Episode 173 - The Exponent IPO - Exponent Recap

Podcast: Exponent

Published: 2019-09-20

Duration: 59 min

Summary

The episode dives into the intricate process and strategy behind Cloudflare's IPO, comparing it to applying for grad school, and explores the evolving landscape of tech layers from storage to networking.

What Happened

Cloudflare's IPO process was likened to applying for grad school, with a focus on crafting a compelling narrative that aligns with financials and company history. The hosts discussed the significance of the 'quiet period' during which public officers like James had to remain silent to avoid affecting the IPO process. The IPO process typically takes around six months and involves creating an S1 document, analyst day presentations, and a roadshow to meet potential investors.

The conversation highlighted the shift in the tech stack layers, emphasizing how the move to the cloud has led to a narrowing at the storage and compute layer with major players like AWS, Google Cloud Platform, and Microsoft Azure dominating the space. This concentration in the cloud computing layer has enabled an explosion of growth in the application layer, driven by SaaS companies like Salesforce.

They explored the network layer's evolution, where traditional on-premise solutions are giving way to cloud-based services like Cloudflare, which are more suited to the expanding global and mobile use cases. The network layer's consolidation is similar to what happened with the storage and compute layers, creating opportunities for new players like Cloudflare to rise by providing distributed solutions.

Ben and James compared Cloudflare's strategy to AWS and Salesforce, noting how Cloudflare started by aggregating the long tail of the market and is now moving upmarket. This approach allows them to provide services like zero trust security and edge computing, which are becoming increasingly important in a mobile, globalized world.

The episode also covered the mechanics of IPO pricing and allocation, addressing why stocks often pop on the first day of trading. This is partly due to ensuring liquidity and managing investor expectations, which can lead to perceived underpricing but is a strategic decision to ensure a successful market entry.

They discussed broader market dynamics, using WeWork's IPO troubles as an example of how private valuations can be misaligned with public market realities. This serves as a cautionary tale for companies relying heavily on private funding without the discipline of public market feedback.

Finally, the hosts reflected on the lessons learned from the IPO process, emphasizing the importance of a compelling story and the structural shifts in tech that companies like Cloudflare are navigating. They noted the balance between maintaining a strong market narrative and the operational demands of being a public company.

Key Insights

• The IPO process for a company like Cloudflare typically spans around six months and involves creating an S1 document, conducting analyst day presentations, and organizing a roadshow to meet potential investors.
• The shift to cloud computing has led to a concentration in the storage and compute layers, dominated by AWS, Google Cloud Platform, and Microsoft Azure, which has facilitated growth in the application layer with SaaS companies like Salesforce.
• Cloudflare's strategy involves starting by aggregating the long tail of the market and then moving upmarket, allowing them to offer services such as zero trust security and edge computing, which are increasingly vital in a mobile, globalized world.
• Stocks often experience a price increase on the first day of trading due to strategic underpricing, which is intended to ensure liquidity and manage investor expectations during the IPO process.