Finding the right investor is critical as venture capital firms continue to pour money into freight-tech startups, a panel of investors said this morning.
“When you’re in that meeting, the harder the questions, the better the investor,” said Brian Yormak, managing partner, Story Ventures. Difficult questions mean investors have done their homework, said Yormak, one of three investors who participated in a panel during FreightWaves’ Transparency19 event in Atlanta this week.
If they don’t know much about the industry, “you’ll go about a relationship, and maybe you’ll get their check,” he said. “But it’s not going to be the quickest check or the most helpful check.”
Digitization, big data and artificial intelligence are fueling a freight and supply chain startup boom, the panelists said. In 2014, investors put $340 million into freight tech; that figure surged to $3 billion in 2018.
Structural conditions are another factor driving venture capital interest. Freight brokerage is a fragmented market, said James Kuklinski, a growth investor with Spark Capital. The industry includes 14,000 brokerages, and the largest, C. H. Robinson, commands only around 3.4 percent of the market.
As a result there’s “a lot of opportunity around software tools to create productivity gains,” Kuklinski said.
The amount of data generated in the past year is equivalent to the amount generated over the past 50 years, said Thiago Olson, managing director, Engage Ventures. “It’s creating opportunity for a whole new class of companies to use that data as a piece of their competitive advantage.”
For venture capitalists, the freight and supply chain sector checks all the boxes, Olson continued. “A large market? Check. Truckload market? Check. Logistics and supply chain? Another check. Very fragmented? That generally spells opportunity for upstarts to come in.”
Across the board, freight-tech deal sizes and valuations are rising. That said, not all good ideas align with venture investment.
“What venture capitalists are looking for are businesses that can go from an initial product to full-fledged business,” Yormak said. “If you’re happy building a product business that’s generating $10, $20, $30 million, that’s amazing, but it’s not right for a venture fund. If there are other verticals you can expand into, that’s when the investor will get excited. But it’s a way bigger vision.”
Hence the common venture capitalist question: ”’Is it a large and growing market?’” remarked Olson.
The panel weighed the possibility of a market correction and whether valuations were inflated and how entrepreneurs should factor in these considerations as they seek out funding.
“In an environment where there is a lot of macroeconomic uncertainty, it is important to be properly capitalized so that you can sustain a downturn,” said Yormak. “However, capital raising is not a prerequisite to building a great business. The best times to raise are when you have more work than you can handle and so need capital to hire or when there is deep competition and capital enables you to capture a market faster than competitors.”
So if you’re going to raise capital, say $5 million, you want to make sure that the enterprise value of the business increases by at least that much, and ideally far more, Yormak said. “If it doesn’t, you should reconsider why you are raising that capital.”
Valuations have gone up at a steady clip, but not all venture capitalists are good investors, cautioned Olson. “We’ll see if there is a correction. Founders, raise your money now, and we’ll see what happens.”
Fergus Caldicott, FreightWaves’ chief technology officer, moderated the panel discussion.