by Y Combinator4/15/2016
It’s one of the largest and oldest industries in the world, with an annual value of an estimated $9 trillion globally. But it has remained surprisingly low-tech and difficult to navigate for many businesses.
Flexport is a startup that wants to change that by using technology to make freight forwarding simple and efficient. It has been quite successful so far: Flexport currently has more than 100 staff and has grown its revenue by 25% each month since it was founded in November 2013.
The Macro sat down with Flexport’s founder and CEO Ryan Petersen to get his advice on how early stage startups can find success when tackling highly regulated industries, and blending software with real world services.
Here are some of his insights:
“It was never my vision in the beginning of creating Flexport that we were tackling this ‘$9 trillion industry.’ I didn’t have this business plan where I figured all that out from the start. I only knew a problem I had personally seen while working for a small import/export business. I thought, ‘Here’s where software could help.’ I knew it was a problem, and I knew I could sell the solution.
Now what we’ve learned is that our customers aren’t just small businesses like the one I had – even the biggest companies in the world experience similar problems, so we’ve steadily selling moved up market, providing enterprise-grade supply chain management solutions.
Complex systems evolve. They’re not intelligently designed. If we had started from the beginning trying to build this super complex system that would work for small and large companies, we would probably not have gotten very far. We had the classic minimum viable product approach, starting with small businesses and what we knew well, and working our way up.”
Choose investors carefully, and educate them well.
“Many Silicon Valley investors by default look for very, very high margins like the ones they’ve seen in pure software. Real world businesses don’t have those kinds of margins. So at Flexport, we self-select investors who get that — who know that we’re a mix of a software company and a real world business.
We’ve pitched people who are really confused when they look at what we do. They say, ‘Wait, this isn’t a software business! The margins are too low!’ And we have to say, ‘Look at the cash flow.’ Many VCs are used to seeing 90 percent margins on a million dollars of revenue. When you’re talking about real world industries, you might be seeing 10 percent margins, but it’s on a billion dollars of revenue. So it’s just a different mindset.
We’ve had to really focus on educating investors about the business. It’s about not just listening to every investor’s advice from the get-go. You have to know your business well enough and have confidence in that. You have to know what rubrics are relevant to you, to say, ‘We’re going to do the hard thing, the real world thing, and that means we won’t look like the cookie-cutter template that software investors are used to.’ Not everyone is going to understand or be a good fit. But if you have great economics, and you focus on solving a real problem for your customers, you can build a great company.”
Structure is crucial.
“Once you reach product-market fit, you need to take a hard look at how your business runs from an organizational standpoint. You really do need a set organizational structure. You need to invest in your culture, and ensure that people have clear lines of reporting. You need an org chart that people understand, that aligns with what you’re trying to do as a business.
The problem for all startups in the earliest stages is finding product-market fit. But once you solve that, you’re going to scale really fast. Then all of a sudden, your existing org chart is going to be a burden. Things you used to be able to do on an ad-hoc basis will start to slip through the cracks. That might be workable for certain kinds of companies for a long time, but it’s not when you’re working in an industry like ours.”
Balance the culture between old and new.
“At Flexport, we have people from startups and Silicon Valley working alongside people who have been working in the freight logistics industry for years. The two cultures are naturally very different. I think the secret to our company’s success so far has been getting both of those groups, who normally would never talk to each other, to be friends and solve each other’s problems.
We have 7 licenses from government agencies that are really hard to get — but I’d say the real barrier to entry for anyone trying to compete with us is matching us on culture. How are you going to get software engineers this good, and logistics people this good, under one roof working on one team? I feel so lucky we did it. I’m pretty confident I could tell someone everything we did and they still couldn’t do it themselves. I don’t even think I could do it again.
Much of our success has been due to trusting people: delegating, not micromanaging. Letting people make their own decisions and creating a culture of autonomy.
We try our best to hire open-minded people. Our business is very dynamic — we update the app 5 times a day. So we need people with freight expertise, but they also have to have the right mindset. And people from the startup world need to respect the people with industry expertise.”
Ask for help.
“Taking that step of formalizing a business is really hard for a first-time founder. Founders are horrible managers, for the most part. It doesn’t come naturally. My advice would be to hire great people who fill in your weaknesses. You have to learn how to let go.
This was one instance where it came in handy for me to be a single founder. If you get traction and get to product-market fit as a solo founder, then when it’s time to recruit more senior people to help build out better structure, there is a much bigger equity pool to play with. You can recruit people to be effective equity partners in the business. I was able to get very high level, experienced people on board that way.
I also hired an executive coach, and it was immensely helpful. I wish I would have done it sooner. I think coaching is super useful. It’s hard to come by, and it’s not cheap, but it’s so helpful. As a founder leading a quickly scaling startup, you’re going to be doing a lot of things you’ve never done before. Once you’ve found product-market fit, I would advise any founder to invest in coaching to help prepare for what’s ahead.”
Respect regulations at all costs.
“From day one, we’ve been focused on compliance. We’ve taken it so seriously, because it’s the biggest risk to our business.
Customs and freight regulators are on the front lines of drugs and terrorism. So our regulators are different from the ones in other industries. They carry guns. If you’re in violation, they will not knock on your door politely. They will come in through the windows. If somehow we oversee a shipment of, say, lithium batteries on a passenger airplane and there’s an accident, we’re not just getting a fine. They’re shutting down our business and someone — most likely me — is going to jail.
Prioritizing compliance means we’ve had to restrain our growth at times. 99% of our customers, when they sign up get put on a waitlist. We don’t take all the companies that want to sign up right away. We have to make sure we have the resources to be in compliance at every step.
You have to get good at checklists and managing expectations. It means slowing down your salespeople when they’re closing a deal. It means having engineers work on something boring related to compliance instead of some amazing cool feature they want to build. I had a customs attorney I was paying before I paid any employees. You have to take it more seriously than the average startup, and instill it at every level.
Y Combinator created a new model for funding early stage startups. Twice a year we invest a small amount of money ($150k) in a large number of startups (recently 200). The startups move to Silicon