Blitzscaling is back and the stock market is paying a huge premium for growth, without consideration of profits. This seems to be at odds with the circumstances that kicked off 2020, when investors were pulling back and putting pressure on startups to focus on sustainable growth.
Even at FreightWaves, which grew by 250% in 2019, investors were telling us that we needed to prioritize profits and sustainability first. But then COVID hit and everything changed.
March, the height of the COVID shutdown, was FreightWaves’ best month in our short three-year history. It seemed to be at odds with the chaos that was going on in the broader economy, but we chalked it up to having a well-positioned product. After all, companies involved in the freight market and supply chain were seeking out real-time market data and were completely discounting historical models because of the effects of the pandemic. They needed the fastest data that they could get their hands on, with context and analysis to help them interpret the data.
FreightWaves’ large media platform, plus the freshest data in the market was winning the day, or so we thought. FreightWaves’ large media presence generates the FreightWaves community, which also helps generate customers. More traditional companies were revisiting how they acquired customers in light of not being able to do in-person sales calls and traditional customer engagement.
While FreightWaves’ business model was working in the pandemic environment, our success was less about FreightWaves and more about what was going on in the broader Freight Tech and supply chain tech ecosystem. Many startups connected to freight and supply chains were setting sales and/or growth records. We weren’t as special as we liked to pretend. We were part of a broader theme – supply chain and freight automation were winning the day. Along with other companies, being in the right place at the right time helped us win.
It became obvious to me in June when I was talking to Jake Medwell, who is a founding partner at 8VC. Jake serves on the FreightWaves board and 8VC is our largest investor. 8VC also happens to be the largest venture investor in logistics and FreightTech in the world, so Jake’s perspective was telling.
He told me that nearly all of 8VC’s portfolio of companies connected to logistics were having record months. COVID had made supply chain and Freight Tech so important that those companies were running up the score. Companies that provide supply chain technology services were seeing interest come from small and large enterprise customers all over the world.
We were in the midst of a technology revolution, where automation, transparency, visibility, and information were becoming paramount to every supply chain, big or small. The companies that had the sophistication to automate their order flows and the capacity to respond to volatile customer demand were winning big, while others were suffering significantly.
Prior to the global pandemic, startups in Freight Tech had experienced cautious customer implementations and long sales cycles. Now they were seeing these rapidly compress. Sales cycles previously measured in quarters were compressed to weeks. It was clearly a unique time.
A few months later, customer funding came back in force. An investor/banker I know described the summer as “death” for deals. In the summer, everyone was cautious, holding out to see if the market would return. A few months later, in October, the same banker said it was the most frenetic pace he had ever seen in his life. Fast forward to December, he suggested that 2021 would be even crazier.
Startups evolve because technology frameworks allow that to happen. The internet, cloud computing and mobile platforms gave rise to the conditions that allowed founders to start the companies. But often, these startups need some moment in history that puts the incumbents at a significant disadvantage over the startups. Startups need to reach an inflection point where their success is inevitable without having to deal with competitors that are trying to destroy them. They also need a change in consumer behavior that is so fundamental that the existing players don’t have products that can adapt to a new reality.
I’ve seen this in another sector – FinTech. Following the financial crisis of 2008, financial tech startups came into their own. The momentum had been building since the introduction of the internet, but there wasn’t a major shift in consumer activity. That all changed in 2008.
Banks got clobbered and were forced to lay off armies of people. Many banks, small and big, shuttered during the period. The banking crisis forced regulators to look at how banks made money. Congress passed laws that changed how banks could make money and how they had to manage their books. The new laws also required a whole new regulatory regime that attacked some of the more predatory activities that banks were known for.
Many consumers also became infinitely more aware of every penny they were spending. In boom times, consumers don’t pay attention to behaviors of companies they do business with. But when times are pressured, consumers will look to ditch providers that make doing business difficult and charge fees for seemingly everything. Consumers will “vote with their wallets” and look for alternatives that offer more for less.
This allowed emerging FinTech competitors to play a central role. While the legacy institutions were fighting for survival, emerging startups were able to use investor capital to build products that focused on customer problems, without concern for short-term profits. Venture capital poured in and deal flow became frantic. However, many of these startups failed to reach sufficient scale and went under or were acquired by larger competitors.
Nonetheless, others became the dominant players in their markets and continue to thrive today. Companies like Green Dot, Stripe, Dwolla, Venmo, Square, Payoneer, Expensify, Marqeta, and Robinhood either originated their business in this period or achieved scale sufficient enough to make them a dominant leader in their product category. FinTech has been the most successful investment category for venture and growth for the past decade. According to Pitchbook, since 2011, $1.74 trillion has been invested in FinTech.
This period provided the right conditions for other startups to thrive. AirBnb and Uber both launched during this time period, giving individuals a chance to rent their assets in a transactional manner. The economic crisis encouraged consumers to find ways to earn alternative forms of income and the Gig economy was the perfect outlet for this.
I lived through this as a founder of a FinTech player that was largely lapped by much better funded startups. We tried to run our business by self funding it. While we didn’t burn as much capital, we traded 20% annual growth for the ability to self-fund, while our Silicon Valley counterparts raised hundreds of millions and went on to dominate.
We lacked distribution and made no investments in marketing. We ended up selling a part of the business to US Bank and then pivoted into banking as a service, which is what my former startup does today. The Silicon Valley startups that took venture funding are worth 100x what my former startup is today.
The biggest lesson I learned from that experience is that distribution is everything in a startup. The second biggest lesson I learned is that when your competitors are taking on capital, you better consider it. Otherwise they will out-market you, hire you, and productize you. They will go on to great riches, while you fight for secondary scraps.
For the Freight Tech community, the lesson from all of this is that the investing cycle is just getting started. The genie will not go back into the bottle. Consumer expectations have permanently shifted. They have learned to rely upon on-demand delivery of goods. Companies have been forced to respond to these demands. The only ones capable are those that have sophisticated logistics networks that can handle on-demand delivery and deliver-anywhere models. Logistics expertise and infrastructure will be a core focus of nearly every company involved in the physical economy.
Companies have also learned that they need to prepare for the unexpected. Having visibility of inventory and product flows are mission-critical. Without that visibility, their very survival is at risk. The startups that are able to solve these problems for companies will continue to grow exponentially.
Investors will follow the money. Since 2011, $302 billion has been invested in supply chain tech. While it isn’t at FinTech levels yet, the growth of supply chain technology investing has been breathtaking. In 2020, the total has reached $52 billion, with some deal announcements embargoed by the companies. In 2011, the number was just $2 billion, so a 2,500% increase has occurred. FinTech, in the same period, grew by just 800%. In fact, FinTech achieved bigger investing numbers in 2018 and 2019, suggesting that the venture interest in FinTech is maturing.
Even though investment growth has been accelerating for years in supply chain tech, 2020 will be the biggest year on record, eclipsing 2018 ($34 billion) and 2019 ($32 billion).
Early stage investors want their shot at the big exit. With the stock market showing that profits are secondary to growth, value will be out of favor with investors. This means that early stage investors, always looking for signals of the next great trend, will see supply chain and freight tech as a sure thing for placing their sector bets. Founders will see a surge of interest in coming months, if not already.