Flexport Is Silicon Valley’s Solution To The Supply Chain Mess

Created

Jan 19, 2023 8:01 PM

Founder Ryan Petersen has positioned himself as shipping's savior, earning Flexport a new $8 billion valuation. But industry rivals say the 41-year-old near-billionaire and his startup are all show.

AS the ferry to San Francisco exits Oakland’s harbor, Flexport’s founder and CEO, Ryan Petersen, turns to watch a towering 370-foot crane hook shipping containers, one by one, onto the deck of a cargo ship. Petersen admires the neat rows of rectangles colored blue, rust red and an occasional teal, stacked on the post-Panamax-class ship bound for Yokohama, Japan.

“I wish I could look inside with a HoloLens to see which containers are Flexport’s,” he says, imagining that Microsoft’s augmented-reality glasses had an X-ray feature. “Any container ship on the West Coast, I guarantee we are on there.”

It sounds like bravado, but for Petersen, 41, it’s simple math. Flexport owns no trains, planes or ships of its own. But as one of the fastest-growing players in a space called digital freight forwarding, Petersen’s eight-year-old company is already the world’s seventh-biggest buyer of cargo room on such trans-Pacific routes. 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.

Backed by some of Silicon Valley’s most prominent VCs and tech billionaires, including Peter Thiel’s Founders Fund, Yuri Milner and Masayoshi Son, Flexport was founded in 2013 to automate paper customs forms. It now does much more, helping customers like Georgia-Pacific (Brawny paper towels, Angel Soft toilet paper), plumbing fixtures maker Gerber and speaker maker Sonos handle all the headaches of shipping inventory from factory to warehouse to store. Flexport’s software analyzes and optimizes a customer’s supply chain, then automates it, often coming up with ways to shave days off delivery and save customers millions in late fees. Flexport’s centralized tracking and messaging cut out thousands of emails, saving clients an average of four work hours per week. For a price, Flexport will even offset their carbon footprint.

Shipping is a huge pond. Global spending on logistics reached $9 trillion in 2020, about 11% of the world’s gross domestic product, according to consultancy Armstrong & Associates. Third-party logistics, of which freight forwarding is a big part, amounts to nearly $1 trillion. In the U.S., it’s a $230 billion business, good for 1.1% of national GDP. Demand is at a record high—global trade volumes rose 8.3% in 2021, according to Allianz subsidiary Euler Hermes. Americans spent 20% more on goods last fall than in February 2020.

Supply can’t keep up. Goods from China to the U.S. now take more than a month longer to arrive than they did in 2019, while the cost of shipping a container has soared from under $2,000 pre-pandemic to more than $20,000 last summer (the current price is around $15,000). Average folks who never gave a thought to the global supply chain are paying attention now. An Oracle survey of 1,000 U.S. adults found that 87% reported being negatively affected by shipping struggles; half said they’d canceled an order in recent months.

For Flexport, it all means business is booming. Sales reached $3.3 billion in 2021, up from $1.3 billion in 2020 and $670 million the year before (Flexport passes about 80% of its revenue directly to its shipping partners). Last year, the San Francisco–based firm generated its first profit, posting net income of $37 million.

SEA SLUGS

Trans-pacific shipping costs, which reached an eye-popping $20,500 for a 40-foot container in September, are finally in decline. Wait times, however, continue to grow.

No surprise, then, that powerful investors keep piling in. The newest: Andreessen Horowitz, the prominent venture capital firm that joined Founders Fund, e-commerce standout Shopify and others in arming Petersen with a fresh $900 million war chest at an $8 billion valuation in January. Forbes estimates Petersen’s 9% stake in Flexport is worth $650 million, after our standard 10% private-company discount. Add in a prolific angel investment portfolio and part ownership of a profitable side business, and he’s closer to $750 million, knocking on the door of billionaire status. (If Forbes valued Petersen’s stake using the price of Flexport shares on the secondary markets, he’d already be there, worth just over $1.1 billion.)

But Petersen doesn’t want to be seen as a pandemic profiteer, getting rich as his customers pay unprecedented prices. He’d rather be seen as shipping’s Mr. Fix-It. Flexport is combing through customer data trying to fill each precious container more completely (most ship only 70% full). It’s rerouting lighter, higher-value products like Everlane’s popular sweaters from sea to air. It helped set up a private rail ramp in Iowa for goods coming from the West Coast to avoid Chicago congestion. For businesses facing inventory crunches, it built an app for truckers to tap into and learn where they’ll be needed 10 days in advance.

Petersen also hasn’t been shy about building his public image. Early in lockdown, he sent hundreds of thousands of units of personal protective equipment to Wuhan, China—then set his team to routing much more back when the virus reached U.S. shores, booking special planes to ship masks by the millions while rallying the public to donate funds. When a ship ran aground in the Suez Canal last March, Petersen demystified the situation on social media and in interviews, even publishing a supply chain explainer picture book for kids. And when the backup of ships waiting to unload at major ports reached a breaking point last fall, it was Petersen who showed up at the Port of Long Beach in California to charter a boat and tweet what he saw, prompting a viral response including a call from Governor Gavin Newsom and an overnight policy change to stack containers higher in local yards.

“Every crisis needs a hero, and Ryan Petersen positioned himself as the face of this. He engages where a lot of executives won’t. It’s what the public wanted to see.”

To insiders in the famously quiet logistics industry, each interview and TV appearance is more testament to Petersen’s opportunism than market leadership. One vocal critic frequently refers to Petersen in dismissive LinkedIn posts as “Private Ryan.” “[Flexport has] made a lot of enemies in the space,” says a veteran industry exec who didn’t want to be named for fear of losing business with Petersen.

But no one can dispute Petersen’s efficacy. “Every crisis needs a hero, and Ryan Petersen positioned himself as the face of this,” concedes Craig Fuller, who runs an industry data-and-news site called FreightWaves. “He engages where a lot of executives won’t. It’s what the public wanted to see.”

As Petersen positions Flexport to go on offense when the shipping world returns (soon, one hopes) to some semblance of normalcy, he’s eager to silence the doubters. “If we can fix problems for Flexport, we can fix problems for the wider world,” he says. “We have a chip on our shoulders. People should believe in us.”

Petersen grew up surrounded by entrepreneurs in Bethesda, Maryland, just inside D.C.’s Capital Beltway. His mother, a biochemist, ran a business helping companies manage food safety regulations. His father was a government economist, using 1970s-era computers to crunch numbers on Soviet defense spending and running a coding business on the side. Petersen’s older brother David stayed up all night building and managing an early online video-game community. Ryan preferred studying abroad in Spain and volunteering in El Salvador.

Graduating trilingual (English, Spanish and Portuguese) with an economics degree from the University of California, Berkeley, in 2002, Petersen initially pursued a global microlending career without success. So he went to work for David, buying trinkets from China to resell, such as gag driver’s licenses made out to “Elvis Presley.” After flipping a container of scooters for a profit on eBay, they moved upmarket to motorsports bikes and parts. Petersen moved to China in 2005 for two years to source the product firsthand. That work helped inspire the brothers’ next business, a search engine of global shipping manifests they built with David’s college roommate while Ryan was attending Columbia Business School. Bootstrapped and profitable within a couple years, ImportGenius.com still generates millions in cash to this day. But the duo had bigger ambitions. And when David was accepted into Y Combinator in 2013 for a construction industry–focused startup, Ryan grabbed an air mattress and tagged along.

RAPACIOUS RATES

The cost of shipping a couch from Asia to America’s west coast has jumped more than 10 times in the past two years; ditto for coffee makers and fridges. Consumers are bearing the burden: Prices for these eight common household items jumped between 19% and 51% over that time.

The gate-crashing younger Petersen made a lasting impression on Paul Graham, the accelerator’s cofounder, who had an interest in global trade. For years, Petersen had tinkered with another idea, a “TurboTax for customs paperwork,” but he needed to clear a rigorous background check (smuggling is one concern) to move goods across the U.S. border. Finally approved in March 2013, he pitched his startup idea, Flexport, onstage to Graham at a 2,000-person event that October. Petersen was accepted into YC’s 2014 batch as one of the last founders under Graham’s direct mentorship. He quickly stood out.

With a seemingly massive market opportunity and an obvious passion for what seemed a sleepy category, Flexport quickly raised $4 million from a gaggle of name-brand firms. Reddit cofounder Alexis Ohanian, then a YC partner, invested alongside Forbes Midas List star Garry Tan. “It was such a valuable industry and so very undesirable for product builders,” Ohanian says. “No 21-year-old in college is lying awake at night saying, ‘I need to build the next Flexport.’ ”

Petersen suddenly needed to deliver Silicon Valley–style hypergrowth. Customs had high margins, but at $99 per transaction wouldn’t amount to enough. What customers wanted, Petersen realized, was an online destination that handled customs and their bigger concern: freight forwarding. Incumbents still relied heavily on sending faxes or PDFs back and forth, or “freight email forwarding.” Within a few months, Flexport had stitched together a working cloud-based version of its software.

By the time Thiel and Founders Fund led a $20 million Series A investment in Petersen in 2015, Flexport was billing itself as a new-look digital freight forwarder. Shipping underwent one of its periodic global crises not long after, when the world’s seventh-largest shipping line declared bankruptcy and had ships seized in Chinese ports amid a pricing crash. The turmoil was good for Flexport—it won business simply by reliably showing up. But it was also a warning: Disruption to trade with China could devastate Flexport’s core business.

So when Thiel announced his public support for Donald Trump, who was championing big new China tariffs during his presidential campaign, Petersen committed a startup sin. Asked onstage at a June 2016 conference if he would still take Thiel’s money knowing he’d support a politician tough on China trade, Petersen spoke from the hip. “Probably not, actually. It depends how desperate we were.” Soon he was on the phone with Thiel to explain himself. The damage control worked. A few months later, Thiel stepped up to invest again—at a more generous price.

By that point, it was clear to Petersen that while Flexport was growing fast, the logistics market wasn’t one where a hard-charging newcomer could sweep the board. “It’s not one of those things where you have a product or you don’t,” says Founders Fund’s Trae Stephens. “It’s death by 1,000 cuts.”

But as Flexport’s revenue doubled past $200 million, then $400 million, and Petersen kept spending to launch offices in ports from Hamburg to Shenzhen, he caught the eye of the world’s leading expert on brute-forcing one’s way to dominant market share: SoftBank. In January 2019, Petersen sat down to close a deal with Masayoshi Son; 45 minutes later, he walked away with a $1 billion commitment.

“That year, any team’s request for headcount, they got whatever they asked,” Petersen says. But three days after the second half of the money was wired, SoftBank-backed WeWork released its ill-fated public offering prospectus. WeWork’s larger-than-life cofounder Adam Neumann was out in matter of weeks. Son’s $10 billion investment was on life support. For Petersen, the ground shifted fast. Having already spent the first of SoftBank’s $500 million, he realized he needed to shift course. The chartered planes stopped. Flexport would try to become a profitable business now.

Much damage had already been done. Flexport’s aggressive fundraising—it has secured more than $2 billion to date—meant dilution for Petersen personally, who today owns just 9% of his company despite having no cofounders. And in February 2020, when Covid-19 shutdowns in China started to reverberate through the supply chain, Petersen panicked. He let go of 50 staffers, about 3% of Flexport’s workforce. Reporters looking for a wider trend among SoftBank companies pounced. The cuts were also ineffective, crushing employee morale for minimal savings. Petersen calls it his biggest mistake as a CEO so far.

Pickup Trucks: With lines of semis now a familiar sight at major hubs, like these at the Port of Oakland, every minute counts. Flexport says its Transmission app shaves 40 minutes from ship to chassis. NOAH BERGER/AP

As the pandemic widened, though, Flexport’s bruised leader and workforce quickly found purpose. Petersen had launched the project of which he’s proudest, the nonprofit arm Flexport.org, back in 2017 to provide discounted freight to nongovernmental organizations and help nonprofits ship donated inventory. Early on, the unit shipped 350,000 masks from the U.S. to Wuhan. When the virus reached Flexport’s backyard, it scrounged up tens of thousands more to reroute to local hospitals. Soon a team of 25 staff in China was sourcing PPE for Flexport’s relief efforts full-time. Petersen started chartering planes again, this time for a good cause. “I don’t think we took a deep breath for three months,” he says.

Flexport and its market looked very different this past October when Petersen had dinner with Stripe cofounder and CEO Patrick Collison. Over 2021, Flexport blew away its own projections, turning a surprise profit as revenue doubled. (The company doesn’t expect to stay in the black as it invests in growth.) But with the source of that money coming from customers paying through the nose and still facing shipping delays, Petersen wasn’t celebrating. Collison was curious how the backup at California’s ports compared to mysterious bottlenecks in his world of online payments. Petersen realized he didn’t really know. So he flew down to Los Angeles to see for himself.

The day after his chartered boat tour of the Long Beach harbor, Petersen shared his findings on Twitter. He outlined some quick fixes, including stacking containers higher and building a new railhead. Petersen’s thread was quickly retweeted more than 15,000 times, including by Coinbase billionaire CEO Brian Armstrong. Long Beach Mayor Robert Garcia sent the list to his staff; the city eased restrictions on stacking containers the next day. Petersen’s phone lit up with calls from policymakers like Gavin Newsom. Crews from Axios on HBO and 60 Minutes asked him to guide them on their own harbor tours. For Flexport, it was a marketing masterstroke, though Petersen swears that wasn’t his intent.

For most everyone else in the logistics business, it was exasperating. “When Ryan Petersen does his interviews, people in the industry typically get upset because he tends to simplify things a lot. He appears sometimes uninformed,” says Robert Khachatryan, who founded the 55-person freight forwarder Freight Right Global Logistics in greater Los Angeles in 2007. Container stacking had limited impact, Khachatryan says. Petersen’s bolder proposals, such as the creation of a government-sponsored railhead depot, remain untouched. “There isn’t a silver bullet for this.”

The notion that Petersen hasn’t earned his stripes runs deeper than all the good press he gets. For years, skeptics have argued that Flexport’s software does little that you can’t find today in competitors’ offerings big and small. Walk into the offices of Flexport and Expeditors, a 40-year-old publicly traded freight forwarder with a market cap of about $19 billion, then strip away all the corporate logos and branding, and you’d see that the operations look exactly the same, they claim.

Six years ago, they were mostly right. “That’s just the reality of being a new company in such a big, complicated business,” says Ben Braverman, a longtime Flexport executive and Petersen confidant.

Customers choose Flexport not because Petersen reinvented the wheel but because its one-stop software suite simplifies their lives. Take San Francisco–based shoemaker Rothy’s, a Flexport customer since 2017. Flexport manages the shipping of 25 products from a factory in China to two hubs in California and Kentucky and offsets their carbon footprint. But it’s Flexport’s visibility tools that allow marketers and store managers to know when to expect new shipments that’s really valuable, says Rothy’s COO, Heather Skidmore Howard. “I would give both of us an A+ in terms of delivery in a really challenging year,” she says.

Flexport is currently testing a new freemium service it will launch this year, one that provides free visibility, carbon tracking and messaging to users even if they don’t run freight with Flexport. Petersen also plans to build out a fulfillment product that can identify high-priority goods—say, for direct-to-consumer brands—and ship them faster through a virtual “HOV lane.”

“Flexport is the definitive next-gen winner in the space, full stop,” says David George, a growth-stage investor who co-led Flexport’s latest round on behalf of Andreessen Horowitz. “They have all these ways to win,” he adds. Petersen agrees: “I call our sales process like playing Battleship. You don’t sink the battleship with one pin.”

Of course, the doubters still doubt. “Visibility is a solution to a problem that shouldn’t exist,” says Adam Banks, the former chief technology and information officer for Maersk, the world’s second-largest ocean carrier, with $40 billion in annual revenue. To hear him tell it, Maersk and its peers own the containers; they’ll want to own the data too, not give it up to Petersen. Others question whether it’ll be Flexport that will win. One challenger with momentum is Chicago-based project44, a pure logistics data play which raised $420 million in January at a $2.6 billion valuation. Lots of people would rather work with project44’s “Switzerland” rather than a brash competitor like Flexport, CEO Jett McCandless argues.

Petersen is used to the sniping by now. “Our industry thinks I’m a clown, which I don’t mind,” he says. “I need to continue to convince them that I’m crazy so they don’t get their act together and compete with us.”