Convoy raising capital at a multi-billion valuation

Founded in 2015 by Dan Lewis and Grant Goodale, both Amazon alumni, Convoy took a technology-first approach to the problems of waste in the logistics industry and inefficiencies in the supply chain. The freight tech startup has so far raised a total of $266 million and has what FreightWaves estimates to be about 900 employees.

Convoy closed its $185 million Series C almost exactly one year ago, in September 2018, that valued the company at $1.08 billion, post-money. That deal was notable because it marked the first time that mainstream Wall Street institutional investors joined venture capitalists in investing in Convoy: T. Rowe Price participated in the round. FreightWaves spoke with T. Rowe Price vice president Andrew Davis about the deal and how his thesis on Convoy had evolved over time. 

To be sure, Convoy’s strategists think about freight brokerage in a completely different way than most companies in the space. When FreightWaves asked about Convoy’s approach to the Southeast after it opened a regional branch in Atlanta, it was expected that Convoy’s operations team would talk about construction activity, produce harvests and major shippers in the region. Instead, they rattled off numbers about the average lengths of haul between cities in the same way that an analyst might discuss the distances between nodes in a network. 

Network effects, probability theory and market economics play a more important role in Convoy’s culture than most traditional freight brokerages, where salesmanship, tacit knowledge of carriers, and sharp negotiating tactics win the day. Still, that approach comes with a cost – lots of employees with titles like ‘engineer’ and ‘developer’ who are expensive but who don’t generate revenue.

We have applauded Convoy’s initiatives to drive ‘stickiness’ on its platform on both sides of the freight marketplace: adding automatic detention pay and drop trailers for drivers and embedding human consultants deep within its customers’ supply chains. Convoy’s recent partnership with BluJay, a transportation management system used by shippers, will reduce friction on the shipper side and let freight flow into Convoy’s platform more easily, bypassing the traditional manual request-for-proposal process.

If a multi-billion valuation sounds like an eye-popping number for a young DFB that hasn’t quite grown into its platform yet, consider the kind of money Convoy is looking for. Late-stage venture capitalists (VCs) write large checks to successful companies and usually secure preferential terms – in the event of an initial public offering, the late-stage VCs will be the first to get paid. That makes those large bets placed by the likes of SoftBank and Sequoia Capital less risky than they appear on the surface, as long as the startup can eventually tap the public markets.

The most interesting part of Convoy’s story is likely yet to come. In terms of people-hours per load, Convoy is already far more productive than a traditional freight brokerage, but it will have to ramp up its productivity by another order of magnitude while also scaling its gross revenue by an order of magnitude to grow into a multi-billion valuation. 

FreightWaves’ proprietary research team, the Freight Intel Group, published a study of the digital freight brokerages’ total addressable market and valuations on the FreightWaves SONAR platform. That study, largely written by senior research analyst Seth Holm, found that the digital freight brokerage sector could be valued at $30 billion in 10 years if the brokerage industry kept growing at trend and DFBs took 50 percent share of the brokerage industry while expanding their gross margins to 8 percent from an estimated 1 to 3 percent today.

FreightWaves’ assumptions were optimistic for digital freight brokerages, but it will be fascinating to see these digital insurgents come into their own and attempt to permanently decouple volume growth from headcount growth.
The competitive threat posed by startups like Convoy has already been recognized by publicly traded companies like C.H. Robinson (NASDAQ: CHRW), Echo Global Logistics (NASDAQ: ECHO), XPO (NYSE:XPO), and J.B. Hunt (NASDAQ: JBHT), which have all increased capital expenditures on technology over the past few years. Those well-capitalized incumbents have the resources to invest in automation and the expertise to adapt to changing market conditions. 

But FreightWaves believes that for DFBs like Convoy, Uber Freight and Transfix to realize their potential and justify their valuations, the freight brokerage industry will become radically more consolidated than it is today. Only time will tell whether the inexpensive, cloud-based tools being developed and marketed to small brokerages will be enough to fend off the largest brokerages building their own technology, or whether the industry will be transformed beyond recognition.