2288

The Butterfly Effect

In the 1960s, Edward Lorenz, a meteorology & mathematics professor at MIT discovered a powerful insight – the butterfly effect. Put simply, it says that a butterfly flapping its wings somewhere in the Caribbean can cause a hurricane in, say, China. While we can all acknowledge that a butterfly cannot make this happen, small things in a complex system do have a massive compounding effect over time. These effects can alter the future fate of the entire ecosystem. Going further with the analogy, it says that there is really no way of identifying that butterfly, aka the tipping point.  But we think there is a butterfly amongst us today.  

The business we are going to unravel now is a butterfly, flapping its $8B+ valuation digital wings in an archaic industry. The compounding effect is likely to turn the entire world of logistics for once, in the right direction. Before we get carried away, let’s set the context, shall we? 

Freight Forwarding Industry – an Elephant in Disguise 

Logistics is not a glamorous industry, period. Going by several accounts, freight forwarding, with its bulky containers, numerous custom approvals and a dozen email tracking chains is the worst! However, behind the dull facade is an engine that quite literally moves the world. So much so that, in 2020, globally logistics spending accounted for 11% of world’s GDP, an astounding $9 trillion

FYI: This is a simplistic depiction of the logistics market. In reality, however, the market is fragmented among several types of businesses (see below)

For the sake of this article, we shall focus on logistics service providers, specifically on freight forwarders.  How do the freight forwarders fit into the larger logistics picture? Freight forwarders plan and coordinate movement of goods across international borders by air, marine and land. So for a company/brand looking to ship products, it goes without saying that they handle the entire process often end-to-end from freight rate negotiations, tracking of containers, aiding in clearance at customs, freight consolidation and pickup/drop off to the warehouse. 

One would imagine that tech drives such a complex chain of freight forwarding activities. As irony would have it, until recently the freight forwarding industry shied away from adoption of tech. To give an example, as per Frieghtos study, even simple things such as, generating a price quotation for a customer, by a forwarder took as long as 100 hours. In its entirety, it translated to mean that a really old inefficient industry, had very archaic ways of doing things (imagine paper trails and faxes), that no longer matched the pace of customer expectations.

We all know that a dissatisfied customer more than often not, equals genesis of newer business models. 

In the past decade or so, digitalisation has begun to charm its way into the freight forwarding industry. Digital freight forwarders as they are now called have developed tech tools that drive up efficiency, improve customer experience, while cutting down on deep entrenched operational inefficiencies. They come in all forms – price discovery marketplaces, carrier reservation platforms, to full blown platforms catering to every freight forwarding need there is. 

Why have digital freight forwarders become such a hot topic of discussion today then? Three words – Supply Chain Chaos. Digging deeper into this we realize that it is a combination of several variables like increase in commodities demand, changing customer expectations and COVID. All in all, the ecosystem appears to be in a turmoil, the beginnings of a hurricane in sight. But which one is the butterfly then? 

The butterfly that we are betting on today is (drumroll…) Flexport – a digital end-to-end freight forwarding platform. Why do we think it is a butterfly? While the spillover effect of a digitally enabled ~$9T logistics industry cannot be quantified, in the remainder of the article we hope to explain reasons as to why we are bullish about Flexport.

Good things come in three, too – founder, solving for an enormous problem and enough war chest to attempt to stand against Goliath (i.e., rest of the freight forwarders). 

Single founder – Breaking bias 

Ryan Petersen, founder/CEO of Flexport and his brother, David, grew up in a fairly entrepreneurial family in Bethesda, Maryland. Dining table conversation often revolved around use of tech to solve for access to government regulations. During his early career, Ryan got into the business of import/export, buying scooters and such from China and selling them online. In 2005, he co-founded ImportGenius with his brother. It is a database that provides real time shipment records for all import/export cargo of 15+ countries including U.S.A, Russia and India. Even today, as a fully bootstrapped and profitable company, Importgenius still generates millions in cash. David is Ryan’s sounding board. It was, after all, his brother’s leap into founding a venture backed startup that provoked Ryan to play in the big leagues too. 

On a lighter note, Ryan and David are well known for their brotherly banter on Twitter

In 2014, Flexport was born at the Winter YC batch, with the sole purpose of automating custom forms. Today it does that and so much more. Its capabilities extend from analyzing/ optimizing a customer’s supply chain, automating it, to remarkably reducing shipping duration and late fees cost borne by the customer. 

Remember the freight forwarding chain we saw before? Now imagine a digital enabler on top of every single step carried out by a freight forwarder. Flexport’s enterprise tool has surpassed customer expectations in terms of ease, efficiency and customer experience. In less than a decade, it is the 7th biggest buyer of cargo rooms on trans-pacific routes. 

As a Forbes article remarks, “Pretty much any Asia-bound ship will have at least a container or two filled with California almonds or auto parts put there by Flexport’s software.” Today Flexport has over 2700 employees, across 23 offices globally and caters to 10,000+ brands worldwide. As a single founder, Ryan has developed an uncanny ability to hire and nurture the smartest and most humble talent. Ex-VP of product, Sean Linehan (CEO, Placement) has previously commented that, “Working for Ryan accelerated his career for at least a decade. Ryan has the uncanny ability to push people to their peak performance.”  

Large Global Trade Problem & Naysayers 

The global playing field for Flexport is vast – $176B of highly fragmented freight forwarding market (in 2020), is expected to expand to $228B by 2025. Among the top 100 freight forwarders today, Flexport is the only company that was founded after Netscape (1994). In other words, tech used by Flexport’s traditional competitors is often older than Netscape, which itself was optimized for home usage/ browsing at slow speeds of dial-up modems.

Due to the nature of industry, Flexport inherited the problem of “tech debt”. Tech debt refers to the challenge associated with taking on old legacy systems of the industry (which still run on say, an AS400 IBM mainframe software) and trying to build APIs (on a side note, more on Fintech APIs here) or a modern computing stack on top of it. No wonder that a lot of traditional freight forwarders find it hard to achieve a decent degree of digitalization.  

Instead, Flexport adopted a platform approach. Commonly known as Platform as a service (PaaS), it allows businesses and developers alike to host, build and deploy everything from simple apps to enterprise software solutions. In simpler terms, PaaS is the platform where SaaS (software as a service) apps are built (Read more on Indian SaaS companies here). 

Circling back to Flexport, they are becoming the ultimate one stop shop for every freight forwarding service need. The heart of Flexport’s business lies in literally maintaining the global balance of supply and demand of goods. We know that COVID altered the wheels of global trade balance, leading to increase in commodity demand (medical, consumer equipment etc.), disruption of supply chain to/from China and varying recovery rates of countries.

Its effect is prevalent even today, where supply is strained on two frontiers.  One, duration – merchandise from China takes a month longer to arrive on American soils, than in 2019. Two, cost of a shipping container – ~7x of the pre-pandemic price ($2000/container). On the demand side, the value and volume of global merchandise trade is skyrocketing. Just last year, the global trade value showed a 22.4% y-o-y increase, almost 15% higher than pre-pandemic. 

In many ways, COVID has become both a boon and bane to Flexport. The company is careful about not coming across as a pandemic profiteer. Flexport has tried to alleviate its customers’ challenges whenever possible. For example, they actively comb through their customer data to fully fill up 100% of the container space, as opposed to a typical 70% full shipping container. Predictive tracking apps for truckers, private railway ramps to reduce congestion, logistics associated with COVID supplies is nothing but the tip of a very large iceberg. 

Flexport has surely won a lot of hearts. Albeit there are more than a few naysayers. Six years ago, when Flexport offered only a subset of solutions that it does today, cynics remarked that the software was only reinventing the wheel. More often than not, this is a common challenge for any new company trying to solve for a big industry. Today, the story is much different. The way we see it, Flexport is akin to  Google for logistics. That is, if Google did what it does now and so much more! 

Flexport has a real time discovery/query platform that tells you the exact price for shipping your product from A to B. With a click of a button, you can arrange for a warehouse and even transportation to pick your product from the warehouse. It is also a google map that allows you to actively monitor where your cargo is on earth at every point of time. It even aids you in custom clearance of your cargo, all the while carrying your goods safely (different insurance options available). In need of capital to transport your cargo? Fret not, Flexport capital to the rescue! (more on this later)  

To its beloved customers, Flexport is truly a one stop software suite for all their freight forwarding needs. 

But, as Taylor Swift would say, there’s always gonna be haters who hate, hate, hate!

Capital to fight against the Big guys

Flexport appears to be the quintessential silicon valley darling with a $8B valuation, $3.3B topline and a profitable bottomline ($37M). In a hyper growth tech world, operationally intense startups becoming profitable is unheard of – therefore, to many, Flexport represents a paradigm shift. 

But how exactly is Flexport churning out money and piquing the interest of stellar investors?

Flexport’s main revenue stream is via freight transportation fees, with additional income from warehousing products, customs brokerage, cargo insurance and trade financing. Last year, companies of all sizes used Flexport’s tech to move ~$19B of merchandise across 112 countries. It doesn’t stop there – Flexport has its sights on the entirety of global trade. It now has tons of data on every shipment, route/ route conditions, customs, brands etc. to bank upon. With data comes opportunities for monetisation. One of their verticals, Flexport capital has thus been launched with the same exact intention – a buy now, pay later (BNPL) financing model for global trade! It almost becomes tough to imagine the scale of the vision. 

It’s no surprise then that the exact vision drew the investors to Flexport, when it was nothing but a caterpillar. Flexport’s roster of investors is as impressive as it gets. Over multiple funding rounds, it has seen participation from investors, the likes of which include, Softbank, Founders Fund, DST global to name a few. Flexport’s latest Series E $935M round was led by Andreessen Horowitz and MSD Partners, with participation from other new and previous investors alike. 

Early champions like Paul Graham, Gary Tan, Alexis Ohanian were enthralled by Ryan’s vision to build products for a highly valuable unalluring industry such as global trade. On more than several occasions they have actively championed Flexport. After all, this was one of the reasons why Flexport was able to attract the type of investors it did, onto its captable. 

We still think we have only scratched the surface of a company like Flexport. Flexport has only begun to flap its wings, the hurricane that will likely follow will change the face of global trade. 

Paul Graham is known to have once said, “Flexport is one of those rare startups that will not merely satisfy its market, but grow it. There will be more international trade because of Flexport, and international trade is a very big thing for there to be more of.”

PS: What Indian startups do you think are causing a similar butterfly effect in logistics? Send us your thoughts. 

Loved the article?

Leave a comment

Your email address will not be published.