Cloudflare is acquiring a small cybersecurity startup founded by former Microsoft employees. Here's how it will help the $5 billion company make a major shift in its business.

• On Tuesday, Cloudflare announced it would acquire S2 Systems, a cloud security startup founded by former Microsoft employees.
• In addition, it's introducing a new product called Cloudflare for Teams, which helps employees securely access their company's software and protect companies from malware.
• Cloudflare CEO and co-founder Matthew Prince says it's introducing this product because as more companies move to the cloud, they're moving away from traditional VPNs and firewalls and need a better, cloud-based way to protect themselves.
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The $5 billion cybersecurity company Cloudflare, which just went public last September, is making two big changes to its business strategy.

On Tuesday, Cloudflare announced it would acquire S2 Systems, a cloud security company based in the Seattle area that was founded by a group of former Microsoft employees, for an undisclosed price. Separately, but related, the company also launched a new suite of products for business called Cloudflare for Teams.

Cloudflare CEO and co-founder Matthew Prince says this new product is one of its "biggest and most important" initiatives.

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Traditionally, Cloudflare has focused on protecting cloud infrastructure - providing tools that improve web-based application performance, even as it helps guard servers and websites from cyberattack. The new Cloudflare for Teams line, however, is about helping protect teams of workers.

Specifically, Cloudflare wants to replace the traditional virtual private network, or VPN, which allows users to form a secure connection between their laptop or phone with a corporate network via the internet, and route all their web traffic through IT department-approved servers.

Doing so puts the user behind a company's firewall, giving them the benefit of the IT department's security and anti-snooping precautions as they go about their day - but often at the expense of internet speed. And for the IT department, managing and maintaining those VPNs is expensive and time-consuming.

Cloudflare's workforce struggled with the concept the same as any other company, before it settled on the idea of using its own technology to find a better way, Prince said. "The problem was that it was incredibly slow and incredibly expensive to maintain," Prince told Business Insider. "If you're in the Singapore office and you want to access the internet, it was really slow and just incredibly brittle and incredibly frustrating. Cloudflare was no different than any other enterprise company where our employees were incredibly frustrated with our IT team."

Rather than go through the tedious, faulty process of using a VPN, Cloudflare for Teams is a suite of products that make secure connections happen behind the scenes, every time a user opens a cloud application or accesses sensitive data.

"What we realize is that old approach, which is there's a castle where you keep all your precious items and secrets and a moat you build around it, that doesn't work as you have the cloud companies," Prince said.

'We either have to partner with these guys or find out how to partner with them'

Prince says that the S2 Systems acquisition fits right into the company's new focus on cybersecurity, even as it gives Cloudflare its first office in the Pacific Northwest.

S2 Systems made its name with software that isolates code running in the browser. In other words, when a website wants to run some code, S2's software runs it in a so-called sandbox where it couldn't hurt your computer or smartphone even if it tried, guarding against malware in even the worst-case scenarios.

"Every single time an employee loads a webpage, that's pulling foreign code into the enterprise in a place that might do real harm or real damage," Prince said.

Prince says other companies, including giants like Symantec, have taken similar approaches. However, Prince says, isolating code often comes with a cost to browsing speed and reliability. That meant he was skeptical about S2 Systems going into its demo, he said. But when he tried it, he was "blown away by how powerful it was," he said.

"I thought, this can't be working," Prince said. "They're way too fast. In this case, it was seamless even with incredibly complicated applications. Once we realized that, we realize we either have to partner with these guys or find out how to partner with them."

Over the next few months, Cloudflare got to know the S2 team. In the end, Cloudflare decided to acquire the company.

"We want to make sure that team is aligned with the long term vision of Cloudflare," Prince said. "We expect them to be incredible new additions to our team and new leaders to build out Cloudflare for Teams products."

Cloudflare for Teams

The ultimate vision for Cloudflare for Teams is to replace the VPN with a suite of services that better guard against modern threats.

One of the core products in that suite is Cloudflare Access, which acts as kind of a broker between cloud software and identity services like Okta, Microsoft, and Google. It gathers the user's login information from the likes of Okta, validates it, and then passes it on to the application once it's determined that the connection is secure.

The other part of Cloudflare for Teams at launch is Cloudflare Gateway, which provides a secure browser connection to help make sure users don't accidentally download or run malware, via Cloudflare's own data centers - while also getting information on their internet traffic, to make sure that the connections are secure.

Rivals like Zscaler offer similar products, but Prince says that Cloudflare has two key advantages: The performance of its product, and its global scale, which means it can connect users to local data centers all over the world.

Prince says that its rival Zscaler has a similar product, but when he spoke with Zscaler customers, he says they were frustrated about the speed of the product. Also, he says that what makes Cloudflare different is that it's available in more locations worldwide, helping it stand up to the latest attacks out there.

"There's an opportunity for us to push the industry forward and you don't have to make the trade-off," Prince said. "We have more capacity and it's distributed in places around the world...Everyone's going to have a presence in North America and western Europe. Where Cloudflare shines is we're in all the other cities where executives will travel to."

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