Federal Express: The Making of Venture Capital
Insight provided by Rines Fund alumni Michael “Dalton” Kaichen, originally published on November 25, 2019
The Rines Angel Fund at the University of New Hampshire is committed to learning the most about private equity and entrepreneurship. This article is a historical overview of a venture which was partially responsible for making the private equity business what it is today. Few success stories can match that of Federal Express and the company’s founder, Fred Smith, is a notable inspiration to entrepreneurs worldwide. The fledgling cargo airline that is presently known as FedEx was not an overnight success; a key note of inspiration is the kind of teams that built the corporation from the ground up. Managers and investors stood up to the plate in a way that is not typically seen in modern day startup deals. The now $30 billion was quite literally built with the blood, sweat, and capital of its founder and venture capitalists.
Every startup begins with an idea formed in the magnificent mind of a revolutionary thinker and the idea itself is usually met by some form of opposition. In 1965, Fred Smith was an undergraduate at Yale University. Smith wrote a term paper for one of his courses during his sophomore year which identified the faults of the current airfreight system and proposed a solution. The exact contents of the paper are not clear but legend has it that the paper discussed the issues with airfreight businesses relying on passenger air routes which did not make economic sense for urgent deliveries. Companies such as United Parcel Service (UPS) were at the mercy of airlines under the ownership of external corporations. It was nearly impossible to guarantee the customer a firm delivery time. To resolve this dilemma, Smith proposed a business that utilized its own aircraft and flight schedule to do business independently from passenger airlines. The professor in charge of grading Smith’s term paper did not see the value in the young student’s proposal and thus Smith received a C- for the assignment. By 1971, Smith had returned serving in the Marine Corps and a tour in Vietnam. At that time, Smith convened with his stepfather, Fred Hook, in Arkansas and assisted him in operating his aviation business. The company was called Arkansas Aviation Sales. The struggling firm provided fuel and hangars for small independently owned aircraft. Smith later received his father’s estate and purchased control of Arkansas Aviation. Smith ultimately transformed the small business into an aircraft brokerage and returned the company to profitability within two years. The business was successful but Smith was unsatisfied with the airfreight system and experienced firsthand the frustrations of delays, being a business owner who required parts on rush. Smith remembered his term paper and returned to the idea of a new airfreight business.
Smith first devised a business model where the company would ship checks and other documents for the Federal Reserve Bank. The network of branches would be the company’s sole customer and the name of the business would be Federal Express. Most important for the purposes of this article is Smith’s interest and incorporation of the Dassault Falcon 20 fan jet into his airfreight system. These jets were largely used by the French Air Force at the time. Falcon 20s were a ten-passenger jet with a range of up to 2,000 miles and could travel at speeds upwards of 550 miles per hour. To purchase two jets, Smith raised $500,000 in capital with the help of his two sisters and convinced the directors of his father’s trust fund to extend a loan of $3.6 million. Most readers are probably wondering how a small venture with two planes and over $3 million in debt became a multinational, publicly-traded corporation with annual revenues of $30 billion. This is when the venture capitalist comes into play.
Smith had connections with Yale colleagues and his passion for his new venture was contagious to investors looking for a return. The venture capital space was fairly new in the 1970’s, but FedEx ended up becoming one of the largest VC deals of its time. Investors contributed funds totaling to $80 million dollars which was used to purchase enough Dassault Falcon 20s to spring the firm into operation. The first night of operations for Federal Express was April 17, 1973. The team that night was comprised of 389 members and this number included investors. Together they loaded 186 packages aboard 14 fan jets. The planes departed Memphis, Tennessee and delivered to 25 U.S. cities. The company did not reach profitability until 1975. Eventually the company became the premier carrier of high priority goods and set the industry standard of “The World on Time”. Years of struggle ensued while attempting to source funds, building a management team, and functioning in a strict regulatory environment. In the end, the leader in overnight delivery came to full fruition through the determination, creativity, and openness of Fred Smith and his team.
It is important for members of the Rines Angel Fund and the investment community of the NH seacoast area to understand that FedEx was not a sure thing. The venture capitalists who invested in the venture in the mid 1970’s was investing millions into the founder’s ability and the people who made the first night of operations a reality. The term paper written by a college sophomore meant nothing until those with the right level of dedication and determination were found. The FedEx team was one that was proud and willing to do what is necessary for the business to succeed. This mostly holds true even to this day; as members of the fund, we have to look for this same passion in each entrepreneur who walks through our door. It can remind us that any idea, no matter how obscene, can be profitable as long as it is properly executed.
Frock, Roger. Changing How the World Does Business: FedEx’s Incredible Journey to Success: the Inside Story. Berrett-Koehler, 2006.
“History.” About FedEx, about.van.fedex.com/our-story/history-timeline/history/. <http://about.van.fedex.com/our-story/history-timeline/history/>
Michael “Dalton” Kaichen is a Rines Angel Fund alumni. He graduated from Peter T. Paul College of Business & Economics at the University of New Hampshire in 2019 with a degree in Business Administration. During his time studying business management, he worked as an operations supervisor at United Parcel Service (UPS) where he is now a package dispatch supervisor. He chose to write an article on FedEx because he believed that understanding a company’s beginnings helps to better understand the existing culture of the firm.
