20VC Flexport's Ryan Petersen on Why Investor Relations Are Overrated, Why Boards Have To Be Rethought & Why MBAs Do Not Make Bad Entrepreneurs



In this episode of 20 Minutes VC, host Harry Stebbings interviews Ryan Peterson, the CEO of Flexport, a modern freight forwarding company that has raised $65 million in Series B funding from notable investors, including Founders Fund and YC founder Paul Graham. Peterson shares his entrepreneurial journey, from founding importgenius.com to testing the Flexport concept and facing a three-year licensing challenge. He discusses the importance of having a flexible work setup that allows for financial stability while pursuing startup ambitions, even with a significant debt from his MBA. Peterson also touches on the misconceptions about MBAs in entrepreneurship, the strategic advantage of starting solo, and the complexities of educating VCs about the freight industry during fundraising. Additionally, he highlights the value of investor relationships and connections, and the potential pitfalls of traditional board structures in startups. The conversation also delves into Flexport's vision of becoming an operating system for global trade, leveraging supply chain data to empower businesses.

Summary Notes

Introduction to the Podcast

  • Harry Stebbings is the host of the 20 Minute VC podcast.
  • Harry promotes visual content on Snapchat and longer form content on mojitovc.com.
  • The podcast episode features Ryan Peterson, founder and CEO of Flexport.
  • Ryan Peterson has previously founded importgenius.com.
  • Harry discusses the convenience of using Xero for accounting and Headspace for meditation.

This is the 20 minutes vc with your host Harry Stebbings.

So joining me today, I'm delighted to welcome Ryan Peterson.

And now zero saved you so much time in your day. You have time for headspace.

The introduction provides the context of the podcast, introduces the guest Ryan Peterson, and mentions the sponsors Xero and Headspace.

Ryan Peterson's Background and Flexport's Origin

  • Ryan Peterson founded Flexport after experiencing challenges in managing trans-Pacific shipments for his e-commerce business.
  • Flexport was designed to simplify the shipping process for small businesses, akin to "Turbotax for importers."
  • Ryan tested his business idea with a website that attracted significant sign-ups, including large companies like Foxconn, Cargill, and Saudi Aramco.

Yeah, well, so Flexport's story is pretty tied up with my own story. I used to run an e-commerce business.

Let's build some SaaS, let's build some software to make this simple for small businesses, to workflow management.

We got, in one year, 300 companies to sign up, and I thought it would be all small businesses like my little e-commerce venture. But among the companies that signed up were Foxconn, the maker of the iPhone. Cargill, which is like one of the biggest commodities agricultural companies in the world, and Saudi Aramco, the largest oil company.

Ryan shares how his personal experience with shipping challenges led to the creation of Flexport and the unexpected interest from large corporations.

Challenges and Licensing

  • Flexport faced a three-year delay due to the need to acquire a customs broker license.
  • Despite the proof of concept's success, Ryan had to recruit knowledgeable people and navigate the licensing process before officially launching.

I didn't actually know how to do any of the things that we were offering, like to ship things. I had no idea.

The licensing part turned out to take three years.

Ryan discusses the initial challenges of not knowing how to fulfill the services offered and the lengthy process of obtaining the necessary license.

Starting a Company with Debt

  • Ryan Peterson graduated from Columbia Business School with significant debt.
  • He avoided job offers to focus on entrepreneurship and set up flexible, part-time work to manage debt while starting a company.
  • Ryan's strategy was to create a fail-safe plan that allowed him to pursue his business without immediate investor funding.

I came out with $140,000 in debt, and I knew during business school that I wanted to start a company after.

I want flexible work, but it's reliable. Like, I can do it when I want to and I can make money, but on my time.

I'm going to just design my life so I can't fail.

Ryan explains how he managed the risk of starting a business while dealing with the financial burden of MBA debt by securing flexible and reliable income streams.

Advice for MBA Graduates

  • Ryan advises MBA graduates to design their lives for success, whether entering the workforce or starting a company.
  • The key is to create conditions that allow for pursuing one's goals without being dependent on external approval or funding.

I'd love to hear what knowledge you'd impart to MBA grads coming out and entering either the workforce or looking to start a company.

Harry asks Ryan to share advice for MBA graduates, which leads to Ryan's insights on life design and entrepreneurship.

MBA Perception and Entrepreneurship

  • MBAs are often thought to be poor entrepreneurs, but this is not due to the degree itself.
  • The misconception arises from selection bias, as most people pursuing MBAs aim to manage existing businesses rather than start their own.
  • An MBA can enhance an entrepreneur's skills in various business areas, including capital markets and marketing analytics.
  • Advice to business school students: an MBA is not detrimental to aspiring entrepreneurs, and if entrepreneurship is not the goal, joining a top company is recommended.

"I think this notion that MBAs somehow don't make good entrepreneurs, it's a little bit silly."

This quote challenges the stereotype that MBAs are not suited for entrepreneurship by attributing the perception to a selection bias rather than the degree itself.

"An MBA, if you're a great entrepreneur, I think an MBA can make you much better at understanding capital markets, at understanding well marketing and how all analytics and data and all the different things that you study at business school."

Here, Ryan Peterson emphasizes that an MBA can significantly improve an entrepreneur's understanding of complex business concepts, which is beneficial for running a business.

Founding Flexport Solo

  • Ryan Peterson had his brother as a spiritual co-founder who was involved in the early stages of Flexport.
  • His brother ran another startup and couldn't commit fully to Flexport, leading Ryan to continue solo.
  • Founding solo eliminated the risk of founder disputes, a common reason for startup failure.
  • After gaining traction, Ryan recruited co-founders, offering them less equity than they would have received initially, which was advantageous for him.

"I sort of did have a running. He runs, actually another startup called Build Zoom, which is another YC company."

Ryan Peterson clarifies that while he founded Flexport solo, his brother played a supporting role and had a significant influence on the company's inception.

"The number one reason that companies fail is that the founders split up, like early stage, right? So you eliminate that risk right away."

This quote highlights the benefit of starting a company solo, as it removes the risk of early-stage founder disagreements that can lead to a company's downfall.

Challenges and Emotional Support

  • Starting a company alone can be emotionally challenging, with bad days and weeks being part of the journey.
  • Emotional support is essential, and in Ryan's case, his brother and later his business partners provided this.
  • Having an emotional outlet separate from one's life partner is crucial to avoid overwhelming them with business-related issues.

"You got to have people that you can talk to about that, and you probably don't want to make it your life partner because they'll go crazy if they have to hear all the crap."

Ryan Peterson acknowledges the importance of having someone to discuss the emotional challenges of entrepreneurship with, suggesting it should not always be a life partner to prevent strain on the relationship.

Fundraising and Investor Relations

  • Ryan Peterson has successfully raised funds as a solo founder, leveraging his track record and previous profitable business.
  • The emotional aspect is the main challenge in raising funds, rather than the logistics or strategy.
  • Flexport's complex business model and managed service aspect required more in-depth explanations during later funding rounds.

"I've never had any trouble raising money for Flexport, though, partially because this is my third business and the last one makes $5 million a year in profit."

This quote indicates that Ryan Peterson's previous business success has instilled confidence in investors, facilitating his fundraising efforts for Flexport.

"We are a global freight forwarder, which means we're coordinating a multi sided platform of real world assets that move cargo all around the world on behalf of thousands of other companies without owning any of those assets."

Ryan Peterson describes Flexport's complex operations, which involve coordinating logistics on a global scale without owning the physical assets, a concept that can be challenging for investors to grasp.

Stock Options and Equity Distribution

  • As a solo founder, Ryan Peterson was able to create a larger stock option pool for early employees.
  • Recruiting co-founders later allowed for a more favorable equity distribution from his perspective.

"For sure. We made a much bigger stock option pool than normal."

This quote reflects the advantage of being a solo founder in terms of equity distribution, allowing for a larger stock option pool for early employees compared to a scenario with multiple founders from the start.

Understanding Market Potential and Profit Margins

  • The importance of understanding the actual market size rather than focusing solely on profit margins.
  • The example given contrasts the desirability of a smaller percentage of a larger market versus a larger margin on a much smaller market.
  • The speaker emphasizes that cash flow shouldn't be the primary focus in certain business discussions, especially when considering large markets.

"Like 6% of what is the question you need to ask yourself, right? And if what is a trillion dollars, who cares if it's 6%? Wouldn't you rather have 6% of a trillion dollar market than like 90% margin on a $10 million?"

This quote highlights the need to consider the scale of the market when evaluating business opportunities. A smaller share of a vast market can be more valuable than a large margin in a small market.

Educating Venture Capitalists (VCs)

  • The challenge of educating VCs about a specific industry without appearing patronizing.
  • The time constraint of doing so within the typical one-hour investment pitch.
  • The difficulty in not only teaching VCs about an unfamiliar industry but also convincing them of the company's potential to succeed within that industry.

"And at the start of this conversation you didn't know anything about freight forwarding. And at the end of the conversation you need to not only know about it, but know what we do and why we're going to win."

This quote illustrates the challenge of educating potential investors about an industry they are unfamiliar with, while also pitching the company's strategy and potential for success.

Selecting the Right Investors

  • The advantage of having investors who understand the industry or have real-world business experience.
  • The speaker's preference for investors who have been involved in real-world businesses.
  • The benefits of building long-term relationships with existing investors who understand the business and have seen it meet projections.

"We found that to be very hard, the very few investors that had it. In our case, it was fine investors."

The speaker acknowledges the difficulty in finding investors with specific industry experience but notes the value of those who do have it.

Fundraising Strategy and Use of Capital

  • The purpose of raising capital and how it is intended to be used by the company.
  • The distinction between raising capital as a war chest for industry growth versus a short-term financial runway.
  • The approach to taking risks with the capital raised, especially in terms of balancing risk and expected value.

"It's about seven years of Runway right now. We might do something stupid, and hopefully it won't be 18 months, but we might spend it faster."

This quote clarifies that the capital raised is meant to provide a long-term financial runway, with the acknowledgment that spending could accelerate depending on the company's actions.

Value of 'Value Add' Investors

  • The speaker's skepticism about the significant impact of 'value add' investors on the company's trajectory.
  • The primary value of investors to the company has been through relationships and connections, such as customer introductions.
  • The preference for investors who provide capital, understand the business, and do not interfere with management.

"Most of them have been amazing, like making connections and stuff, but we would have pretty much had the same company without any given thing that any of them did besides give us lots of money."

This quote expresses the speaker's view that while investors have been helpful, especially with connections, the company's success is not solely attributable to any specific actions by the investors.

Company Governance and Board Meetings

  • The speaker's experience with company governance, including the lack of a formal board until after significant fundraising.
  • The informal and enjoyable nature of board meetings when the speaker was the sole board member.

"Yeah. I mean, we didn't have a board at Flexboard until we'd raised $30 million and just created the board after the series B when we raised another 65."

This quote provides insight into the company's approach to governance and the timing of establishing a formal board.

Negotiating Investment Terms

  • The importance of securing the best terms in an investment deal.
  • The speaker's perspective that the best terms are not necessarily about the highest valuation.
  • The consideration of factors such as ownership and control in determining what constitutes a good deal.

"Yes, for sure."

This concise affirmation supports the idea that securing favorable investment terms is a priority over other factors like valuation.

Company Valuations and Exit Strategies

  • Ryan Peterson emphasizes the importance of realistic company valuations and exit strategies.
  • Founders should assess whether their company has the potential to become a billion-dollar business.
  • High valuations can limit exit possibilities, which are important for founders to eventually realize financial returns.
  • External advisors can provide a reality check on company valuations and potential.

"I never worried about high valuation for Flexport because I just think it can be the biggest business in the world and it's so awesome. It's all I ever want to do. So we're not going to sell the business, therefore high valuation, and I believe that we'll clear the hurdle."

This quote explains Ryan's confidence in Flexport's potential and his disregard for high valuations due to his commitment to the company and belief in its success.

"Are you really going to build that big of a thing? If so, if not, then you really don't want to raise insane amounts of money at high valuations. Right. Because you cut off exit possibilities."

Ryan points out that founders should critically evaluate their company's growth potential, as overvaluation can restrict future exit opportunities.

Investor Insights and Liquidity Options

  • Ryan shares an anecdote about a billionaire investor who advised against going public as the only means to achieve liquidity.
  • The investor suggested that borrowing money to pay oneself a dividend could be an alternative to an IPO.
  • This conversation highlights the value of investors' insights and the various paths to liquidity for private companies.

"And when you want liquidity, you know, you can always just borrow a couple billion dollars and pay yourself a dividend."

This quote reflects the investor's perspective that there are alternative methods to achieve liquidity without necessarily going public.

The Role of CEOs and Dream Jobs

  • Ryan jokes about being a CEO for only one day, suggesting he enjoys his current role.
  • He expresses interest in being the CEO of a company that owns ski resorts and heli-skiing operations, showing a personal interest in outdoor activities.

"Why only for one day? Oh, wow. I think I would be. My friend Tom is the CEO of Intro west. They own like a bunch of ski resorts and a heli skiing operation and I think I would just do that for the day."

Ryan's response indicates his hypothetical choice would be driven by personal enjoyment rather than business or professional aspirations.

Venture Capital Industry Changes

  • Ryan suggests rethinking the structure and role of company boards.
  • He criticizes the traditional authority given to boards and questions the qualifications of board members in making crucial company decisions.
  • The concept of boards is historical, and Ryan challenges their necessity and effectiveness in modern businesses.

"I would like to see boards be rethought."

Ryan expresses his desire for innovation in the governance of companies, indicating a need for change in the way boards operate.

Favorite Reading Materials

  • Ryan enjoys reading his own company's blog, Flexport, and also appreciates content from SaaStr by Jason Lemkin.
  • He uses Twitter frequently, suggesting it's his preferred source for news and updates.

"Well, the Flexport blog, by the way, is my favorite blog because I write most of the posts."

Ryan's preference for the Flexport blog highlights his involvement in creating content for his company and his pride in it.

"I've always read Saster and been a big fan of Lemkin stuff."

This quote shows Ryan's admiration for industry thought leaders and his commitment to staying informed through their insights.

Flexport's Vision and Future

  • Flexport started as a freight forwarder but aims to become more by leveraging supply chain data.
  • The company seeks to help clients improve their businesses using this data for inventory reduction and financing.
  • The ultimate goal is to create an operating system for trade, integrating various partners in the supply chain.
  • Even if Flexport does not fully realize this vision, Ryan believes the company will still succeed in customer acquisition and service.

"Our vision is really we start by being a freight forwarder, just helping companies move freight around the world. In secret. Companies come for the freight, like for the better user experience and pricing and transparency on moving freight. But they actually stay for the data because we are secretly actually, what we do is structure all your supply chain data and give it back to you in useful forms in time."

Ryan outlines Flexport's strategy of initially attracting clients with freight services but retaining them through valuable data services.

"If we really succeed. If we fail, we'll just build the best customer acquisition and service model in a trillion dollar industry and still do quite well."

This quote shows Ryan's confidence in Flexport's business model and its potential for success, even if the broader vision is not fully realized.

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