CDN Industry Shakeout

Global Overview

There are several economies in the world that are struggling. China, once the largest US trading partner and the fastest-growing global economy, is struggling and facing a decoupling from the US. The Ukraine war has sent energy prices skyrocketin g in Europe, and Germany, known as the economic engine of Europe, is breaking down. The story of the struggling economy is happening all over the world.

Some are saying that the end of globalization is at hand, giving way to regionalizatio n. US companies are nearshoring in Mexico and reshoring back to the US to avoid the supply chain issues that plagued them during COVID. In the US, times are toug h. We could draw the conclusion that the US economy is also struggling, but that’s not the case based on various indicators.

The US economy is firing on all cylinders. In fact, GDP is forecasted to grow a mind-blowing 5.8% in Q3 2023. Although our economy is booming, it seems something is off, at least in the technology industry. And this is manifesting itself in the CDN industry.

State of the Economy

US inflation has co oled to a two-year low, unemployment is at a fifty-year l ow, and GDP gro wth was 2% in Q1 2023 and 2.3% in Q2 2023. On top of this, Bank of America has backtrack ed and said there will be no recession this year, but a soft landing. And several public companies like Google, Facebook, Apple, Akamai, and Cisco are trading near one-year highs.

Yet, tech companies continue to lay off workers, including Edgio and StackPath. One of the many reasons why this is happening was due to cheap money. Over the last decade, cheap money, the byproduct of low-i nterest rates, encouraged the investment community to take on more risk. As a result, tens of billions of dollars flooded into venture capital (VC) coffers. And what are VCs supposed to do with all that money if not invest in startups of all shapes and sizes? This period, which started in 2022 and continues to the end of 2024, is called the “reset“.

The Great Reset

Today, the startup world is in the midst of a reset. The word “reset” is used in the VC community to describe the current crisis in which inflated startup valuations are being brought down to realistic levels during down rounds or portfolio adjustments.

Brad Ge rstner, CEO of Altimeter Capital, who has invested early in Zillow, Snowflake, MongoDB, and ByteDance, has stated that “repricings have to occur,” especially with unicorns. Repricings refer to the reduction of valuations when startups undergo down rounds. It is rumored that valuations are being slashed by 50% to 80% across the board.

Gerstner goes on to say that of the 1,400 unicorns in 2022, 100% of them will likely have to undergo a repricing, with an average valuation that is 50% to 80% lower. In fact, he believes that 30% to 40% of the 1,400 unicorns will cease to exist because they do not have product-market fit.

Down rounds are bad for startup founders because their equity can be wiped out.

High-profile resets

- Canva, which was valued at $40 billion in 2021, has been marked down by 67.6% by T. Rowe Price, which led that round.
- Stripe, which was once valued at almost $95 billion, has raised new funding at $50 billion, with its valuation down by almost 50%

A down rou nd is defined as

“When a company raises a financing round of venture capital funding and the pre-money valuation of the company is lower than the post-money valuation of the previous round.”

Source: Carta

Hunter Walk, Partner at Homebrew and a global thought leader in seed-stage funding c alled the current funding climate the “perfect storm.” He explained that many startups with weak business models extended their lifespan because money was widely available. In today’s market, that’s not happening.

Investors are saying that startup coffers are running dry and will continue to do so until the end of 2024. In other words, this money will be flushed out of the system and a new era will begin. In short, these startups should not have survived this long. Expect more layoffs and shutdowns to occur this year and next. Overall, venture funding was down 55 % in Q1 of 2023.

Impact on the CDN Industry

The Great Reset is wreaking havoc on the tech industry, from small startups running on seed money to large, profitable startups that are laying off workers. Many of these startups use cloud computing and CDN services. CDNs are likely to be more impacted than the big three cloud providers.

Even if startups shut down and cease to use AWS services, there is another trend that is countering this activity: generative AI. If you haven’t noticed, the cloud giants and GPU companies like Nvidia are reaping massive profits from the generative AI movement. The revenue generated from this segment should more than offset what is being lost from what these startups spend on AWS and the like.

There are five major CDNs in the US: Akamai, Cloudflare, Fastly, Edgio, and StackPath. The #5 CDN, StackPath, is significantly smaller than Edgio in revenue. The Great Reset is impacting some CDNs more than others. Akamai is the most resilient, followed by Cloudflare and Fastly. The Great Reset is not hurting them since they are public. We could say they are in a position of strength because they are public and they could gobble up the weaker competition.

Akamai is in the best position to withstand the current crises. They are like a utility company that thrives in adversity because it can scoop up the weaker competition. They have been going through various crises since the first dot-com implosion more than twenty years ago. They’ve been through the telecom meltdown, accounting scandals of the early 2000s, 9/11, and the real estate implosion.

Recently, Akamai announced an offering of con vertible notes so it can raise $1 billion. What are they going to do with that extra cash?

Do they plan to buy Edgio? Unlikely, because there might be some antitrust issues at play. But what about StackPath?

StackPath’s Uphill Battle

StackPath has raised a total of ~$400 million in venture capital. The last round took place in March 2020 in the amount of $216 million. They were a unicorn after that, raising money at the right time.

At this time, the public CDN stocks were trending upwards. A year later in 2021, Fastly’s stock was 4x times its current stock price. In 2022, Cloudflare was trading at 3x times its current share price. We could blame COVID for the meteoric rise. Regardless, this would have been the perfect time for StackPath to go public, but we don’t know if they had the annual recurring revenue (ARR) to do so.

Here is a breakdown of their fundraising:

- Raised $180 million in July 2016 and acquired MaxCDN plus three other small startups.
- Raised $216 millio n in March 2020, for a total of $396 million.

StackPath was a unicorn back then, but what is their current valuation today in the Great Reset? If we apply the reset logic of a 50% to 80% lower valuation, would StackPath be valued at $200 million to $500 million? However, that logic is flimsy at best, and there is a better way to value them. StackPath could easily be compared to Edgio. We’re not qualified financial analyst so take this with a great of salt.

Edgio’s forecasted 2023 r evenue is between $392 million and $398 million. Their current valuation is $158 million. StackPath has much less revenue. They are a private company, so this information is not public. Some rumors put their annual revenue between $50 million and $100 million. And Edgio has a superior product line across the board. In short, Edgio has 4 to 8 times the revenue of StackPath and a better product. Thus, if Edgio is valued at $158 million, what should StackPath be valued?

StackPath is in a bad position now. So where do they go from here?

StackPath could weather the storm if they choose to do so. It is likely, as they have the ARR and bank account to do so. Plus, their headcount is much lower than the public CDNs. However, investors are impatient in the Great Reset and more inclined to write off bad bets and move on.

Prediction

Our prediction is that Akamai will acquire StackPath. Why else would Akamai be raising money? And StackPath is small enough that it will not raise antitrust flags. Sorry to say, but the acquisition is likely to be a fire sale, similar to the Instart acquisition. Akamai is a great fit. We would put them as the best fit in all of tech for this type of acquisition. If it happens, let’s see if Akamai takes the high road and keeps its employees around, unlike Instart.

What about the Abstract CDNs?

The Abstract CDN segment includes Netlify, Vercel, Deno, Bun, and Fly.io. CDN is a core offering, but they have a more diverse product portfolio, so they are not traditional CDNs.

Since we are discussing funding headwinds, we’ll break this group into two camps. Each camp is being impacted differently. The first camp is Netlify and Vercel. The second is Deno, Fly.io, and Render.

Netlify and Vercel

Unfortunately, Netlify and Vercel are great reset candidates. Netlify raised $105 million in Series D funding (totaling over $200 million) at a $2 billion valuation, and Vercel raised $150 million in Series D funding (totaling over $300 million) at a valuation of $2.5 billion, both in November 2021.

If we apply the reset logic to Netlify and Vercel, as we did with Stripe and Canva, their valuations would be anywhere between $500 million and $1.25 billion.

Deno, Fly, and Render.io

Now for the good news. There are some winners out there.

Fly.io raised $70 million in Series C funding (totaling $110 million) in June 2023, and Render raised $50 million in Series B funding (totaling $76 million) in June 2023. They are not as exposed to a reset as Netlify and Vercel since they raised their funding in the middle of the reset. Additionally, according to LinkedIn, the headcount for both startups is less than 100. However, one danger is that both are building their own Points of Presence (PoPs), which can be expensive. Just ask Subspace.

What is the ideal PoP count for a well-funded CDN-like startup? We would say 25 (10 in the US, 5 in Europe, 5 in Latin America, and 5 in Asia Pacific).

Deno and Oven

Deno raised $21 million in Series A funding (totaling $26 million) in June 2022, and Oven raised $7 m illion in Seed funding in August 2023. Both are in a position to weather the Great Reset storm if they keep their burn rate and overhead low. However, if they are making boatloads of cash like Pinecone, they can raise whatever they want. That’s unlikely since they compete with Cloudflare.

Closing Note

Let’s end on a positive note. For that, we need to look back a few years in history.

Three of the luckiest startups over the last five years are Shape Security, Nginx, and Volterra. These vendors participated in the CDN ecosystem, although they were not traditional CDNs. They sold for boatloads of cash, and the founders made out like handsomely.

- Shape Security was acquired by F5 for $1 billion.
- Ngi nx was acquired by F5 for $670 million.
- Volterra was acquired by F5 for $500 million.

The interesting part is that all of them were sold to F5.