Higher valuations driven by supply-demand imbalance
One thing that the pandemic has made clear is that large retailers — not just other third-party logistics and transportation providers — will be prolific acquirers of e-commerce fulfillment platforms.
COVID-19 has had a complex and multifaceted impact on the capital markets for transportation and logistics technology companies. Social distancing, corporate bans on travel, and choppy performance during the pandemic made it difficult for many deals to close. But that only made deploying the approximately $1 trillion of dry powder available to private investors more urgent over time.
On the supply side of the marketplace, many freight-tech and tech-enabled logistics companies have performed quite well as the digital transformations of their customers were abruptly pulled forward by years. On-demand warehousing companies like Stord and Flexe, digital freight matching players such as Uber Freight and Loadsmart, and e-commerce fulfillment companies including ShipBob enjoyed strong momentum that showed up in venture capital investment, if not M&A just yet. These companies are clearly still in high-growth mode and not ready for exits.
“The coronavirus pandemic has fundamentally changed the market for logistics technology companies in e-commerce fulfillment and last-mile delivery for the next five to 10 years,” said Burke Smith, managing director of the transportation and logistics practice at Capstone Headwaters. “The sheer number of shippers through e-commerce has boomed — look no further than Shopify doubling sales in Q3 2020 ($767 million) vs. Q3 2019 ($391 million) — causing a fragmented market of small shippers in dire need of getting products directly to consumers. This has created a massive need for software solutions to efficiently facilitate those deliveries.”
Smith cited Shipbob, Flowspace, Delivrr and Bringg as examples of companies in the space that have raised $150 million since Feb. 1 — i.e., all COVID-era deals — but noted that there haven’t been large exits yet. Capstone Headwaters published a study of logistics technology deals at the beginning of December.
For most of the 21st century, public investors paid a premium for high-growth companies compared to the private markets. That wasn’t the case from roughly 2015 to 2019, as the number of initial public offerings slowed and the cohort of private unicorns grew ever-larger. In 2020, that dynamic appears to have shifted, and a series of red-hot IPOs may encourage more freight-tech companies to go public. Digital freight broker Transfix is rumored to be discussing a special purpose acquisition company (SPAC), while this week in the announcement of its $100 million Series D, visibility solution provider project44 said it would look to go public in the next two years.
But for freight tech companies, strategic acquisitions will always play a major role in helping investors exit companies and providing liquidity to founders.
“Traditionally these companies may look to exit in an IPO, or to be acquired by another technology provider or private equity group, but another option is emerging,” said Nathan Feldman, transportation and logistics analyst at Capstone Headwaters. “Strategic companies throughout the retail supply chain are taking a hard look at their technology stack, and some are turning to acquisitions. While it was going out of business at the time, startup Deliv, which provides crowdsourced same-day delivery technology, was acquired by Target in May and will enhance Target’s efforts to improve the delivery process. Other major retailers will probably follow suit to stay relevant.”
The universe of potential buyers of e-commerce fulfillment platforms — including technology stacks and logistics providers — has definitively widened. The market will continue to see traditional deals like Transplace’s June acquisition of ScanData, a parcel transportation management system that optimizes roughly $2 billion of parcel spend annually. But the Capstone Headwaters bankers think that 2021 will yield more deals from buyers in different parts of the value chain, like Panasonic’s minority stake in Blue Yonder and Square’s acquisition of Stitchlabs.
Many of the better-quality companies are choosing to sit out of the market, preferring to take on growth capital from a position of strength rather than explore an exit. One of Capstone Headwaters’ key insights is that the rising valuations in the logistics technology sector — revenue multiples have remained north of 3x — is not due to insanity or imprudence on the part of investors, but reflects a fundamental economic reality about capital markets. In freight tech, demand is outstripping supply.
“There’s an interesting disconnect in the market right now because many high-quality, would-be sellers have, understandably, put off an exit transaction until the world develops a sense of normalcy again,” Smith said. “On the other hand, buyers are being extremely aggressive and are overlooking much of the business disruption that has come along with the pandemic. Strategic buyers are looking to fill product gaps, private equity has over a trillion dollars in dry powder that they need to spend, and banks are again funding transactions with a healthy level of debt. The capital and desire to do deals is very much there. Put simply: Supply of quality companies is low, demand is strong, and valuations have grown to represent that fundamental economic disconnect.”
One of the questions left unresolved by Capstone Headwaters’ research is what this most unusual year for freight, technology and freight-tech deals means for 2021. To Burke Smith’s mind, 2021 might go one of two ways. If you take the view that the current frenetic pace of deal-making is simply a bubble from investments that were delayed by COVID complications, Smith said, then you might expect a slowdown and a gap at some point next year. But if technology adoption trends hold up, e-commerce maintains its momentum, and the most attractive companies begin seeking exits, then M&A markets could see a “resurgence.”
On a longer timeline, the Capstone Headwaters bankers say that overlapping factors in the transportation and logistics technology sector will drive activity for years to come.
“We’re seeing buyers start to wake up and see the disconnect between how powerful and important transport and logistics is, and how little they’ve invested in and adopted in the tech space to solve some of those issues,” Feldman said. “Autonomous robots for warehouses have seen a lot more VC activity over the last three or four months, and we’ve seen a yard management company acquired by Accel-KKR, and machine learning software and blockchain starting to permeate the logistics technology space. In general, there’s a much stronger focus. It’s a good moment in time — a little bit of a perfect storm with COVID, APIs and other things that allow you to stitch together a very complex network of providers — a much better moment to try to find a solution to these problems.”