Despite significant investment in supply chain and logistics technology firms, venture capitalists say a divide remains between investors and the industry when it comes to understanding how shipping works, what needs fixing and where it can be disrupted.
In February, the New York-based venture capitalist Brian Laung Aoaeh wrote a lengthy blog post with a simple title: Ocean Freight Shipping. The analysis set out to explore the landscape of startups aiming to enter the world of container shipping in some way, but in truth, it also aimed to explain to the investor community just what container shipping was all about.
And therein lies the rub. Despite $8.4 billion in investment in supply chain and logistics technology firms from 2012 through 2016, according to research by venture capital database CB Insights, and many more hundreds of millions invested during 2017, there often remains a divide between investors and the companies seeking that investment when it comes to understanding how the industry works, what needs fixing and where it can be disrupted.
“When my study came out, there were so many founders who said to me, ‘Oh my God, you have no idea how nice it is to meet a VC (venture capitalist) who understands the industry,’” Aoaeh, a partner at early-stage investment firm KEC Ventures, said in a recent interview with American Shipper.
Opinions vary as to how far along the current wave of investment in supply chain, logistics, and shipping technology is, but most analysts agree it began in 2011 or 2012. That’s when a number of current founders started eyeing the possibility of using modern technologies, a clean slate, and a fresh viewpoint to address inefficiencies in the multi-trillion dollar global trade market.
“When I first saw how enormous this industry is, my jaw almost dropped,” Aoaeh said. “I was thinking to myself, why is anyone messing with digital media when there’s this multi-trillion dollar industry out there?”
Self-Reinforcing Cycle. As more money migrates to logistics and supply chain technology—via both enterprise software providers and startups—the question becomes, “will it continue at its current speed, will it accelerate, or will the bubble pop?”
“Given the central role that supply chain plays in moving physical goods, services, people, and information from place to place, I feel there is insufficient investment in early-stage startups tackling supply chain problems,” Aoaeh said. “One hundred percent of global GDP is dependent on the interaction between physical supply chains and digital supply chains. Looking at it from that perspective, then one has to conclude that early-stage VCs like me have failed to recognize—and exploit—the opportunity that supply chain presents.”
“One hundred percent of global GDP is dependent on the interaction between physical supply chains and digital supply chains. Looking at it from that perspective, then one has to conclude that early-stage VCs like me have failed to recognize—and exploit—the opportunity that supply chain presents.” Brian Laung Aoaeh, partner, KEC Ventures
Victoria Beasley, a senior associate with San Francisco-based Prelude Ventures, had a similar take.
“As an investor, I’m an eternal optimist,” she told American Shipper. “There’s always more innovation to come. With the advent of new forms of transportation, there are new things to come that haven’t been dreamt up yet.”
It’s difficult to foresee which of the startups currently being funded by VC firms will affect meaningful change in the industry, but Beasley said she sees room for more growth in the coming years.
“We’ll start to see who’s getting traction and who’s not,” she said. “Given how massive the industry is and how far there is to go to catch up in the digital era, there’s a lot of value to capture, and we’ll continue to see investment in innovation.”
Prelude is an early-stage investor in ClearMetal, which uses machine learning to help shippers, carriers and third-party logistics companies gain insight into internal and customer behavioral patterns.
“There’s always money for entrepreneurs who are trying to disrupt, especially a big industry,” she said. “Things are changing so fast in transportation, and that—to me—is a hallmark of where investment dollars go. Even taking the second layer, the macro drivers, where there’s change, there’s the opportunity for innovation, and there’ll be capital behind it, so it’s sort of self-reinforcing.”
Those underpinning this tidal wave of economic activity in logistics startups can generally be separated into two categories: purely supply chain-focused venture capital groups, and firms making an investment in supply chain as part of a broader portfolio.
Among the more prominent names in the former group are New York-based Supply Chain Ventures, backed by industry and investment veteran Dave Anderson, and Chattanooga, Tenn.-based startup accelerator and investor Dynamo. The latter includes dozens of VCs scattered around the globe, from the traditional capital markets like New York, San Francisco, and London to relatively new hotbeds like Chicago and Singapore.
The investment model for the supply chain-focused funds is straightforward. They surround early-stage companies with mentors who can help them build their companies, but can also impart domain expertise. Broader-based VCs, on the other hand, can impart domain expertise that might not be directly available through their own guidance by installing industry veterans on a startup’s board of directors.
Risky Business. Aoaeh’s assertion that more, not less, investment is needed in innovative logistics technology isn’t exactly shared by everyone in the industry.
“I get friends in VC all the time asking, ‘What about this one and what about this one?’” Robby Nathan, chief executive officer of the Chicago-based freight brokerage LoadDelivered, said at an October freight technology summit held by the startup project44.
From Nathan’s perspective, the problem afflicting the global freight transportation industry is that the expectations of early-stage funds often don’t match the adoption realities of those technologies.
“This industry will not be disrupted; it will be evolved,” he said. “From a VC perspective, you can’t raise for a fund until you’ve deployed the capital in the previous fund, and you don’t know about the success of the previous fund for five to seven years.”
Nathan shook his head as he tried to make sense of recent investments in digital freight brokerages, potential competitors for his business.
“VCs don’t understand our industry,” he said. “They are being lied to. They’re making investments in companies that are not unique. The smartest guys in the world are spending $50 million for brokerage revenue.”
Justin Hall, chief customer officer at YRC Worldwide, a holding company comprising less-than-truckload (LTL) providers YRC Freight, YRC Reimer, New Penn, Holland and Reddaway, agreed with Nathan’s assessment.
“It can feel like gypsy math,” said Hall. “There’s so much cash on the sidelines, some of these folks can take a gamble. What’s happening is supply chain is as important to the C-suite as it’s ever been. CIOs (chief information officers) and supply chain managers are just as important as the CFO and that was never the case. Logistics is how you win wars.”
Of course, VC investments are by nature high risk, high reward.
“Remember, the VC model is to take a chance,” said Erica Martin, a vice president at the private equity firm Warburg Pincus. “I would look for VCs who have demonstrated the ability to get out of [Silicon] Valley and have concrete, transferrable lessons.”
Anderson, who founded Supply Chain Ventures 15 years ago and has invested in companies likes Descartes, LLamasoft, and Transporeon, among newer startups, said people who focus purely on VC activity are missing a big part of the puzzle.
“Private equity and strategic investors are getting into this big time right now,” he said in an interview, mentioning names like TPG Capital, Francisco Partners, Summit, Greenbriar, and Trimble. “Those are the real serious players now from a capital point of view. The venture guys are pretty timid in this space. The PE guys have been really rolling things up, and strategics as well.”
Anderson said he keeps an ever-growing spreadsheet of potential companies in which to invest, spread across 30 to 40 different sectors.
“There’s so much going on,” he said. “I have a list of 500 supply chain startups I’ve looked at over the years. At this point, I’m looking at 40 early-stage supply chain startups a month. Sensors, monitoring, spoilage management and supply, truckload routing, blockchain, drones, robotics, sustainability, last-mile delivery guys, returns analysis. It’s all over the map in terms of innovative platforms. Some of them will disrupt and many of them won’t.
“Is there a lot of money thrown around that shouldn’t be? I’d say, ‘yes.’ It reminds me of the 2000 era, when virtually everyone was starting a marketplace.”
Anderson said he could think of around 25 VC firms off the top of his head that dabble in supply chain.
“Maybe they have one investment,” he said. “It’s one thing to take advantage of all this new tech, but how does it relate to real supply chain problems? How is this thing going to pay off? That’s the question to ask.”
The flipside of that problem is supply chain operations people who get wooed by startups, but don’t have a foundational understanding of how to implement these advanced technologies.
“You take artificial intelligence, machine learning, virtual marketplaces, robotics, supply chain monitoring, big areas where there’s a lot of activity,” he said. “Most supply chain professionals haven’t been trained in any of these spaces. They go in, get excited, then they have to install and they get nervous. Adoption is the key word. They know it’s different; they know they have problems they need to address. And they’re being told there’s a better way to book, or a way to move to omnichannel. But it’s a bit of a mystery to them.”
Support, Not Supplant. Anderson believes the current wave of funding is far from over, largely because modern systems architecture allows for tools that do things that simply weren’t possible in previous investment cycles.
“If you were looking to optimize your supply chain, there’s only so much you can do inside your supply chain,” he said. “Many of the new startups enable you to work with supply chain partners around information sharing that can help both parties. Couple that with the growth of AI and machine learning, and that’s something that traditional supply chain planning and execution software doesn’t have. Their tech is not enabled around doing this.
“[The traditional software providers are] going to be the acquirers in many cases. They’re looking closely at these startups. Like C.H. Robinson and Freightquote (the digital brokerage it acquired in 2015). They wanted a virtual marketplace alongside the capacity they managed by phone.”
Another boon for current startups is that many are developing applications that sit atop or alongside established enterprise software, Anderson said. That places the startup in less of an adversarial situation with those enterprise application providers and in more of a complementary role. In fact, many logistics startups market their systems as a way to help companies better leverage existing technology investments. That might mean better extraction of data or more efficient procurement, among other possibilities.
Aoaeh said he believes this wave of investment is still in its infancy precisely because of those supporting technologies.
“The last major supply chain investment cycle spanned the 1990s, extending into the early 2000s,” he said. “A lot has changed since then with regard to enabling technologies like artificial intelligence, connected devices, sensors, cloud computing, cybersecurity, and distributed systems (specifically distributed ledgers).
“The next wave of supply chain innovations will be geared towards weaving these technologies together in order to make global supply chains and value chains more efficient, more resilient, more transparent, and less costly. Figuring that out will take time, and working through all the accompanying issues that will arise and that will have to be addressed for that to happen requires patience. I think this is the most promising investment opportunity of the next two or three decades, but the challenges are technological, economic, financial, and political in nature. So things will take time.”
Sitting atop the list of concepts Aoaeh finds most interesting is blockchain, perhaps the hottest topic in supply chain technology in 2017.
“The trend right now is to chase startups building supply chain software that is based on the blockchain, with a view toward disrupting already existing supply chain platforms,” he said. “I generally find such claims dubious in the near-term because they tend to reflect a lack of appreciation for the complex and interlocking mechanisms that make supply chains work—strategy, management, finance, logistics, and regulations. I personally prefer that founders seek a niche that will yield relatively easily to their initial efforts, and then grow from the beachhead that they create there.”
Beasley and her firm, meanwhile, are focused on technology investments that achieve a broader goal: environmental sustainability.
“We’re focusing on mitigating climate change,” she said. “We believe there are many industries—industrial and otherwise—that have been stuck in the dark ages when it comes to using basic data analysis tools. A little bit of data analysis and acquisition can make a big difference in operational decisions.
“One of the things when we’re investing in data-centric companies is we’re looking for industries where there’s a lot of data to be had. Shipping and logistics is ripe when it comes to a data-rich environment.”
Beasley said her research into logistics and global trade revealed a market ready for transition.
“The supply chain world is changing,” she said. “Retailers and other [beneficial cargo owners] really want to control their own supply chains. Before, as long as they got the shipment from point A to point B, that was sufficient. But external pressures have woken folks up. [They realize,] ‘If we don’t do something more innovative, we’re getting to get cut out.’ So for us, that makes it an attractive, investible segment.
“When we did our diligence, we’d talk to BCOs and map out how much slack is in their system. It was staggering to us how much slack a big box retailer has to have to avoid stockouts. And if they can save that slack, it goes straight to their bottom line.”
She also noted that the sheer size of global trade will always serve as a lure to big fish investors.
“Large markets are very attractive, and it’s hard to find a bigger market than moving goods around the world,” said Beasley.
Echoing Anderson’s sentiments, Beasley said Prelude Ventures was intrigued by the way a company like ClearMetal could insert itself into and supplement a BCO or freight forwarder’s existing processes, as opposed to replacing them.
“They can very easily allow traditional, slow-moving players to effectively plug in a solution and compete,” she said. “And that’s very exciting. Are they going to be able to tear everything down and start over and build like Amazon? Probably not.”