Last week, three major FreightTech deals in rapid succession made it clear that the segment has entered a new phase of maturation and increased sophistication. This is a story not just about the abundance of capital currently available for the best FreightTech startups — it’s also about what founders have learned about playing the FreightTech game and how their companies have changed.
On the morning of Tuesday, Sept. 21, digital freight brokerage Transfix announced that it would go public by merging with a special purpose acquisition company, while project44 acquired fellow real-time visibility provider Convey for $255 million. Two days later, the digital freight marketplace Emerge said it raised a $130 million Series B venture capital round led by 9Yards Capital, Tiger Global Management and The Spruce House Partnership.
These were not the largest FreightTech deals in history. After all, Convoy closed a $400 million Series D in November 2019, and Uber Freight raised $500 million from Greenbriar in October 2020. Flexport got the Softbank treatment in 2019, to the tune of $1 billion.
But the details of last week’s deals make it clear that the FreightTech landscape has evolved beyond its origins in venture capital’s initial, experimental interest in 2014. The first crop of digital freight brokerages, including Convoy, Transfix and Uber Freight, are widening their margins and aiming for profitability. Now Transfix, founded in 2014, will join Uber Freight on the public equities market, where its financials will be scrutinized every quarter as the company works toward achieving sustainable growth. When Convoy finds an exit, that important generation of FreightTech startups will have passed through the entire venture capital funding cycle and graduated from startup status.
The real-time visibility space is rapidly consolidating as winners benefit from powerful network effects — every integration of new suppliers and carriers makes the whole network more valuable for existing users — and attract more capital, buying up niche players. Leading visibility providers like project44, founded in 2014, and FourKites, founded in 2013, have scaled by partnering with growth equity investors and pursuing their ambition for truly global coverage.
Convey wasn’t project44’s first acquisition (Danish startup Gatehouse Logistics and maritime visibility providers Ocean Insights and Clear Metal were tacked on first), but it was the largest and confirmed that the land grab in visibility is only heating up.
The overall market structure of real-time transportation visibility is now largely determined by the race between project44 and FourKites, the two largest and best-funded providers, to be the first to establish truly global coverage. Both companies are focused less on competing with each other on product differentiation in North America truckload, for example, and more on achieving that art of arts: global end-to-end visibility into inventories at the purchase order level.
Emerge’s growth trajectory and the sophistication of its approach both mark it as one of the most important second-generation FreightTech startups. To begin with, Emerge, founded in 2017, is attempting to solve a more complex problem than the first generation of digital freight brokerages. Those companies pitched themselves on the idea that automated freight matching and pricing could drive efficiencies that benefited the shipper and the carrier while making the intermediary more profitable, even in a lower-margin world.
It’s perhaps useful to think of Emerge as a digital marketplace for lane-level, rather than load-level, relationships among shippers, carriers and brokers. The RFP management aspect of Emerge and the platform’s ability to optimize contracted freight across multiple shipper networks means that the company’s technology stack is occupying roughly the same territory as a 4PL or managed transportation provider.
The fact that Emerge’s model has gained traction with customers — not to mention investors — speaks to both the progress that FreightTech has made and to the savvy of Emerge’s founders, Andrew and Michael Leto, who already had successful exits from GlobalTranz and 10-4 Systems.
Emerge is raising more money earlier than most other technology startups, too. Emerge’s $20 million seed round in 2018 dwarfed the typical seed round in that year, which averaged $3.1 million. Emerge followed up by raising the same amount in 2019, but its $130 million Series B round last week was also far larger than the average Series B, which came in at $32 million in the fourth quarter of 2020.
We’ve seen round-size inflation across the venture capital industry but most notably in well-established sectors like fintech and consumer social. That serial entrepreneurs are now raising huge rounds from sophisticated, global asset managers like Tiger suggests that FreightTech is well known and well regarded.
There are of course further aspects of these deals — and the stories behind them — that speak to how FreightTech has grown up in the past seven years.
Project44’s largest acquisition proves that CEO Jett McCandless has mastered the financial art of valuation arbitrage in addition to his technology leadership. Project44 paid just over 13 times revenue for Convey, but as part of project44, Convey’s revenue should be rated closer to the Bessemer Cloud Index’s current 22.8x multiple, instantly increasing project44’s overall valuation by nearly double what it spent.
That financial logic is driving consolidation in visibility as much as the startups’ desire to solve the problems of multinational shippers’ chief supply chain officers. McCandless saw how those deals work not at his current financial sponsors but deeper in his roots in less-than-truckload brokerage, back when XPO went on an M&A spree and intermediaries like Worldwide Express were buying out their agents and capturing the same arbitrage. McCandless is now on a mission to win a new, global technology race, but he’s using tactics he studied earlier in transportation.
The first generation of digital freight brokerages had to adapt their go-to-market and capacity strategies as the initial opportunity of connecting the largest enterprise shippers to owner-operators through a mobile app proved to be somewhat limited.
Transfix, Convoy and Uber Freight all learned that the true owner-operator market is not actually that large — maybe 75,000 drivers who aren’t leased on or under some kind of other forced dispatch — and that enterprise shippers have complex needs that aren’t necessarily best addressed by one-off transactional relationships. So the digital brokers built technology down for SMB shippers, like free transportation management systems that helped small customers manage their freight and work inside clean data formats.
At the same time, the digital brokers built technology up for small carriers, including desktop platforms that helped dispatchers assign loads to trucks and track metrics like revenue per truck per week and empty miles. It turned out that executing awarded freight at scale required partnerships with high-quality small and midsize carriers, not just owner-operators. So even the first generation of digital freight brokers evolved significantly as they took investment, served their customers, grew revenues and shipped new software.
Transfix also matured as an organization as it sought access to public market capital, revamping its C-suite by bringing in Lily Shen to serve as chief executive officer while Drew McElroy moved to chairman, and adding transportation industry veteran Sophie Dabbs as chief commercial officer.
Emerge’s model demonstrates that the Leto brothers’ new understanding of freight market dynamics is appreciably more complex than digital brokers’ first attempts to automate the matching and pricing of spot truckload freight. Emerge’s marketplace is built on the understanding that siloed information creates uncertainty and therefore risk, driving up cost and introducing unnecessary economic inefficiencies. When shippers see how their contract lanes overlap and complement each other, they can use common capacity providers. If a beverage company knows that a food company is putting reefer trucks from a certain contracted carrier into its origin market, it can include that carrier on its next bid, betting that the carrier will have a lower cost to serve than the broader market.
What Emerge has achieved so far, namely the rapid integration of shipper network information at scale — $4 billion of freight from 300 customers is already flowing through its marketplace — was predicated on two things. First, the Letos saw how bid processes could be transformed by the inclusion of new kinds of data, but secondly, shippers themselves had to become more comfortable exposing their networks and lanes to a much larger number of transportation providers.
Both factors — the founders’ vision and the willingness of shippers to collaborate with data — indicate how much progress FreighTech has made.
Subsegments of FreightTech that were established early, like digital freight brokerage and real-time visibility, are finding exits and consolidating. Serial entrepreneurs who have been through the VC cycle once before are finding a warm welcome from investors their second time around, raising huge rounds for complex new approaches to freight market inefficiency. And, in general, capital has never been more plentiful: Private investors’ dry powder topped $2.9 trillion last year, according to Bain & Co.’s 2021 Global Private Equity Report.
Ultimately, it’s the combination of record amounts of available capital, evolving thought leadership, strategy and business models across the segment itself, and the recirculation of successful founders into new startups that makes the current moment so compelling to watch, and so promising.