Goodbye 2020, hello 2018?
Recent forays by Greenbriar and BlackRock into cash-burning digital freight brokerages reveal a shifting landscape for capital across asset classes that holds profound implications for venture capital-backed freight tech startups.
An enormous mountain of dry powder needs to be put to work by private equity investors who are increasingly turning to venture capital-style investments in startups. That capital will fuel growth at the next round of digital freight brokerages and other freight tech companies, creating a new class of fast-growing majors.
Last week, BlackRock (NYSE: BLK), a colossus among asset managers with a portfolio valued in the trillions, announced that it had led a $90 million Series C investment in Loadsmart, which valued the digital freight brokerage at $400 million. TFI International (NYSE:TFII) and Maersk Growth also participated. Calculating the valuation multiple was easy: Loadsmart CEO Ricardo Salgado said it would finish 2020 with ‘north of $100 million’ in revenue, pegging its valuation at about four times post-money revenue or more than three times revenue pre-money.
In October, Greenbriar Equity Group announced that it had led a $500 million investment in Uber Freight, the digital freight brokerage division of Uber Technologies (NYSE: UBER). The deal valued Uber Freight at $3.3 billion post-money. Uber Freight’s third-quarter revenue came in at $288 million, or a $1.152 billion annual run rate, meaning that Greenbriar valued the business at about three times revenue.
The Greenbriar-Uber Freight investment was notable for a number of reasons, not least of which was the fact that Greenbriar, a traditional private equity firm focused on buying controlling stakes in cash-flowing private businesses, had departed from its typical playbook to get in the deal. A minority stake in a large cash-burning public digital freight brokerage was atypical, to say the least, for Greenbriar.
What does this mean for founders?
These recent investments show that relatively small digital freight brokerages are still in high demand and can command rich valuations comparable to the most attractive private companies (in November 2019 Convoy raised $400 million at a $2.75 billion post-money valuation on approximately $600 million in gross revenue or a 4.5x revenue multiple).
These high valuations can be a double-edged sword for founders, though, especially when there’s a significant difference between VC valuation multiples and public market valuations. If a private digital freight brokerage raised at 4x revenue but then had to sell to a public company at 3x revenue, the company would have to grow significantly just to maintain the same valuation. Years of growth would be rerated downward, and, needless to say, the investors’ capital would be the first returned. Typically venture capital is “last in, first out,” meaning the most recent investor who in theory bought at the highest price will be the first to be covered in a transaction. Founders only get paid after a great exit, and rich valuations introduce a higher threshold for success.
At the same time, the recent Greenbriar and BlackRock deals signal that more money is ready to come into freight tech, which could shift the venture capital supply-demand dynamics in founders’ favor. It may be easier to raise more money on more favorable terms.
BlackRock ramped its venture capital practice in 2019 and began investing at a regular pace this year, closing 23 deals in 2020, most of them in healthcare and biotech, according to Pitchbook data. BlackRock’s accelerating activity in a new asset class may be related to its need to deploy the more than $17 billion in uncalled capital, or ‘dry powder’, that has already been committed by its clients. In the third quarter of 2020, “alternative assets”, which include private equity, hedge funds and venture capital, were only 3% of BlackRock’s assets under management but accounted for 10% of the firm’s fee income.
Why traditional investors are moving further into risk assets
The first question prompted by these two deals is why are large traditional investors deciding to jump into venture capital? Uber Freight of course is no longer a startup, but as a high-growth technology platform with net losses, it still has some characteristics of a VC-backed startup.
Part of the answer is that in an investing environment that is more and more characterized by near-zero interest rates, firms with institutional investors as limited partners must find yield somewhere. But a more fundamental cause is the sheer amount of dry powder that has accumulated in the private markets. Limited partners — a pension fund, for example — commit capital to investment firms with a deadline for deployment. As the investors find opportunities, they call the dry powder from their limited partners (LPs) and write checks. According to Preqin data, by June 2020 private equity investors were holding $1.45 trillion in dry powder globally.
As Greenbriar’s managing partner John Anderson explained in a recent conversation with FreightWaves president George Abernathy, the COVID-19 pandemic’s social distancing rules made getting deals done more difficult, and its economic disruptions made company forecasts more uncertain. But the private equity firms’ LPs stuck with them, which ultimately led to stores of dry powder growing higher. We expect to see more ‘tourists’ in freight tech venture capital writing large checks to second-tier companies that haven’t scaled yet.
What do the deals mean for digital freight brokerages? BlackRock’s investment in Loadsmart signified that there is more than one growth trajectory that can attract capital. While negative gross margin blitzscaling was the early playbook established by Uber Freight and Convoy, Loadsmart was different. Loadsmart was founded three years before Uber Freight and one year before Convoy, in 2014. But it grew more slowly, taking six years to reach $100 million gross revenue, and raised less money, $161 million.
Perhaps in another industry, investors might have viewed smaller digital freight brokerages like Loadsmart, NEXT Trucking, and Transfix as secondary players, but at some point, it became clear that the opportunity was so large, and the logistics industry so fragmented, that it would be possible to build many billion-dollar companies. ‘Winning’ will not be defined as achieving the #1 or #2 position in the brokerage industry, but by reaching sufficient scale and profitability to make an exit and generate a great return.
In 2015, the year Convoy was founded, there were six freight brokerages with gross revenues of $1 billion or more. Today there are 15 brokerages on a $1 billion-plus annual revenue run rate. Most of this new class of freight brokerage majors were built by private equity firms. Using a “buy-and-build” strategy, PE firms paid high multiples for platform-quality companies and then bolted on smaller shops at lower multiples, averaging down in the process. Redwood, Mode, NTG, BlueGrace, and GlobalTranz are all examples of PE-backed companies that have climbed into the ranks of the top freight brokerages.
The next round of growth may look different. Venture capital-style investing differs from private equity in a number of ways. Most VC firms do not have sector expertise in transportation and logistics. Although this is changing to some degree as supply chain-focused VCs grow more prominent, the new tourists driven into freight tech by the imperatives of capital deployment will not share that expertise. They will advise and direct their portfolio companies from a distance — BlackRock, in other words, probably doesn’t know much about growing freight brokerages. Greenbriar does, of course, but remember that it will only take a minority stake in Uber Freight.
Big checks written from a distance imply a return to typical VC startup growth trajectories. It remains to be seen whether the recent emphasis placed on unit economics, including gross margins and customer acquisition cost, holds up under the deluge of capital waiting to come into the industry and the growth those investments will demand.
So the next class of large freight brokerages to come of age may not look like the last one, with its heavy emphasis on private-equity style M&A. Instead, if digital freight brokerage startups like Forager, TransLoop, Zuum Transportation, and Torch Logistics get traction, they may find plenty of additional rocket fuel available at a discount.