Venture capitalists throwing money at trucking tech startups

Money

But with so many companies, how many will survive?

Money is flowing into trucking tech startups, and it is showing no signs of slowing down. According to CB Insights, the industry is on pace for its first billion-dollar year in cumulative funding. But the question remains, how much of this windfall of funds will end up in companies that truly make a difference in the trucking space?

In 2016, the firm reports, $742 million was invested in trucking tech startups across 59 deals globally. This year, those numbers are on pace for more, led by the recent announcement of $62 million invested in Convoy, $60 million for Peloton Technology and $42 million for Transfix. Through the first six months of 2017, CB Insights says, trucking tech startups have raised $583 million in 33 deals globally.

“Deal activity has remained above 11 or more deals for six consecutive quarters,” the firm says. “Quarterly funding dollars have also topped $130M every quarter since Q2’16, after eclipsing that mark just once in the quarters prior.”

So for the time being, the investments have staying power. But will the companies?

Julian Counihan, founding partner of Schematic Ventures, a seed-stage venture capital fund investing in technology companies within manufacturing, supply chain, transportation and broader industrial technology, says that the transportation space is important enough to warrant more attention. While investing at Red Sea Ventures, he observed few venture funds willing to dedicate resources to build supply chain domain expertise.

“I saw an opportunity and launched Schematic Ventures." he tells FreightWaves. “With a vertical focus, I have the ability to invest with more information and leverage the work I do with corporate partners for portfolio companies."

Counihan says that the transportation space has attracted venture investors given similar dynamics to prior successful investments.

“It’s a very fragmented, large market with expensive, offline intermediaries. Applying successful patterns seen in similar markets, on the surface, this becomes an attractive market for venture investors," he says.

While that singular focus may help Counihan and other similarly focused investors, there are millions of dollars flowing into companies – many of whom are competing in the same space for the same business.

“It’s kind of like an oil driller’s mentality in that you have to drill a lot of holes, and most will be dry, but a few will be gushers,” John Larkin, managing director-research at Stifel, explains to FreightWaves. Larkin adds that the level of diligence from many venture capital firms does not match that of private equity firms. One of the reasons, again, is their experience watching Uber.

“The issue is Uber disintermediated the taxi industry so quickly and easily that the thought is if you can move a person, why can’t you move a pallet,” he says. “The [startup’s founder] may be a terrific technologist but not understand the business of moving freight.”

Counihan, who launched Schematic in January and says he has invested in warehouse automation and industrial robots, laid out some of the items he would focus on when considering an investment in a digital transportation broker.

“I want to see a clear path to unit economic profitability,” he says. “Have a timeline for moving from subsidized commissions to market-level pricing. Clearly identify how technology will improve operating margins or drive growth."

Counihan says he believes some of the recent uptick in investment in the space is due to the “Uber for freight” movement.

“The ‘Uber for freight’ category is very visible and has received a lot of attention,” he says. “I believe that if you have capital … you can build a successful freight brokerage. The question will be, does the investment make financial sense? To achieve venture returns on a freight brokerage investment priced at a valuation multiple far above public comparables, these businesses will have to demonstrate new technology to drive radical margin improvement and reach never-before-seen levels of growth - things large, sophisticated freight brokers have been attempting for years."

The fact is, despite these billions of dollars flowing into the industry, many – if not most – of these companies will fail.

A 2012 study by Harvard Business School senior lecturer Shikhar Ghosh looked at over 2,000 venture-backed companies from 2004 to 2010 that raised at least $1 million. Their success rate? 25%. According to Fast Company, 75% of those firms failed, and as many as 40% never returned a dime to investors.

If that holds up, of the 59 global deals announced so far this year, 45 will fail. And that’s only part of the problem. Larkin notes that many of these startups – primarily the brokerage startups – are running into industry giants like Coyote and C.H. Robinson with established clientele in an industry that is built on relationships.

“They haven’t actually been laying down,” Larkin says of the biggest industry players. “They’ve been developing their own Uber-type platforms. The criticism is that transportation has been a late adopter of technology. I think the transportation industry is sitting up and taking notice. You have people like J.B. Hunt investing $500 million [in Hunt360]; C.H. Robinson’s [investment] in Luminosity; and XPO is investing a huge amount in tech.

“I think some of these smaller companies don’t realize …that is not inconsequential competition,” he adds. “It is the best of the best.”

The investors, though, don’t seem to mind.