Flexport’s Ascent Raises Valuation and Volume Questions

JOC.com — In an international logistics sector awash in start-up technology providers, San Francisco-based forwarder Flexport is the undisputed rockstar.

Looking at one specific metric — venture capital raised — Flexport is in a category by itself, having raised $304 million since its founding in 2013, according to Crunchbase, a technology funding database. That’s nearly triple the amount raised by any other single logistics tech startup as of mid-September and many times the amount raised by other so-called digital forwarders such as Barcelona-based iContainers ($8.3 million) and Berlin-based FreightHub ($23 million).

Flexport is investing the funds in a rapid expansion, with new offices in the next five years planned in Singapore, Shanghai, Sydney, Mumbai, São Paulo, among other cities, the company announced recently.

Yet all that investment has raised the stakes for Flexport to produce a profitable business model or achieve a profitable exit for its investors, which, given the multiples expected of venture capital investors, would be a sizable sum. It has also heightened the freight industry’s level of skepticism regarding basic questions such as how much volume the company actually handles and, ultimately, what Flexport — which has styled itself as an industry disruptor — actually does that represents a fundamental break from a forwarding industry that has plied its trade uninterrupted for centuries.

Flexport is reportedly now valued between $1 billion and $1.5 billion, up to six times its 2017 gross revenue of $226 million (a figure the company disclosed on a LinkedIn thread in late April).

Typically, forwarders are valued at one times gross revenue; what makes Flexport that much more valuable? Do the normal rules of valuation not apply to a company barely five years old that claims to have invested as much in technology as any other part of its business?

Graham Parker, CEO of the logistics software provider Kontainers, noted in a January blog that Apex Maritime, a trans-Pacific non-vessel operating common carrier (NVOCC) was valued at $175 million in 2015 when Hong Kong-based Kerry Logistics acquired a 51 percent stake.

Apex’s Asia import volume in 2017 was 324,673 TEU, making it the No. 2 NVOCC in the trade, according to PIERS, a sister product of JOC.com. That volume was more than three times that of Flexport’s stated 2017 volume, yet it garnered a valuation less than one-eighth that of Flexport’s today.

Felxport’s volume

Valuation is just one area where Flexport’s meteoric rise has been met with skepticism. On the subject of its volume, there are questions as to whether Flexport is moving the amount of volume it claims to be moving, given that it acted to conceal its volumes from the US Automated Manifest System (AMS) data, which forwarders aren’t allowed to do.

Added to that is a perception that the company has swaggered its way into relevance more on the strength of clever marketing and an ability to attract blue-chip venture capital investment than any significant differentiation or above-average performance.

The skepticism has drawn founder and CEO Ryan Petersen into online skirmishes with critics who vocally question Flexport on LinkedIn. For many industry stalwarts, the question comes down to what, if anything, makes Flexport so fundamentally different from international forwarding incumbents, such as Kuehne + Nagel (K+N), DSV, Panalpina, or others, that explains its huge cache of investment? In other words, while Flexport is clearly on the road to building a new global forwarder, is it building anything fundamentally new or different?

Certainly, building a global forwarding organization requires significant capital, and Flexport has that in spades.

“I strongly believe you need to raise lots of capital to gain market share [buy into larger clients]; build a global logistics technology network [warehouses, local offices, etc.]; and build a cutting-edge technology platform [the cost of engineers],” Michael Wax, chief commercial officer and co-founder of Freighthub, told JOC.com in an email.

Part of the answer is tied to Petersen’s original aims. In various public statements, he said he set out to create a logistics company built purely on modern software and unburdened by legacy systems and expectations. Early on, Petersen said his goal was to build another Expeditors International of Seattle, Washington, one of the world’s most historically successful forwarders, only with a blank technology slate.

Later, he sought to compare K+N unfavorably to Flexport, and received a letter from K+N’s lawyers as a result. As he is fond of saying, all of the world’s largest forwarders were built prior to the advent of the internet, and Petersen argues they are thus dependent to varying degrees on software that doesn’t mesh with the way modern commerce operates.

He’s certainly not alone in seeing a big opportunity in leveraging state-of-the-art technology in forwarding.

“The digital forwarders have figured out that during the life of an international shipment the same information is used over and over again, and that this information cannot only be automated, but reused for different purposes,” Dan Gardner, vice president of supply chain for Lakeshore Learning Materials, wrote in a 2017 commentary for JOC. “Whereas less sophisticated forwarders rekey information for quotes, bookings, bills of lading, importer security filings, et al., the digital forwarders have written code that repurposes the same information for each phase of a shipment. In the end, this feature, along with tracking and tracing capabilities, is the essence of the international digital freight forwarding model.”

In going down this road, Flexport has become much more than just a tech flavor of the month. It is the most recognizable face of a huge wave of investment in logistics technology while also becoming the go-to reference point for almost every other startup in freight, logistics, and shipping.

How successful the company proves to be is essentially a barometer for all logistics startups.

“We really would like to see them pull this off and get acquired because it will lift all boats, so to speak,” the CEO of a forwarding technology startup told JOC.com.

Multiple other startups voiced similar sentiments to JOC.com, suggesting that Flexport’s ability to raise sizable sums bodes well for their ventures, even if they are perceived as competitors, because it gives their own capital-raising efforts a boost.

But while Flexport may be a darling of Silicon Valley, with Petersen holding himself out as a guru of global trade and a mentor to other startups, a very different theme in the emergence of Flexport is how it has been received by the legacy logistics market, with many freight veterans openly skeptical to the idea that Flexport’s model is unique or even that its stated volume is for real.

“A lot of companies have been digital for years,” said Alan Baer, president of the NVOCC OL USA. “People have been entering data in systems for a long, long time, and there are market participants that have integrated systems so they’re looking at the same data, so I don’t know if there’s anything earth-shattering about that.

“You can hype it, but sooner or later, the market realizes real value. We’re watching the 2000 to 2006 housing market play out in logistics technology,” Baer said.

“From what I can see, Flexport has been fantastic with its marketing to investors, and I get why the investment community got behind them,” said Mark White, chief commercial officer of the freight forwarder SEKO Logistics.

But, he said, “Flexport, unlike SEKO, has nowhere near this type of history or foundation arising from 40-plus years of investment — a layer that has stabilized our global reach and expansion in facilities, infrastructure, systems, and people.”

Other more technology-oriented forwarders are impressed with Flexport’s ability to raise money and quickly make a name for itself in a fragmented market.

“They are doing all of us an enormous service by elevating the perceived value of advanced technology,” said Jon Slangerup, CEO of the third-party logistics provider (3PL) American Global Logistics. “They’ve created this heightened sense of urgency about tech, which is great for us because it’s making shippers think through their supply chains and come to us.”

Slangerup said he appreciates that Flexport has taken an avant garde approach to building a logistics company.

“I’ve seen both the venture capital and private equity sides and see the challenge they have,” he said. “They’ve done it in a typical venture capital environment. Most companies in this industry are private equity-owned. I don’t think people in this industry understand the venture capital model. They’re probably saying to themselves, ‘How does this company get this valuation when we’ve been doing it this way for so long and we don’t have anywhere near this valuation.”

“But I’ll never be critical of these guys because I know the challenge. If they do it, God bless them, it would be a tremendous achievement of leadership if they cross that chasm.”

White, too, gave credit to Flexport for opening investor coffers, but like others raises the point about how unique it is.

“It’s brought the freight industry into the investment community’s focus,” White said. “That benefits the whole industry. But from what I have seen, Flexport is not so novel or unique in the industry from the types of services clients expect and the level of engagement required from a typical freight forwarder. The industry knows the industry.”

Petersen told JOC.com his sole focus is ensuring shippers and carriers take Flexport seriously, and that he’s not worried about how competitors or other critics perceive his company. Among those customers are Georgia-Pacific, Sonos, and roughly 2,000 merchants that sell to Amazon, Petersen said in an Aug. 30 podcast with the technology investor and accelerator Y Combinator (of which Flexport was a 2014 participant).

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