JOC.com—The amount of venture capital (VC) investment entering the freight logistics market is eyepopping, but it’s still unclear to what extent trumpeted software innovation is trickling down to shippers’ containerized supply chains.
According to research earlier in 2018 from the strategic consultants Simon-Kucher, more than $2 billion has been invested in logistic technology startups globally, with hundreds of millions more added to that total in recent months. The exact figure can be tricky to calculate, since logistics funding tends to include everything from freight-oriented entities to those involved in warehousing, last-mile/last-touch, and even areas such as food delivery apps.
Without context, this money can look like foolhardy bets on fledgling, non-asset-based companies with little revenue and no reputation in a highly fragmented industry. But it’s important to understand that VC groups have a roadmap in mind when investing in logistics technologies. And the companies that take on VC similarly understand the model they are using, one that allows them to grow quickly in personnel, geographic reach, and engineering scope, but one that also compels them to sell a stake in their own potential success.
VC and logistics providers — the overriding questions
The broader questions when it comes to the compatibility between the VC and logistics worlds are: will the investments ultimately benefit the end users, and specifically shippers; is VC funding of startups penalizing wellrun companies that are not VC-backed; and whether principals at VC funds understand the logistics industry well enough to be placing multimillion-dollar bets in the market.
Matt Tillman, CEO of the logistics software startup Haven, quantified the impact of VC on his customers at the JOC Logistics Technology Conference in late October in Las Vegas. Tillman said he is able to turn $100,000 in subscription revenue from a shipper into $1.5 million in value for that shipper. That’s because a start-up software-as-a-service (SaaS) provider is valued by VC groups at roughly 15 times its revenue, so that $100,000 invested in Haven turns into $1.5 million in potential investment in the company by its investors, money that is reinvested in serving the customer since the early phase of startups is built on rapid growth of topline revenue.
There are varying viewpoints of whether this approach benefits the industry. Many in the logistics industry believe the amount of VC flowing into the market is unhealthy, creating a looming bubble in which VC groups will disappear if the economy turns or take their money to the next hot space if it doesn’t. Others believe that even if VC money is creating unrealistic expectations around what software can actually do to make logistics more efficient, the cumulative effect of money flowing into the industry will have a net positive effect.
“Before we make an investment, we’ll sit down and whiteboard how we can meaningfully help the company — that’s where we’ll say, this could be an interesting match,” Santosh Sankar, director of Chattanooga-based Dynamo Venture Capital, a VC focused purely on supply chain technology, said at the Las Vegas event. “If you sit in the seat of a shipper, we’ve seen the rise and fall of large businesses, household names, so now everybody is more proactive. There’s a culture of solving problems using solutions that might be startup-generated. It doesn’t matter who they’re backed by.”
Sankar, whose $18 million fund backs early-stage supply chain software companies, also said that potential buyers of solutions should not necessarily be awed by a multimillion-dollar investment in a software company. “Just because you see a splashy fundraise doesn’t mean that’s a successful business,” he said. “It’s just one step and milestone in the broader journey. Anyone could be an investor, but what actually matters is helping the founders build a business and harvest the return on the backend.”
Software startups can often get lost in the buzz around an idea and fail to understand why shippers might choose other products in their market, said Julian Counihan, founding partner of Schematic Ventures, a New York-based supply chain-focused VC. “To be able to break that down and the variables your customers care about — that’s something a lot of startups can improve on,” he said during a panel on how VC firms look at the industry at the Logistics Technology Conference. “Just knowing what the format of VC is, knowing the VC is going to look to take 15 percent of the value of your company. Understanding what the investment round is.”
Does it matter if the VC firm understands its client’s business?
One question voiced among logistics veterans regarding liquidity coming into the industry is the extent to which VC groups (particularly those that are not supply chain-focused) are arming themselves with enough knowledge to make educated bets on certain startups. In other words, are investors enamored by ideas, individual founders, or broader market potential? And does it matter if they don’t truly understand the logistics industry before investing in it? “The average investor is very talented,” Counihan said. “If they don’t have domain expertise, they know how to find it and hire it. To those folks in the industry, when you see outside faces and they don’t know the vernacular of supply chain, it can look like they’re shooting from the hip. But they’re good at their jobs, and perhaps they don’t need to be close to the industry to make good investments.”
Sankar agreed, saying there are pros and cons to running a dedicated fund for a certain sector. He said the bigger, multi-vertical funds can apply basic principles in horizontal industries to investing. “They’ll find someone who has worked in the industry,” he said. The flipside, though, is that Counihan said some newer investors find supply chain “boring.”
“We’re excited about it, and that has worked out well for us. If you’re new to the industry and someone is describing their TMS [transportation management system], or whatever layer in the supply chain stack, you kind of have to love the industry to want to dig in.” There’s also the issue of whether VC funding is artificially pumping up the value of certain startups, to the detriment of companies (profitable or not) that haven’t attracted such funding. The bulk of those companies in which VC is uninterested are established or legacy software companies or service providers, companies that are no longer in a rapid growth stage.
“The level of innovation that’s occurring is mind-boggling and while it comes with a lot of confusion in the marketplace, it also comes with a phenomenal amount of opportunity,” Jon Slangerup, chairman and CEO, American Global Logistics and former executive with FedEx, said at the Logistics Technology Conference. “As Flexport (a digital freight forwarder that has landed $300 million in VC and strategic investment) and all these other companies emerge, we have challenged ourselves internally to say ‘do we have the best platform?’ Is it what our customers need to scale and grow? The answer was no. We’ve invested tens of millions of dollars in the past year-and-a-half to make sure the platform could handle bolt-on technologies. We will be able to offer a robust array, that’s what our customers count on. If we don’t, we lose the race, and we’re no longer relevant. There are many companies like mine that are struggling with the same issues. The bigger they are, the bigger the struggle, because those legacy platforms are hard to change.”