The story of NEA and CloudFlare: From sandwiches to $1B valuation

Matthew Prince, CEO of website security and acceleration startup CloudFlare, had more venture investors than he knew what to do with this past December.

“We had crazy-high offers that were well over $1 billion valuation,” Prince said in an interview for this week’s Business Journal cover story, “Billion-dollar baby boom.”

Prince’s tale isn’t an unusual one among the record number of venture-backed private companies who have achieved 10-figure valuations before going public or being acquired. Year-end reports show that the number of funding deals declined nearly 12 percent in 2013, but the amount invested jumped by about 8 percent. And many VCs were chasing a handful of very hot companies like CloudFlare.

Prince turned for advice to Scott Sandell of New Enterprise Associates, who has become a trusted adviser since investing in CloudFlare’s $20 million Series B round in July 2011.

“I told Scott, ‘People are offering a lot of money at very high valuations, but I just don’t like these people,” Prince said. “Scott told me to just go with my gut.”

In the $50M round that launched CloudFlare into the billion-dollar club, Prince decided to go with Union Square Ventures and Greenspring Associates in addition to NEA and other existing investors Venrock and Pelion Venture Partners.

“We have spent a bunch of time figuring out the right people to bring on as investors when we have decided to raise money,” Prince said. “That’s how we wound up with Scott and NEA in the first place.”

That relationship almost didn’t happen. When Prince’s team pulled together a list of venture capitalists they wanted to talk to regarding a Series B round just before Halloween 2011, Sandell’s name wasn’t among those under consideration.

“The business had taken off like a rocket, and we put together a series of meetings with venture firms that we wanted to hear pitches from for our Series B round,” Prince recalled.

Just before the meetings, though, Ray Rothrock of Venrock — a trusted Series A investor —called.

“He said, ‘There is a guy I ran into at lunch and I really think you should talk to him,” Prince said. “I told him, ‘Ray, we have spent a lot of time on this and have the firms all lined up to make their pitches. It’s too late.”

But Rothrock convinced him to take the meeting, and a preliminary breakfast led to an invitation for lunch the next day.

“Scott later told me that he decided to invest in us in the first 10 minutes of our breakfast,” Prince said.

When he showed up for lunch at NEA’s offices at the luxurious Rosewood in Menlo Park, Prince found a pile of sandwiches on Sandell’s desk.

“He told me, ‘ I didn’t know what you like, so I ordered one of each,'” Prince laughed. “I don’t think they came from the Rosewood, maybe from Subway or something like that. I don’t think I even touched any of them. I was just swept up in the meetings and the people I met there that day.”

One of the people who dropped in was NEA co-founder Dick Kramlich, who told Prince he reminded him of Silicon Graphics and Netscape co-founder Jim Clark.

“Meeting somebody like Dick Kramlich and realizing that he still had a seat at the table at NEA meant a lot to me,” Prince recalled. “Then this guy named Greg came in, asked a lot of technical questions and left. He was wearing kind of ratty clothes and I remember wondering, who is this guy? He had really nice hair and incredible glasses, though.”

The guy in the ratty clothes and nice glasses turned out to be Greg Papadopoulos, the former chief technology officer at Sun Microsystems who had joined NEA as a partner.

“When I found that out, it blew me away,” Prince said. “All I remember was that he understood what we were doing immediately and asked all the right questions. He left the room for a while and came back, telling Scott, ‘I think it will work.'”

All told, the decision to bring NEA on as an investor took about seven days.

“Scott has been an incredible adviser and board member ever since,” Prince said. “That is actually more important than the money and that is what he advised me when I asked about our latest round. Go with your gut.”

The admiration is mutual, according to Sandell, whose track record of backing billion-dollar companies has landed him near the top of Forbes annual Midas List a number of times. His firm has enjoyed the most billion-dollar exits in the past 10 years, along with Greylock Partners and Sequoia Capital.

“Cloudflare is one of the first companies that come to mind when I think of who might become a ‘super unicorn,’ one that turns into a $100 billion opportunity,” Sandell said. “What’s exciting to me about CloudFlare is that they already have over one-third of existing Internet users on their platform and they are processing about 5 percent of total global Internet traffic, accelerating it by more than double with a relatively modest infrastructure footprint.

“They are in the process of building a better Internet, one piece at a time,” Sandell said. “That is exactly the kind of company you want to invest in.”