Lessons from Flexport for Building a Vertical SaaS Unicorn

Since the start of the pandemic, the $9 trillion logistics industry has been the subject of intense scrutiny as global supply chains collapsed and show few signs of improvement. For operators at the helm of one of the thousands of companies that typically play a narrowly focused and often obscure role in the massively complex global supply chain — freight forwarders, brokers, and shipping companies — this newfound attention on their industry’s fragility has been unnerving. Although the logistics industry is seeing record-breaking revenue as the cost of shipping soars, most companies in the sector are understandably reluctant to talk about it. After all, the soaring profits of the logistics industry are a result of its shortcomings rather than its strengths. No one could blame them for wanting to change the subject.

The notable exception is Flexport, a freight forwarding company led by the charismatic 41-year-old CEO Ryan Petersen. As global supply chains crumbled, Petersen memed and tweeted his way into the public spotlight by calling out the industry’s glaring faults — and offering some solutions. Along the way, Petersen has grabbed the attention of policymakers like California’s governor Gavin Newsom and investors like Andressen Horowitz, which recently poured nearly $1B into the company’s Series E round at a valuation north of $8B. In 2020, during the height of the pandemic, Flexport achieved profitability for the first time and last year it reported revenues exceeding $3B. It’s a remarkable run for a company that was only founded in 2013 and its success has important lessons for vertical SaaS founders who are looking to build the next industry software unicorn.

Before we dive in, however, it is worth explicitly stating that Flexport is not a vertical SaaS company in the way that the term is normally understood. Rather, it is a tech-enabled freight forwarder. While it doesn’t own its own ships or cargo containers, Flexport is in the business of helping its customers move their goods from point A to point B with as little friction as possible. It achieved this by creating a platform that leverages massive amounts of data, automation, and the digitization of the many pen-and-paper processes that are still the norm in the logistics industry. So while Flexport may not be a vertical SaaS company itself, the fact that it is transforming an industry’s workflows through software makes it a great case study for vertical SaaS companies operating in the logistics industry or any other sector.

So here are 6 takeaways from Flexport’s meteoric rise for current or prospective founders to consider as they work toward building the next vertical SaaS unicorn:

1. There is immense opportunity in highly fragmented industries
   The global logistics industry — and the freight forwarding segment in particular — is highly fragmented. DHL Global Express is the largest company in the sector in terms of revenue and commands just 6% of the market. More than 60% of the freight forwarders are small providers that each individually command less than 2% of industry revenue. This kind of extreme fragmentation in an industry presents an incredible opportunity for a vertical SaaS startup. Not only does it lower the barrier to entry and provide plenty of wedges for a startup to get a foothold — Flexport started as a “TurboTax for customs” before setting its sights on being the system of record for the entire global supply chain — it also creates opportunities for marketplaces, lowers customer acquisition costs, and reduces risk from competition. In short, fragmented markets allow vertical SaaS startups to start small while thinking big.
2. Low software penetration is a warning sign, but not a dealbreaker
   As we’ve written before, vertical SaaS is about enablement, rather than disruption. These software companies are designed to help their customers do their jobs more effectively, rather than fundamentally changing the dynamics of their industry. In many cases, this means replacing outdated software with a more modern alternative. But in industries with extremely low digital penetration (e.g., freight forwarding), tech companies can find themselves selling into whitespace rather than replacing inferior solutions. While Flexport has shown that this can be a phenomenally successful strategy, a lack of software adoption in a given industry can also be a warning sign to stay away. More often than not, this is because the workflows are not unique or complex enough to justify a vertical solution. Thus it is critically important for founders to identify why software penetration is so low before diving into a market — the same data could represent a once-in-a-lifetime opportunity to digitize an industry, or a recipe for disaster.
3. Fintech can dramatically expand addressable markets
   Flexport offers a dizzying variety of products to its customers that tackle many different pain points in the supply chain. Notably, however, one of their largest product categories is financial services. They offer their customers everything from trade finance to duty drawback and cargo insurance, which helps them navigate the often painful process of securing the funds they need to move goods across the planet. For vertical SaaS companies, finding a “second act” that can expand their addressable market is the name of the game. Over the past few years, embedded fintech products such as payments, lending, and card issuance have emerged as potent levers for growing a vertical SaaS business’ revenue and expanding their addressable market. As Flexport realized, their deep industry knowledge and the data their customers generate on their platform gives them an advantage over conventional lenders because it allows them to dynamically underwrite financial products for their customers. This same opportunity is available to vertical SaaS companies through embedded fintech products.
4. Build for your customers’ customers
   Unlike vertical SaaS companies, Flexport isn’t in the business of selling software to other freight forwarders. Instead, they offer their products to businesses up and down the supply chain, selling to their customers, their customers’ customers, and their customers’ customers’ customers. This is a strategy that can also be effectively wielded by vertical SaaS companies to significantly increase their revenue. The most common approach is through embedding a payment system in a vertical SaaS system. This allows vertical SaaS companies to tap into their customers’ payments revenue by collecting a small portion of each transaction between their customers and their customers’ customers.
5. Automate administration
   While Flexport is hardly the only tech-enabled freight forwarder or logistics data platform, its emphasis on automation makes it stand out amongst its peers. A key to understanding Flexport’s success is that it has automated several administrative functions that are crucial for a freight forward to interface with the global supply chain, which has saved its clients an average of 4 hours per week. This kind of time (and ultimately, cost) saving through software automation is invaluable to business owners and often one of the strongest selling points for verticalized systems of record. The lesson from Flexport is that founders should take a deep look at their customers’ workflows and figure out ways to automate as much of the time-consuming administrative tasks as possible.
6. Aggregate through APIs
   A notable feature of Flexport’s platform is its emphasis on APIs. This solves a few problems at once. First, it creates a network effect because it allows other businesses to build tools that directly integrate with Flexport’s platform, which provides deep incentives to continue using their products. Second, it helps the company standardize the data that flows into their systems, which allows them to accelerate the automation of core workflow tasks while also extracting more insights from the data itself. The willingness to integrate with other businesses through its APIs is a beautiful demonstration of Ben Thompson’s “aggregation theory” in practice, which has arguably been the driving force behind the largest tech companies to be built in the last 20 years. By making it easy to integrate with their service and build complementary products, Flexport dramatically attracts more users to their platform and dramatically lowers its customer acquisition costs. Vertical SaaS companies like Toast and Procore have also developed robust integration ecosystems through their API, and founders should strongly consider following suit. While this can involve significant engineering effort, the payoff in terms of aggregation effects can pay for the investment several times over.

While Flexport is not a perfect model for a vertical SaaS company, its meteoric rise offers many important lessons for SaaS founders building industry-specific software. For a deeper dive on Flexport’s business model, we’d recommend checking out this article from The Generalist that was published last month or Forbes’ recent cover profile of Ryan Petersen.