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, CoFounder @ Cloudflare

In a dynamic conversation on 20 VC, host Harry Stebbings and guest Matthew Prince, co-founder and CEO of Cloudflare, delve into the nuances of startup success, challenging the notion that focusing on niche markets is the key to growth. Prince argues that setting ambitious goals and casting a wide net is crucial, sharing Cloudflare's journey from a startup to a billion-dollar company. They discuss the importance of diverse co-founder selection, avoiding the 'slog' of stagnation, and the power of having a big vision to attract top talent and investors. Prince reflects on personal regrets, the significance of impact over wealth, and the potential for Cloudflare's continued exponential growth.

• Entrepreneurs often make the mistake of choosing the wrong co-founders.
• Another common mistake is not aiming for an ambitious enough goal.
• High ambition can lead to significant success, as evidenced by the speaker's experience with their pre-IPO investors.

"A biggest mistake that entrepreneurs make is picking bad co founders. The second biggest mistake is not setting their sights on an ambitious enough target."

This quote emphasizes the importance of careful co-founder selection and setting high goals. The speaker suggests that these two factors can greatly influence an entrepreneur's success or failure.

• Matthew Prince has scaled Cloudflare significantly in terms of revenue, market cap, and employee count.
• Cloudflare's mission is to help build a better Internet.
• Matthew Prince is noted for being one of the few tech executives sanctioned by Russia.

"Matthew has scaled Cloudflare to over a billion dollars in revenue, $20 billion in market cap and over 3200 employees."

This quote outlines the significant achievements of Cloudflare under Matthew Prince's leadership, highlighting the company's impressive growth and scale.

• Matthew Prince's parents were bootstrapped entrepreneurs, influencing his own entrepreneurial path.
• He never learned traditional job-seeking skills, instead focusing on starting businesses.
• His first money-making venture involved selling illegal fireworks at school.

"Both my parents... were both entrepreneurs and both bootstrapped entrepreneurs... So I think that I just assumed that kind of what you did when you were adult was you start hundred businesses, most of which failed, but sometimes they occasionally worked..."

This quote reflects on the speaker's childhood and the entrepreneurial environment he was raised in, which shaped his approach to business and risk-taking.

• Project Honeypot, a system tracking how spammers harvest email addresses, led to the founding of Cloudflare.
• The initial reluctance to start Cloudflare was due to the perceived difficulty of the task.
• Co-founder Michelle Zatlyn played a crucial role in recognizing the potential of Cloudflare.

"It was actually Michelle who was like, that's the idea. We're building that."

This quote captures the pivotal moment when Cloudflare's co-founder convinced Matthew Prince to pursue the idea that would become Cloudflare, highlighting the collaborative nature of the founding process.

• Matthew Prince has a deep connection to his work at Cloudflare, unable to imagine doing anything else.
• He believes entrepreneurs must either love what they do or learn to love it over time.
• His passion has grown with the company's mission to defend the Internet.

"This is the first job I've had where I haven't been imagining what else I could do."

The speaker expresses his profound commitment to Cloudflare, indicating that his work aligns closely with his personal interests and passions.

• Reflecting on his future with Cloudflare, Matthew Prince acknowledges the possibility of stepping away at the right time.
• He discusses the challenges successful founders face after leaving their companies.
• The intertwining of personal identity with the company is a common struggle for founders.

"I think that to be as successful as gates, to be as successful as Bezos to be as successful as Benioff, not only do you have to love it, but it becomes you and you have an enormous stake in the success of a firm..."

This quote explores the deep connection founders have with their companies and how this affects their identity and sense of self.

• Matthew Prince questions the definition of success, linking it to impact rather than market cap alone.
• He shares a personal experience where Cloudflare's actions had significant geopolitical impact.
• The speaker suggests that happiness and impact are closely related for him.

"So I think that happiness for me at some level is the seismic impact."

Matthew Prince defines his personal measure of success, emphasizing the importance of making a positive impact on the world, which he finds intrinsically rewarding.## Russian Atrocities and Ukrainian Defense

• Matthew Prince expresses pride in helping Ukraine defend itself against Russian aggression.
• He highlights the importance of his technology in allowing private and secure organization of protests, particularly by Iranian women.
• Matthew has been personally sanctioned by the Russian government, which he finds surreal but wears as a badge of honor.

"I've been personally sanctioned by the russian government which is somewhat surreal, but I'm super proud of that and I'm proud of the fact that we are continuing to help Ukraine win the war."

The quote reflects Matthew's sense of pride in being recognized for his contributions to Ukraine's defense and the broader implications of his work in supporting secure communications for activists.

• Matthew Prince was on an airplane when he found out about the sanctions and was concerned about flying over Russia.
• He mentions that he and two other tech executives, including Marc Benioff, were sanctioned at the same time.
• Matthew values his anonymity and the ability to live without public recognition.

"I was on an airplane and I remember thinking, God, I hope we're not flying over Russia, which we obviously weren't because the war had started and no aircraft flying over Russia at that point."

This quote illustrates Matthew's initial reaction to being sanctioned, revealing his immediate concern for his physical location and safety.

• Matthew Prince emphasizes the importance of co-founder relationships and division of responsibilities.
• He shares his negative experience from a previous startup with co-founders who were too similar to him, leading to conflict.
• In contrast, he and his Cloudflare co-founder Michelle have distinct strengths and responsibilities, which has contributed to stability and success.

"And what was interesting was when two of us stepped away from operating roles in the company, the company went on just fine without the two of us, because fundamentally, the problem was the three of us were the same person."

This quote highlights the issue with having co-founders who are too similar and the conflicts that can arise from a lack of clear, differentiated roles within the company.

• Matthew Prince discusses whether co-founders should be friends and shares his perspective that starting as colleagues is preferable.
• He believes that co-founders will inevitably become friends if they work well together.
• Matthew stresses the importance of having co-founders with complementary skills and perspectives.

"So I think you inevitably, if you do it right, become friends. But I think what you want to start out as is colleagues."

Matthew is emphasizing the idea that while friendship can develop over time, the initial relationship between co-founders should be professional and focused on complementary skills.

• Matthew Prince argues that diversity should not be pursued for appearances but because diverse teams are more successful.
• He believes that diversity in perspectives and skills allows a team to cover more of the problem space they are trying to solve.
• At Cloudflare, the diversity among the founding team members contributed to the company's success.

"The reason you do diversity is because more diverse teams win."

This quote succinctly summarizes Matthew's view on diversity, positing that the true value of diversity lies in the varied perspectives and problem-solving abilities it brings to a team.

• Matthew Prince acknowledges the difficulty of balancing personal relationships with the demands of starting a company.
• He shares his own experience of prioritizing the company over relationships and the eventual transition to stability and readiness for marriage.

"But I think what happened was company came first, and I screwed up a whole bunch of relationships because of that."

Matthew reflects on the personal sacrifices he made for his business and the impact it had on his personal relationships.

• Matthew Prince outlines the potential outcomes of venture-funded businesses: success, quick failure, and the 'slog.'
• He argues that quick failure is preferable to a prolonged struggle without progress.
• Professional investors are preferred over personal connections like friends and family to mitigate the impact of potential failure.

"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."

Matthew is explaining the least desirable outcome for a startup, where the company is stuck in a state of minimal growth and lost potential without a clear path to success.

• According to Matthew Prince, the most crucial step for founders is to hire and recruit incredible people.
• He emphasizes the difficulty of early-stage recruitment and the importance of building a capable team to achieve success.

"Companies are just collections of people. The hardest thing by far that you do early on is recruiting."

This quote underscores the idea that a company's success is fundamentally tied to the quality of its team and the significance of recruitment in the early stages of a startup.## Pitching Ambitious Visions vs. Niche Products

• Matthew Prince highlights the difference in appeal between pitching a niche product and an ambitious vision when recruiting talent.
• He suggests that a grand vision, like challenging Amazon, is more likely to attract better engineers than a niche product like a snowboard shop in Ottawa.
• Matthew implies that the scale of the vision can impact the quality of the team you build.

"Which of those pitches gets you better engineers?"

This quote questions the effectiveness of different pitches in recruiting talent, suggesting that a more ambitious vision is likely to be more appealing.

• Harry Stebbings discusses the optimism in the Bay Area that encourages people to believe they can change the world.
• Matthew Prince adds that while the Bay Area is great for starting companies, it's not ideal for scaling them.
• He shares how Cloudflare's ambitious early vision to "run the Internet" helped attract top talent.

"Oh, the unbridled optimism and the view that you can change the world."

Harry Stebbings identifies the optimism in the Bay Area as a driving force behind its success in fostering startups.

• Matthew Prince argues that a big vision was crucial for Cloudflare to attract incredible people and to address the right questions from technical, policy, and product perspectives.
• He emphasizes that starting with a broad vision allows for unexpected market discoveries, such as the interest from civil society and human rights organizations in Cloudflare's services.

"Our vision is to run the Internet mic drop."

Matthew Prince shares Cloudflare's ambitious vision, illustrating the importance of a grand goal in inspiring and attracting people to the company.

• Matthew Prince describes the initial challenge Cloudflare faced in needing data to build models for security, which in turn required customers.
• He explains how offering a free version of the service helped overcome this problem by attracting a wide range of customers, including unexpected segments with high security risks but low budgets.

"So in order to get customers, we had to have data. In order to get data, we had to have customers."

This quote explains the interdependency of data and customers in Cloudflare's business model and how they approached solving this dilemma.

• Matthew Prince challenges the notion that successful businesses often start with a niche focus, arguing that it is a retrospective PR narrative rather than reality.
• He contends that most successful entrepreneurs start with broad, ambitious goals rather than small, niche products.

"That's complete and utter PR retrospective BS."

Matthew Prince dismisses the common narrative of businesses starting with a niche focus as a post-hoc fabrication.

• Matthew Prince warns against setting too narrow a focus early on, as it may limit the company's potential and attract people who only see the initial vision as the end state.
• He advises that while appreciating early customers is important, focusing too much on a niche can prevent a company from achieving a larger vision.

"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."

Matthew Prince highlights the risk of attracting talent with a narrow vision that may not align with the company's long-term goals.

• Matthew Prince emphasizes the importance of setting ambitious targets and cautions against entrepreneurs aiming too low, which he believes is a common mistake.
• He also criticizes the tendency to focus on small markets, which even if dominated, do not represent significant opportunities.

"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."

Matthew Prince identifies the lack of ambition in setting targets as a major pitfall for entrepreneurs.

• Matthew Prince asserts that investors expect startups to have a big vision and that this is also important for recruiting and maintaining motivation.
• He agrees with Harry Stebbings on the necessity of connecting the current state of the company to future milestones and visions, especially when acquiring customers.

"When you're fundraising, you have to present a big picture. When you're recruiting, you have to present a big picture."

This quote emphasizes the need for startups to communicate a large-scale vision in various aspects of their growth, including fundraising and recruiting.

• Matthew Prince expresses skepticism about the value of certain perspectives within the startup and VC ecosystem, suggesting that there is too much focus on what key figures think.
• He credits Cloudflare's success in part to being outsiders who were not initially part of the "cool kids" group, allowing them to focus solely on building the company.

"There's a lot in the early stage startup and VC ecosystem that's a lot of sort of the court intrigue of, oh, what does Harry, think about this? Or what does Keith robot think about this?"

Matthew Prince criticizes the preoccupation with influential opinions in the startup world, implying that it can be a distraction from the actual work of building a business.

• Matthew Prince discusses the different forms of entrepreneurial success, from bootstrapped businesses to billion-dollar companies.
• He shares an example of a successful bootstrapped business model where entrepreneurs repeatedly create cash-flow positive companies.

"But I think you can have an amazing bootstrapped business that gets to 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 apiece."

This quote provides insight into an alternative model of entrepreneurial success that does not necessarily involve scaling to a massive size or going public.## Importance of Niche Focus

• Focusing on a niche can lead to significant success and allow for diversification of interests.
• Dean of Tough Mudder is used as an example of niche success versus Cloudflare.
• Tough Mudder's success is highlighted by its visibility, such as t-shirts seen in airports.

There's a guy I went to business school with, we were in the same business plan competition. So you have cloudflare on one side, and then the other person will Dean, who started tough Mudder, which is a mud race.

This quote exemplifies the concept of niche focus by comparing two different successful ventures, Cloudflare and Tough Mudder, and their respective paths in business.

• Having money removes the stress of financial instability, but beyond a certain point, it doesn't add to happiness.
• Wealth beyond necessities like housing and transportation offers diminishing returns in terms of happiness.
• Success is not solely measured by wealth but also by the positive impact on others and the world.

Not having money sucks. Like when I couldn't pay my rent, that made me very unhappy. But I think that there's a certain level of wealth that you get to where it turns out that cars are cars.

Matthew Prince shares his personal experience with money and happiness, emphasizing that while lack of money can cause unhappiness, accumulating wealth beyond basic needs does not necessarily increase happiness.

• Success for an entrepreneur is not just personal wealth but also the success of the team and the broader ecosystem.
• The ability to positively change the lives of employees and partners is a key measure of success.
• Generating wealth across the company and ensuring partners see returns on their investments is important.

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.

This quote highlights the broader impact of entrepreneurial success, where the focus is on the collective success of the company's team members and the fulfillment it brings to the entrepreneur.

• VCs are valuable but have limitations due to the difficulty of severing relationships.
• Public market investors offer honest feedback and can exit their investment more easily, which can lead to healthier relationships.
• Long-term public market investors can be more beneficial than VCs due to their longer average holding periods.

Public market investors are great because they'll tell you the truth. If they don't like what you're doing, they sell your stock.

Matthew Prince explains the advantages of public market investors, comparing them to VC relationships and highlighting the ease of exit as a positive factor for transparency and honesty.

• Personal regrets can stem from misunderstanding situations, such as misjudging someone's behavior that is caused by health issues.
• It's important to consider underlying factors when someone's behavior changes, such as personal life or health issues.
• Learning from past experiences can lead to more empathy and a better understanding of others.

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.

This quote conveys Matthew Prince's regret over how he handled a difficult situation with a co-founder who was later diagnosed with a neurological condition, reflecting on the importance of understanding and empathy.

• Personal aspirations include making a positive impact on the world, particularly in the realm of Internet and privacy.
• Legacy considerations involve how one's contributions have influenced the world and the principles they've stood by.
• The desire to correct past misconceptions and contribute meaningfully to society is a driving force.

Internet with a capital I? I wrote my college thesis on why the Internet was a fad in 96, and I feel like I have a penance to undo that early wrong.

Matthew Prince shares his aspiration to leave a legacy that reflects his contribution to the Internet, aiming to make up for his earlier skepticism about its significance.

• SaaS businesses have a natural compounding effect that can lead to exponential growth.
• Cloudflare's growth trajectory is compared to Salesforce's, highlighting the potential of subscription models.
• Building a large, iconic company involves solving big problems, having a compounding business model, and continuously aiming for higher goals.

I think that as we look forward, we're on a path from a billion dollars of revenue to $5 billion of revenue that's inevitable that we'll get there.

Matthew Prince discusses the growth potential of Cloudflare and the necessary elements for scaling to a $200 billion market cap, emphasizing the power of compounding interest in SaaS business models.