their sights on an ambitious enough target. I think it's picking bad mokas. There's some mokas that just shit, Mackie. That's an ambitious enough target, right? It's like if all of a sudden you have quarter of the market on providing services to sell people like me, you know, a new car, that's a bad market.

38:33Even if you're wildly successful, it's just not a big enough thing. Is there any other BS that you hear from investors? You see on Twitter, they're like, God, I wish these guys would just know. There's a ton. Like, Michelle and I went just went back to TecCrunch Disrupt, which was a few weeks ago. And I remember where we were like, I wonder if anyone still comes to disrupt because we don't really think about it anymore. And you walked in and it was record attendance. And there's a lot in the early stage, start up in VC ecosystem that's a lot of sort of the cordon tree of, what is Harry think about this or what is Keith or boy think about this?

39:08And I have to confess, I haven't thought about that in a really, really, really, really long time. I think part of Cloudflowers success was, we were no buddies. We didn't know anyone. We didn't get invited to all the fun parties. We weren't part of the cool kids. And I think as a result, we just focused on how do we build the company. And so I just haven't, I did spend a ton of time thinking about it early on and I didn't spend a ton of time thinking about it today and yeah, every once in a while I'll see a tweet from so about you and I actually think there's a duty as somebody who has been successful.

39:40And you and me, while the successful's entrepreneur and having an outcome which is, you don't have to go public, you don't have to, you don't have to be a billion dollar idea. but I think you can have a amazing bootstrapped business that gets to, it's actually Michelle, my business partner, her husband, he's got two other guys, and the three of them just churn out bootstrap businesses and they try to get each of them to cash flow basically $3 million a piece. Basically each take a million dollars out and then they just do it with the next one, they do it with the next one. And some ways that's like the best possible business.

40:14So you're not thinking that case, huh? I wonder what they could do if they actually focused. Clearly very talented into it. If you can have reliably from a SaaS business that you don't have to spend them a shimon, a million dollars that comes off of it, and then you can with two of the people who have different skill sets and you work well with, can go off and build a second one, a third one, a fourth one. That's pretty good. It is, but why didn't you just build the first one, or second one, to something much bigger? It could things compound over time and get easier a generally speaking. Again, that's the place where focusing on a niche makes a time of sense.

40:46The guy, you know, what to business school with. Well, we're in the same business bank off of dishes. You have Cloudflare on one side and then the other person, you know, will Dean who started Tough Mudder, which is a mud race. And I think it's an open question whether they've been more successful or we've been more successful. They have no costs. They've got this thing that's just a machine that just kicks off a ton of cash. and he can go and focus on other things that he cares about. Whereas, I gotta show up every single day. And yes, on paper, it's much less likely you're gonna have will on your show, but I'm not sure that that's optimizing for what real success is.

41:24Whenever he told me somebody, he's like, success will be when you're walking through an airport and you see someone wearing a tough mutter t -shirt. And every time I walk through an airport now, there's someone wearing a tough mutter t -shirt. So they've done, they've done really well. Baffee, does money make you happy? Not having money sucks. Like what I couldn't pay my rent, that made me very unhappy. But I think there's a certain level of wealth that you get to, where it turns out that cars are cars, and I've never really been that into cars. So like, you know, I drive a fine car, but I've never optimized for that.

41:56Houses are basically houses. And so once you can afford a car, you can afford a house, you can live in a place which you enjoy. You can know that your kids are going to not only eat, but be able to go to school wherever they are. That the marginal value from each additional dollar is I think not the thing that motivates a many people. I think some people use it as a way to keep score. How do you keep school then? Do I feel like we're making the world better? And I hope that we're then generating enough wealth across the entire company where the people who have come on this journey with us can do it.

42:30Another late night, Tuy -Auzin, it was in DC meeting with some of our team and one presenter, and it's like, yeah, emotional. I was like talking about, I was able to buy the house of my dreams because I came to work at Cloudflare. And I was like, that's what's really cool about being an entrepreneur is, it's not about you, it's the fact that the people who are around you are able to be successful. And that's true with the broader ecosystem. And I think it's actually really important as you think about who, even your partners are from a financing perspective. Everyone who bet on us, pre -IPO, made at least 10 times the money that they invested with us.

43:07The VCs are value -mathy. Of course. VCs are great. Public market investors are even better in a strange way, but for sure. A wide -published market for investors is better. For the same reason that in places where you have no fault divorce, you have fewer abusive marriages. Tons of research into that. It turns out that being able to get divorced makes for a better relationship. The hard thing with VCs is it's really hard for them to fire you or you to fire them like it's got to get really bad Before that happens and so it's harder than for each side to tell each other the truth and it risks becoming a really unhealthy Healthy marriage, which is part of the reason why it's so important to you know really think not to about the firm But about the people who you're gonna bring on and be a part of it because you're stuck with them for a really long time and there's really no good, easy, clean divorce from VCs.

44:01Vice versa is true as well. Public market investors are great, because they'll tell you the truth. You know, if they don't like what you're doing, they sell your stock. Everyone's like, but, you know, there's a short -term focus. There's so, like Bailey Gifford, who's, you know, one of Cleffler's, you know, top investors is Scottish firm. Their average holding period is 16 years. That's the average, right? So that's way longer than any VC that's out there. Again, if you can find the right Polar Park investors, they're super smart, they'll tell you the truth, and it's in part because of the fact that if they don't like you, it's easier for them to get divorced.

44:35I want to move into a quick fire on Matty, so I say a short statement and you give me your immediate thoughts, that sound okay. Sure. What's your biggest regret? I'll get choked up if I talk about it. So Lee, who's the third co -founder and for Chase, it's company more, but you had some I knew Lee longer than I knew Michelle and at some point in sort of the 2014 -2015 timeframe, he just started becoming a jerk and it was hard because it was like he was just being a jerk at work and it was incredibly disruptive. We burned through a lot of great people because of his behavior. I assumed that it was because you know he'd made some money and he basically even married that kid and then he got divorced and married someone from work and I figured you just were sort to like some people are successful and then they become jerks.

45:19And I figured that was what was happening with him. Instead, it turned out he had a pre -rare, neurological condition called frontotemporal dementia. It's the same thing that Bruce Willis has, but Lee was in his 30s, which is extremely rare for something like this. I have tons of regrets around that. I regret being as angry as I was at him because I basically had to fire him. And that was a super hard decision for me and then where I was a mess, he was like, yep, you're probably right, time to leave. And the reason why is the frontal lobe of your brain is the thing that is what helps you process and have empathy and have human relations.

45:51And if you look at the brain scans, it's easier to missing those. And so I have a ton of regrets around how that all went down. And I try now when people, their behavior changes dramatically to ask, is there something going on in their personal life? Is there something going on with their health? Is there something else that's out there? And that was an incredibly hard thing. At least still alive, but can't speak anymore is a hollow shell of the person who used to be. If you search online for what happened to Lee, there's a wired story that tells the story of it, but I have tons of regret around how we handled that.

46:23What one word which you most want to be on your tombstone and why that word? Internet. With a capital I. I wrote my color thesis on why the internet was a fab in 1996, in 1996, and I feel like I have a penance to undo that early wrong. I was born in 96, Maggie. Yeah, well, I'd say, and so where are you gonna...

46:47I'm 48, so I'll be 49 in November. It's only in the last, like, few weeks or there, but a handful of times where I felt really old and that was just one of them. So thanks for that, Harry. Listen, I'm always here to, you know, just bring you up, give you that positive boost. Were you named after the prince? I thought you were baby and be like contemporaries, but you're much, much younger. No, I'm much more and I don't, I don't look that old. I'm 27, Matthew. Like, I'm, you know, it's pretty weird to put it on profile. Your Twitter profile makes you look much older than you are. Yeah, I know. I'm just, you know, devastating, good skincare routine, which, you know, this secret to success and all things.

47:21You've got a pal, but one, you've got a dinner party. You can have a one -guest. Who do you have a dead or alive? Who do you have a my, them? You can offer them anything. So alive, I really admire Tim Cook. I think he's a very principled person every time I've interacted with him. He's just, you know, it's easy to poke at Apple as the most successful company in the world right now. But Tim just is a human, I think, is really interesting. And having grown up as a gay man in the South and having had the success he has, you know, I, way before Apple was sort of leaning into privacy, I heard him speak about how important privacy was for his life and his career.

47:58And, and I really admire how principled he is. Dad, I think that probably somebody who's thought really deeply about the sort of principles of rule of law, so maybe Aristotle, maybe Madison. Because I think that the interesting thing is that, for us, is that when you get to a certain size, we're all in the game of the trust game. How can I prove that we're trustworthy? That's a fundamental problem of governments is how do you continue to be trustworthy? And I think people who have thought about those challenges and really thought through how you put in place systems that create trust That's I think those are really interesting people.

48:36I'd love to have conversations with them Final one for you Matthew If you look at where we are today, which is circuit 20 billion rocket count people take into that Monday Ten years time what needs to happen for cloud flash be a 200 billion dollar company? I was hanging out with Parker Harris who's the other co -founder of Salesforce force. And this was right before the pandemic. It was January of 2020. And I was reflecting on the first 10 years of Cloudflare and every single day, including weekends and holidays. I did the math and at that particular time, we had generated something like $7 million in shareholder value every day since we had launched, including weekend and holidays.

49:19And I was like, I wonder how that benchmarks against other firms. And so I looked at Salesforce and what they had done over that same 10 year period, which was the second 10 years of their life. And I did the math. And every single day, including we get some holidays over that same period of time, they had generated something like $48 million of shareholder value, which is extraordinary. And I told Parker that and he's like, wow, that's so cool. I never thought about it that way. But there is something really incredible about subscription businesses. I think it was Einstein, although there might be Miss Crudit, who said that you're the most powerful force in the universe's compounding interest.

49:59And SaaS businesses have that natural compounding effect to them. And so, I think that as we look forward, we're on a pass from a billion dollars, a revenue to five billion dollars, a revenue. That's inevitable that we'll get there. It's just a matter of how long it takes. And I think that if you're solving big problems, as big as possible, unlike what Harry suggests. And if you're working on things, and if you have a business model, which is, again, in SaaS business, this is amazing, because they're in Harrelin Compout. Those are the ways to build very large iconic companies, and I think you're gonna see us and many others over the years to come get to $200 million.

50:35And by the way, that's still not success. We have a lot to go up with that. This is Matthew, I'm so thrilled that you did come and back on the tweet, regardless of agreement or not. I've loved doing this. To end being your cheap day, like everyone else you've got to email like 10 times with me and just like, sure, come on. Banny are 53 times unbelievable, he made me wait, but Matthew thank you so much and this has been amazing. I mean I thought Matthew was fantastic, I always love a guest who wants to debate, if you want to see more from us behind the scenes of course you can on YouTube by searching for 20VC, but before we leave each day, did you know that every 20VC episode you listen to is recorded with Riverside?

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