Flexport #DealMemo

This #DealMemo is inspired by Aaron Batalion’s Medium post. I realize Flexport is past Series A and is not really ground floor now. But I loved the idea and wanted to put down some thoughts. Everything that follows is based on publicly available information.

Learn more about Flexport.

Team

Very strong C-suite, 2 out of 4 CxOs have relevant industry experience. CEO is a serial entrepreneur. Rest of the leadership team consists of regional heads (presumably for Hong Kong and Amsterdam) as well as a seasoned customs broker w/ 25 years of experience.

I did do some LI sleuthing and noticed that they recently transferred a Logistics Manager from SFO to NYC, who is also the first operations hire into the NYC office. The second layer of the team looks good overall and there are a bunch of folks w/ logistics chops.

I noticed that a lot of folks have been promoted to senior roles from within, always a good sign for any company. This team can create magic in the Logistics-as-a-service (LaaS) space.

Idea

Flexport is a licensed freight forwarder for the internet age that uses people and software to manage the complexity of international trade.

Let me try to unpack this one liner.

A freight forwarder, is a person/company that organizes shipments for individuals or corporations to get goods from the manufacture/producer to a market, customer or final point of distribution. International freight forwarders have additional expertise in preparing and processing customs documentation. Information typically reviewed by a freight forwarder includes the commercial invoice, shipper’s export declaration, bill of lading and other documents required by the carrier/country of export, import, and/or transshipment.

Yes, if you have never been in the logistics industry or managed a global supply chain you wouldn’t know. But logistics is as complex as it can get. The best companies in the world are still trying to figure this out and often times run a heavily bandaged process.

Finally, I firmly believe that complementarity between software and humans is the path to building a great business. Doctors need to marry clinical understanding with an ability to communicate it to non-expert patients. Software might be able to do one or the other, but they can’t combine them effectively. Better technology in medicine won’t replace professionals; it will allow them to do even more. So too in logistics. Flexport has got it right.

Market

The global logistics market is roughly 10% of global GDP.

The Transportation sector has grown at 7% every year since 2011 and is expected to generate $3.8T of revenue in 2016.

The US accounts for > 40% of this global sector.

Traction

As of last April Flexport had more than 100 staff and had grown its revenue by 25% each month since it was founded in November 2013.

The biggest impediment to growth will be regulation/compliance. That means slowing down your salespeople when they’re closing a deal to ensure compliance gets priority. But the company is well aware of this and that is why an overwhelming majority of their customers are put on a wait list immediately after signing up.

Why will Flexport win?

  1. Strong team
  2. Great idea
  3. Vibrant market
  4. Solid traction

There is a huge market pull for a LaaS platform provider to help navigate this complex process. By taking away the grunt work from companies (telephone calls, fax/email, EDI, ASNs, etc) and their supply chain managers Flexport is well poised to help unlock immense value in an industry that has remained surprisingly low-tech and difficult to navigate.

 

6 filters for truth (hat tip to Scott Adams)

  1. personal experience (human perceptions are iffy)
  2. experience of people you know (even more unreliable)
  3. experts (they work for money, not truth)
  4. scientific studies (correlation is not causation)
  5. common sense (a good way to be mistaken w/ complete confidence)
  6. pattern recognition (patterns, coincidence, & personal bias look alike)

the nearest we can get to the truth is Consistency. look for confirmation on at least two of the dimensions listed.

where is software not eating the world?

software is eating the world. it uses the smartphone and the internet as knife and fork to do so. looking to learn a foreing language? hello duolingo. want to learn coding? start on codecademy. wish to take an econ class? sign up at coursera. looking to dine at a snazzy restaurant? reserve using opentable. looking to meet that special someone? get on tinder. hungry & busy/lazy? order on grubhub. dream of a wardrobe that has infinite selection? stitchfix will take care of that. one can keep going on.

software is literally everywhere, right? wrong. one sector that software is yet to devour is affordable housing. how can we leverage software to provide reliable affordable housing? this is a huge market globally and ripe for disruption by software. many families spend close to 30% of their annual income on housing.

are there other sectors where software is not eating the world but could/should?

day 5-7, cleantech + the future + it’s a wrap

renixx_greentech_capture

nasdaq

The similarity in the two charts above is unmissable (no points for guessing the second chart, timeframe gives it away). The renewable energy sector that started out with immense promise and enormous market opportunity is now in a shambles. But this is in no way an attempt to dismiss the huge potential that exists and continues to be untapped. This is a point of view and should be taken as such. I will find time to write a separate follow-up on this topic.

Cleantech startups made the following judgement errors per the contrarian czar:

  1. markets & competition – problem with huge markets is that you can’t protect yourself from whatever monsters are out there, ready to eat you up
  2. secrets – Solar costs fell slowly over a number of years. Wind power came down a bit quicker, but there was still no real step function to it. Improvements in battery technology have been fairly incremental as well. No real secrets.
  3. durability – What are the odds that your incremental solar cell technology is going to be durable over that kind of timespan? When there’s an identifiable pattern of incremental progress, it is very unlikely that you’ll have the last mover advantage when you make a marginal addition
  4. distribution – companies literally couldn’t distribute the power they would generate. Even if you build a huge, efficient solar farm in Southern California, how do you build power lines to get the energy to L.A.? In practice, people tended to ignore the difficulty of connecting with the grid. It was assumed not to be a very interesting or major problem.
  5. timing – Where you are on the timing curve is incredibly important. The usual timing argument in cleantech goes like this: cleantech is inevitable because it’s really important. The big wave will come 4 or 5 years from now. So we should start now and we’ll catch that wave when it comes.
  6. financing – Solyndra for instance, took $1.65 billion in late stage venture financing. When investors put in that kind of money into a company, it has to grow phenomenally large for things to work out. A good, broad rule of thumb is to never invest in companies who are looking for less than $1 million or more than $1 billion.

Moving on now to the future of human progress. This chart is pretty self explanatory and no points for guessing where a tech optimist will land.

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Finally, to wrap up this series on zero to one, my favorite chart:

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Let us all move vertically, intensively, from zero to one, by doing new things that don’t necessarily scale!

day 4, founder traits

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These charts are a great way to think about and identify startup founders. There are many founders on either side of the trait spectrum but close to zero who will have a blend of the extremities. That tells you a lot about founders and startups. Not for everyone.You have to display polarizing traits.

The chart below depicts the self-reinforcing loop that is prevalent among successful founders. They realize that they possess certain extreme traits and start exaggerating them. Soon, other (press, members of community, etc) start focusing on these traits and finally the founders just morph into someone really different.

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day 3, marketing-sales continuum

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Today’s conventional wisdom is skewed towards the “build it, and they shall come” ideology. This is driven by the overwhelming focus on product which is a direct result of technical founders at the helm of startups. Not to forget the lean startup movement and the MVP framework, both of which are focused on bettering the product by incorporating user feedback.

Although it is ideal if your product is viral and you do not need to spend a dime on customer acquisition, it is not always the case. Early in the life of a startup founders should explore ways to accelerate viral growth through referral programs, and focus on providing a ‘wow’ customer experience.But eventually, every founder must have a paid marketing/sales strategy that weighs the LTV of a customer against the CAC (cost per click/conversion).

Let’s talk about the graphic at the top. This scale is a great way to understand the magnitude of spend on acquiring customers broken out by customer segment. Businesses seem to have a good grasp of the techniques to reach consumers like you and me, referral programs, fb/twitter ads, SEO, etc. On the other end of the spectrum you have pioneers in complex sales like SpaceX (NASA deal), VMWare (b2b), and Palantir (US gov deals).

The big opportunity though is in the middle. Small business is a tough nut to crack. They are highly fragmented and no great strategy exists to cater to these companies. How do you convince a mom-and-pop store to buy your order management software solution?

This begs the question, if you build it, will they come?