When the valuation of the much-hyped co-working lease space provider WeWork cratered from $47 billion in early 2019 to below $10 billion in mid-October as its initial public offering (IPO) was suspended and its founder and CEO ousted, it shined a light on an issue larger than just the fortunes of one formerly heralded startup.
It called into question whether WeWork’s biggest venture capital (VC) backer, SoftBank, with a total investment greater than $10 billion, was properly valuing the companies into which it was investing. And, in the context of container shipping and logistics, that leads the conversation directly to Flexport, the San Francisco-based forwarder that secured a $1 billion funding round in February led by SoftBank, by far the largest VC investment into the transportation and logistics market.
SoftBank valued Flexport at $3.2 billion seven months ago. The question, in the wake of what many financial analysts see as a missed valuation of WeWork (not to mention another SoftBank investment, Uber), is whether that valuation will grow, stagnate, or shrink. Valuation in a pre-IPO stage, in the absence of a public share price, is the value of the investors’ stakes in the business.
Valuation parlor game
It can seem like valuations of young companies are a parlor game more than anything based on fundamentals, but where Flexport’s valuation goes from here has actual consequences in terms of where the company goes, and by extension how it will serve customers. Flexport, as the most heavily venture capital-backed company in logistics industry history, is the bellwether for the broader group of VC-backed companies to have entered the space in the last decade.
A Flexport spokesperson told JOC.com in mid-October that the company chose the SoftBank Vision Fund “because they recognize our long-term vision and the capital required to reach it. Our job now is to serve customers with a wide array of tech-enabled freight forwarding services and to live up to the promise we made to our employees and investors. That’s our focus as a company."
According to venture capitalists and equity analysts who spoke to JOC.com on background, Flexport essentially has four near-term paths as its options: raise more venture capital; go public; sit tight and use existing fundraising to enable expansion; or seek to be acquired.
The specter of a lower valuation for Flexport (if SoftBank’s misses on WeWork and Uber bleed into its other investments) would affect the forwarder’s fundraising efforts or any plans it has to go public. Flexport could be faced with what’s known as a down round, or a financing round at a lower valuation than its preceding round. Each share in the company would be less expensive, and therefore the investors could take a larger portion of the company (known as dilution) than they would have if the valuation had increased from the previous round.
It’s more than just the implications of WeWork’s diminished valuation and the venture capital ties between WeWork and Flexport at play here. Freight forwarding still involves large numbers of people on the ground to handle tasks that are difficult or impossible to automate, primarily around shipments exceptions (such as when trucks don’t show up as expected, or asking a carrier to do a favor for a valued customer). The Flexport model is not considered as scalable as some of the purer software-as-a-service (SaaS) companies that have successfully gone public in recent times. As one venture capitalist put it to JOC.com, “There are no network effects there.”
In other words, Flexport needs to drive revenue growth in the same way that incumbent forwarders do: one customer at a time, with a set of services catered to that specific customer, even if the technology is designed to scale across its customers. In a SaaS environment, the same core piece of software can be leveraged across an entire customer base.
Funding to weather adversity
“Bringing global trade online will not happen overnight,” the Flexport spokesperson said in response to questions about how the SoftBank valuation struggles might impact Flexport’s future. “The industry is complex and addressing its problems requires significant investment across technology, infrastructure, and expertise. When we raised our most recent round, our intent was to have enough funds to build out all three of these areas while weathering any economic or political turbulence on our path to profitability.”
Flexport has never been shy about promoting its technology-first approach to forwarding, but it is a people-intensive company similar to other third-party logistics providers (3PLs). CEO Ryan Petersen said in September his company has 1,700 employees.
At the announcement of the $1 billion SoftBank round in February, Flexport said it earned $441 million in revenue in 2018, a 95 percent increase over 2017. Because Flexport is privately held, its financials are not publicly available outside of what the company provides, but assuming Flexport’s revenue growth in 2019 is similar to that of its stated 2018 growth, it would be on track to generate about $860 million in gross revenue this year.
On a per employee basis, that would be a theoretical ratio of about $506,000 of revenue per employee. Compare that to publicly traded rival Panalpina, which in 2018 had revenue of about $419,000 per employee (Panalpina was acquired by DSV in a deal completed in August). In 2018, DSV earned about $245,000 per employee, while Kuehne + Nagel earned $270,000 per employee (both DSV and Kuehne + Nagel are publicly traded). The revenue per employee metric is useful as a gauge to measure Flexport against its forwarding competitors, but software providers would aim to ultimately have higher per-employee revenue generation.
In one sense, SoftBank’s problems with its other investments shouldn’t apply to Flexport. Flexport is a different company in a different market and different internal characteristics. Yet it’s hard to decouple Flexport from the broader SoftBank discussion simply because nearly three-quarters of Flexport’s capital raised to date has come from the $1 billion funding round in February led by SoftBank.
The health — and perception of health — of the broader Vision Fund portfolio are not irrelevant for Flexport. Venture capital is in many ways a perception game. Big name VC firms are brought in to deals to bolster the profile of the startup being backed. When a VC perceived to be on the lower end of the totem pole is leading a round, that can be perceived negatively, and influence the attractiveness of a startup in future investment rounds.
When a large VC with a consistent track record misses big on an investment, it’s considered an anomaly. But when a VC, even one as well capitalized as SoftBank, misses on numerous late-stage valuations, it becomes a concern. The key, as it relates to the valuations of WeWork and Uber, is that those were supposed to be SoftBank’s success stories. VCs invested a total of $12.8 billion into WeWork, according to the venture capital database Crunchbase. The company was privately valued by SoftBank at $47 billion in January, but Bloomberg reported Oct. 18 the valuation at initial public offering could be as low as $8 billion.
SoftBank didn’t respond to a JOC request for comment.
All this leads to an important question regarding the near-term future of Flexport: Does it need to raise more money? “Independent of runway, it’s important for a startup to fundraise every 12 to 24 months, to ‘check in with the market,’” the venture capitalist Semil Shah, founder and general partner at Silicon Valley-based Haystack Ventures, wrote on Twitter Oct. 15. “The act of convincing a new investor to get conviction and set a price is a healthy checkpoint for all parties — founders, early employees, and existing investors.”
One could surmise that Flexport is now big enough and has secured enough funding to no longer be considered a startup, and thus may not be in need of future venture capital funding. But that notion belies the modern model of VC-backed growth, in which VC investments — from seed stage all the way to multi-billion dollar later rounds — are all larger than they were a decade ago. Startups that have successfully raised venture capital are staying private longer and thus waiting to go public longer.
In that environment, Flexport may need to keep raising funds.
According to tech sources who spoke to JOC.com at the time of the $1 billion funding round led by SoftBank in February, raising that much money made sense for Flexport if its goal was to overtake incumbents, because forwarding takes human resources, which takes capital. But, they also said, it might limit Flexport’s next steps. Less funding, on the other hand, might presage an initial public offering, and a lower valuation might entice another company to acquire Flexport.
By taking such a large tranche of investment, they said, Flexport might be boxing itself into a single path down the road: acquisition by a private equity firm, which would be an entirely different scenario, in making the end to Flexport’s tale similar to other 3PLs and software companies in the logistics industry.
Petersen, at the time, disagreed with the notion that the $1 billion investment into Flexport might reduce the number of paths it could take. “It establishes ourselves as a strong independent company. The future is wide open on what we can do. Our investors of course expect a return on their investment, but there are many ways to pay those investors back.”
The bigger issue, as VC and private equity experts explained, is what happens if Flexport goes out for funding in the near future but is only able to raise a down round. And therein lies a key question about how Flexport is valued and what its path forward is. Is its growth fundamentally constrained by its 3PL model, or can it achieve what SaaS companies can?
When asked if there is a concern that Flexport may be categorized in a different long-term growth segment by investors because it isn't strictly a SaaS company, the Flexport spokesperson said, “that's not a concern for us.”
Flexport last week added a SaaS component to its offerings in acquiring the container visibility software provider Crux Systems, which it will continue to offer as a standalone solution. And that might provide a window into what the future of the company looks like, i.e. more of a platform and less a pure forwarder or SaaS provider.
Bubble about to pop?
More broadly, an equity analyst in the transportation and logistics space told JOC.com he sees signs of a “late-stage startup VC capital bubble.”
“People are starting to see the light that tech is not such a defensible thing,” the source said. “Tech in and of itself is a competitive advantage. It’s big, but it doesn’t last long. It’s all coming to a head and it’s just a matter of when.”
In other words, there’s a feeling in some quarters that part of the money flowing into logistics technology is not aimed at good long-term investments because the technology component of those investments can be replicated. Head starts count for something, but not everything.
On the other hand, Flexport’s model in some way mitigates that vulnerability, because it has been investing its capital in industry expertise, not just technology, which — although not a pure differentiator — allows it to more effectively compete head-to-head against incumbents.
Some notable hires in the past few months include: Mathijs Slangen as vice president of sales in Europe (Slangen previously worked at the freight broker Coyote Logistics and before that was with the consultant Seabury); Rosalie Cmelak as a key account manager (she worked for 15 years at Oracle, including a key role in developing its global trade management software); and Tom Gould as vice president of customs and trade advisory (Gould’s long career most recently saw him serve as a senior director of customs at the trade law firm Sandler, Travis & Rosenberg).
But the equity analyst said Flexport, as well as well-capitalized domestic digital freight brokers, need to be wondering about their future path. “The question investors have to ask is ‘what is someone going to pay for it and what’s the exit?’ I’m not sure there’s a ton of appetite in the public markets. And in terms of potential buyers, who’s left?”
He gave a specific example in the domestic market. “Why would they buy a digital freight matching company at 10 times revenue when they could buy [the freight broker] Echo [Global Logistics] at 10 times [earnings before interest, tax, depreciation, and amortization]?”
The analyst said forwarder valuations, in general, are “under pressure” due to concerns around global economic growth, trade skirmishes, and even the shorter-term issue of the low-sulfur fuel mandate impacting the container shipping industry from Jan. 1.
“Going from high growth and net negative earnings to less growth and becoming profitable is a huge challenge,” the analyst said about Flexport. “You need growth within the pie or growth of the pie.”
Another path might be to use funding to acquire customers, he said, though “once you pivot to a rollup, you have to spend money on backend integration.”