Cloudfare, the web performance and security unicorn, earlier this week released the details of its confidential IPO registration filed in July. Earlier this year Fastly, which operates in the same space, also made the transition to public markets, but results have been lackluster – its stock closed on August 14th down seven percent from its IPO price. Still, during its time as a private company, Cloudflare raised approximately $254 million, most recently at a valuation of $1.8 billion, though this was in 2015. Despite Fastly’s performance, 2019 has already seen many successful IPOs. Key question is will Cloudflare be as well accepted by public markets as it has by private investors?
Unlike other recent late-stage, venture-backed companies headed for the IPO window, Cloudflare has not exhibited a constant pattern of net losses. The company appeared on its way to positive net income in 2017, yet that trend reversed significantly in 2018. Our examination of the S-1 found that stock-based compensation costs dramatically jumped that year to over $27 million from $2.8 million in 2017¬ – almost a 10x increase in just one year.
While determining exact valuation figures for the company can be difficult, institutions believe there has been some appreciation since its last primary funding round in 2015. In its filings with the SEC for the reporting period ending May 31, 2019, Fidelity’s “Growth Company Fund” marks its holding of Cloudflare Series D stock at $13.59. The original issue price for this series was $6.13. We’ll find out over the next few weeks if the eventual IPO will be valued in line with Fidelity’s estimations.
Two private growth unicorns filed S-1 documents this week, The We Co. (formally WeWork) and Cloudflare. With a dearth of tech IPOs in August, we expect these filings to mark an uptick in IPO activity for the fall. Markets are signaling this expansion may be on its last legs, thus prompting late-stage, private growth companies to enter pubic markets before investor confidence falls further. Whether this strategy pays-off for We Co. or Cloudflare will depend on perceived growth prospects for the firms and whether investors have any appetite left for loss-generating albeit fast-growing VC-backed companies. Time will only tell.
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