Is winter coming for the super hot FreightTech space?

Will the hot investing cycle in FreightTech cool?

Much has been written and discussed regarding the venture capital (VC) cycle by commentators, columnists and bloggers, while Twitter has blown up with discussions about whether venture investing is about to collapse. People closer to the industry, including industry executives, journalists, and/or sell-side equity analysts attached to publicly traded companies have applied the same logic to FreightTech startups. 

While this is a reasonable and tempting thing to do, I believe the venture cycle in freight is far from topping and we have a long runway ahead of us. 

Venture investing, like every form of investing, follows cycles. Industries can go from unattractive to super-hot in a flash, only to create a bubble and painfully burst once the sector fails to live up to its promise of outsized returns. This is usually caused by investors and startups getting ahead of themselves and thinking the opportunities are bigger and will come faster than they do. 

I personally lived through one of these boom and bust cycles. I ran a prepaid debit card processor that was focused on creating alternative solutions in banking. The company was angel funded. We had spent about $20 million building up a processing platform that was more advanced than the market needed at the time. We also were heavily focused on the future of neo-banks, i.e. the idea of providing decoupled banking services without the need to be a traditional bank. 

I ran the company for four years before I met the first venture capitalist. It was 2010 and there were three prepaid debit card companies in our space – Green Dot, Netspend and Higher One. Each was planning an IPO. The financial crisis was still a major factor in the economy, but that didn’t stop VCs from chasing the space and didn’t stop these FinTech upstarts from growing exceptionally fast. 

VCs were excited about the enormous possibility of providing banking services to the unbanked and under-banked, as well as providing digital native banking services that were built outside of a traditional financial institution. 

We were much smaller, just a few million in revenue. We also weren’t growing exceptionally fast. Around 30% revenue growth per year would have been a fast growth year. That didn’t stop VCs from trying to get their foot in the door. 

In a given week, I would receive dozens of VC calls, from those that wanted to invest in the business. Valuations were attractive, in some cases 20x our revenue. In one extreme example, the investor wanted to move the company to another city, but I didn’t want to relocate. They offered up a private jet to allow me to commute from my home to the company’s new HQ on a weekly basis. 

We got really close to taking investment dollars, but never did, thinking that the company would be worth more after the three kings of prepaid went public. 

Starting in June 2010 and over the course of six months, all three companies completed an IPO. They all did really well in the first few months of being a public company. But that changed in early 2011, as investors soured on the sector.

The companies’ fundamentals were still very sound, but investors started to have a jaundiced view on the metrics and challenges of the business. The magic had worn off. The reality of unit economics had set in. High customer acquisition costs (CAC) with high churn made the model undesirable for most investors. While all three were leaders in their distribution channel, they all lacked the ability to hold on to an account for many years. To generate growth, they were forced to increase sales and marketing expenses to attract new cardholders.

The prepaid industry (media, conferences, VCs, analysts and executives) had all painted a story about how profitable these prepaid businesses would become at scale. After a few quarters of earnings reports, public investors became cynical. 

Over the course of two years, Green Dot’s stock collapsed from $63 to $9.98 per share; Netspend’s stock dipped to $3.90 from it’s IPO price of $11 per share; and Higher One dropped by over half to $8/share. 

I am sure it was painful for insiders and stakeholders in the publicly traded prepaid card companies. Losing a lot of paper wealth can be demoralizing and frustrating, especially when it is public. For founders of smaller companies that depend on outside investment for growth, it was even more painful. My company went from being a super-hot startup to a pariah in less than a year.

Investors had no desire to invest in the prepaid debit card space. 

The lucky ones went on to sell their businesses to a large bank (Bank Simple to BBVA); a major tech platform (TxVia to Google); a large fintech company (Card Lab to Blackhawk,  Netspend to TSYS, Edo to Augeo).

For the rest of us, we might as well have closed shop. Venture investors had no desire to invest in the prepaid debit card space. The industry was naked and it didn’t look fit. 

We were lucky that we had a small fleet card that was attractive to a buyer. US Bank ended up buying our fleet card business unit for a large multiple of revenues. The investment kept the rest of the company alive and allowed us enough time to pivot to different markets. 

But living through that winter was painful. Founders in prepaid went from rock stars in the venture world to dead men walking. 

It wasn’t a lack of growth that killed venture sentiment in the prepaid sector. Rather, it was horrible unit economics and public awareness of how expensive customer acquisition costs were, how undifferentiated products were, and how hard it was to make unit economics profitable even at scale. 

In the prepaid debit card world, the products are almost identical. 

A few of the providers have neat functions on their apps or better UI, but mostly the products are pretty vanilla – they help people store and spend their money. Any added features are “nice-to-haves,” but rarely change outcomes in how customers interact with them. 

Customer acquisition is usually done through channel partners (Walmart, check cashing stores, universities, banks) or direct to consumer (online). All of these channels are quite expensive. You are either paying a channel a lion’s share of the income or you are buying leads that can often take nearly a year to break even. 

The challenge is that switching costs are so small and products undifferentiated, customers might be acquired through one channel and easily migrate to a rival platform with lower costs. The money the initial provider spent to “bank” the customer was dead money the moment the client switched to another platform. 

In many ways, I can draw similarities between the FreightTech investments and the prepaid business, especially in the load matching (digital brokerage space). Digital providers are going up against large incumbents, hoping to offer a cheaper option with slightly better features or services. The incumbents, out of fear of losing share, are forced to spend money on IT development and marketing dollars to fend them off. 

The digital brokerages are using investor capital to buy market share. There is nothing to suggest that these newly acquired customers will stay long enough to cover the acquisition costs (or incentives in the case of discounts) that the digital brokers are offering. Even if they decide to jump in with a new age platform, switching costs being almost zero provides perverse incentives for shippers to migrate between platforms. After all, many shipping executives receive bonuses and incentives for lowering transportation costs annually. 

And since many of the services offered by digital brokers and traditional providers are very similar and undifferentiated, it is hard for providers to paint a compelling story about why their platform deserves loyalty more than an opportunistic discount or incentive. 

In one last and perhaps telling example of the similarities between the spaces, we measured success in prepaid based on how much volume we would process. Our take rate (interchange or commission)  generated 1.4-3% of all dollars managed. We generated nearly $500 million in processing volume by 2014. Did this mean, we were a $500 million revenue company? Absolutely not. We only recorded our take rate as revenue. 

It is tempting for digital freight platforms or freight payment audit firms to boast about their gross volumes as a way of showing how big their revenues are. In many ways, these are vanity stats. What really matters in revenue is your net revenue or take rate. It would be great if digital brokers or freight audit firms started to report their net revenues versus their gross volume handled as revenues.

Does this mean that FreightTech is doomed? Absolutely not.

In fact, there is a lot to be bullish about. Companies that have positive unit economics with high growth should do exceptionally well with investors. Most of these will be found in specialized niches: cross border, drayage, heavy haul, break bulk, less than truckload to truckload consolidation. It will become harder and harder for providers of undifferentiated services to maintain attractive unit economics and sustain growth.

Companies that may have undifferentiated models will likely move to be do something specialized. In prepaid, we saw Payoneer pivot to become a massive global remittance platform and become a unicorn. Marqeta, a company with very similar offerings to my own went deep into payment distribution for the gig economy and growth exploded. Companies in niches with real differentiation in the market will do very well. 

Also, firms that operate as subscription-based businesses with predictable revenue streams (hardware or software as a service) should remain attractive for VCs.

Even digital brokers or matching platforms have the potential to do quite well. They must focus on ways to ensure that their shipping customers are loyal and don’t switch. They should try to focus on uncrowded and specialized niches. Specialists will be the winners here.

While the prepaid debit card world was collapsing, the broader FinTech world kept attracting record venture capital investment. Stripe, Robinhood, Venmo and Square all emerged as winners in the FinTech revolution and all emerged during the prepaid winter. 

VCs, even those burned on prepaid, kept investing in the FinTech space. Investors started to understand the difference between crummy business models (like my former company) and the ones that had positive unit economics. FinTech startups were required to demonstrate that their customer lifetime values were far below their acquisition costs.

The other reason I am bullish – the financial services sector is smaller than the logistics sector. Representing 7.5% of the U.S. economy, financial services is smaller than logistics which is 8.5% and yet FreightTech investing is far smaller than FinTech.

This matters because VC investors are looking for opportunities and markets that are early in their disruption cycles. They also love markets that have massive Total Addressable Markets (TAM).

At some point, winter will come to specific verticals inside of FreightTech. Digital brokerages may lose luster as investors come to question the unit economics of these businesses. For companies that have focused on building subscription-based platforms or tech-enabled marketplaces with attractive unit economics, investor sentiment will remain fire hot.

Interested in more stories about the intersection of freight and venture capital? Check out my new weekly podcast with VC Jon Bradford, “For Freight’s Sake.”

One Comment

  1. What a fantastic article.

    We often hear only about the “rah-rah” with startups – but to get a comparison with another, yet related, industry where things went wrong takes guts and a willingness to expose yourself for the benefit of a brighter future with new ventures. Experience is the currency of success!

    The winners in freight-tech will be the ones that SOLVE a real problem that exists TODAY (you can move on to solving tomorrow’s problems when tomorrow actually comes).

    SALES…followed by PROFITS…followed by STICKY customers. That’s the recipe. THOSE are the hallmarks of a company that will make it in this new freight-tech business.

    Tim Higham
    AscendTMS (

Craig Fuller, CEO at FreightWaves

Craig Fuller is CEO and Founder of FreightWaves, the only freight-focused organization that delivers a complete and comprehensive view of the freight and logistics market. FreightWaves’ news, content, market data, insights, analytics, innovative engagement and risk management tools are unprecedented and unmatched in the industry. Prior to founding FreightWaves, Fuller was the founder and CEO of TransCard, a fleet payment processor that was sold to US Bank. He also is a trucking industry veteran, having founded and managed the Xpress Direct division of US Xpress Enterprises, the largest provider of on-demand trucking services in North America.