• ITVI.USA
    15,841.280
    3.720
    0%
  • OTRI.USA
    26.920
    0.070
    0.3%
  • OTVI.USA
    15,818.420
    1.300
    0%
  • TLT.USA
    2.540
    0.000
    0%
  • TSTOPVRPM.ATLPHL
    2.850
    0.220
    8.4%
  • TSTOPVRPM.CHIATL
    3.310
    0.440
    15.3%
  • TSTOPVRPM.DALLAX
    1.400
    0.050
    3.7%
  • TSTOPVRPM.LAXDAL
    2.670
    0.660
    32.8%
  • TSTOPVRPM.PHLCHI
    2.120
    0.240
    12.8%
  • TSTOPVRPM.LAXSEA
    3.070
    0.300
    10.8%
  • WAIT.USA
    125.000
    -2.000
    -1.6%
  • ITVI.USA
    15,841.280
    3.720
    0%
  • OTRI.USA
    26.920
    0.070
    0.3%
  • OTVI.USA
    15,818.420
    1.300
    0%
  • TLT.USA
    2.540
    0.000
    0%
  • TSTOPVRPM.ATLPHL
    2.850
    0.220
    8.4%
  • TSTOPVRPM.CHIATL
    3.310
    0.440
    15.3%
  • TSTOPVRPM.DALLAX
    1.400
    0.050
    3.7%
  • TSTOPVRPM.LAXDAL
    2.670
    0.660
    32.8%
  • TSTOPVRPM.PHLCHI
    2.120
    0.240
    12.8%
  • TSTOPVRPM.LAXSEA
    3.070
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    10.8%
  • WAIT.USA
    125.000
    -2.000
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American Shipper

Logistics’ own shark tank

The latest round of funding for freight forwarder Flexport shows early stage venture capital groups are nowhere near burned out on logistics technology startups.

   In the world of early stage venture capital funding, the amount of money that the tech-enabled freight forwarder Flexport snared Monday in its second round of funding is very significant.
   The company said it received $65 million in Series B funding from a basket of VC firms, mostly companies that had backed San Francisco-based Flexport in its Series A round of funding.
   That amount might pale in comparison to the amount recently invested, for example, in JDA Software by its primary investor, but it’s a large amount for a company that is still early in its evolution.
   And it’s the latest collision between the world of logistics and venture capital groups investing in technology aiming to change the industry.
   There’s little doubt now that VC funds are aware of the potential goldmine logistics represents. And a handful of VCs are placing moderate to significant bets in this industry, mostly based on the idea that global trade is so large and yet so inefficient from a process perspective.
   Flexport is, of course, not alone. There are literally hundreds of technology startups or technology-empowered service providers that have received some level of outside investment over the past few years. One only needs to scan Crunchbase, a searchable trove of technology investment information, to get a sense of the number of companies and investments involved.
   Simply put, there are a lot of founders and a lot of investors all working a room that’s been largely untouched for years.
   Behind this development are three dynamics:
     • A burst of ideas from technology-minded people trained in mathematics or engineering wanting to solve logistics problems;
     • Low technology infrastructure barriers that allow these people to innovate at a reasonable cost;
     • And cheap capital.
   American Shipper has had a number of discussions in recent weeks with various logistics-focused venture capital principals to discuss what is it that attracts them to logistics and why they’re investing in certain firms.
   “Sometimes what happens in our business is people get interested in a market and look at the businesses in that market, and track it,” said Kevin Thau, a general partner at San Francisco-based Spark Capital, formerly one of the first employees at Twitter, and now an investor in the global freight startup Haven. “The alternative approach is you meet a compelling founder and they enlighten you about the market. You can be a market-first or people-first investor.”
   For the most part, VC funds are coming to logistics via the latter.
   “As seed-stage investors, we tend to be opportunistic regarding the sectors we look at,” said Roger Chen, principal at the New York-based early stage capital fund Gencast Ventures. “The companies that we review typically have little to no revenue so we need to get very comfortable with the team and business model in each case. Our interest in the sector is largely driven by founders coming to us with great ideas.”
   One of the primary reasons most think logistics hasn’t been on the VC radar until lately is that it was not necessarily seen as a business that could be blown apart by technology. There’s an existing supply chain technology landscape that has produced incremental cost reduction, efficiency gains, and process changes for shippers and service providers over the last few decades.
   And so most VC funds, until recently, knew little about the inner workings of the business. Some still know very little. Some, as Flexport founder and chief executive officer Ryan Petersen put it, are put off by the amount of humans that still need to be involved in the business.
   But take a look at that Crunchbase list and you’ll see that a lot of VCs are intrigued by what they see in logistics.
   “Is it one of the few real large verticals that has not been impacted by technology,” said Joe Floyd, a principal at San Francisco-based Emergence Capital Partners, one of two funds that recently invested in the software-as-a-service application programming interface (API) provider project44. “There were plenty of software applications, and tools to make people’s life easier. But there was hardly anything built specifically for the cloud.”
   Floyd, who has studied the logistics startup environment intently, said there are some basic decision-making criteria for which company he’ll invest in.
   “You have to be in a pretty sizable industry,” he said. “You can own an industry, but you might only be a $100 million company. So is the fight worth fighting? Is the pot of gold big enough?”
   The other key consideration is whether the technology is intended to “disrupt or enable people,” he said. “You have to think about what’s going to happen to the industry. Is this technology trying to replace brokers or middlemen? Automate processes? This is a highly fragmented industry, and it’s difficult to sell to a long tail in an efficient manner. To me, the best play, the most scalable play, is technology to enable the biggest players to be more successful.”
   Chen said there are a number of trends that make the logistics sector interesting.
   “Many parts of the industry are stuck in the old way of doing things – faxes, phone calls, lots of intermediaries, and all very relationship-driven,” Chen said. “I think the younger generation is more open to bringing in digital technologies to solve for some of those inefficiencies. There seems to be new interest from entrepreneurs, as well. Many of these new companies are bringing a consumerized experience to logistics and are building on the lessons from Uber and marketplace models in other sectors. Amazon has also been an eye-opener for what is possible in the supply chain so they have been a wake-up call to the industry in many ways.”
   A key determination in VCs’ decision-making process is what stage of company they look to invest in.
   “There’s early stage versus later stage,” Thau said. “In later stage, you’re playing a waiting game and waiting until a winner is clearly emerging and get in as close to that inflection point as possible. But you’re taking less risk so have to pay more for the company.
   “In early stage, which is what I do, there are two aspects to it. There’s a race that everyone is going to be running, and I’m trying to pick the right horse, and to do that, I’m looking at team, product and market. Those are the only aspects we look at. But once a market gets hot, there are a lot of horses trying to enter the race. If you wait until all the horses are on the track, it might be too late.”
   Statistics on success rates for startups vary by industry, but the broader point here is that a VC group is making bets on a number of companies in the hope that some of those bets will pay off and some of them will pay off really big.
   The amounts being invested in logistics startups is on par with similar companies at similar stages in other industries are getting, Thau said. Though Chen said VC investing is not uniformly distributed across sectors or time “so it’s hard to say what is par.”
   “It does seem like interest in logistics has picked up over the past few years,” Chen added. “As VCs continue to get educated on the sector and if some of the much-hyped startups start to exit via acquisition or (initial public offering), I think you’ll see the dollars invested continue to rise.”
   Another element is just how closely involved the founder needs its investors to be. For some startups, the code and the business model is solid and the company just needs capital to grow its sales footprint. In other cases, the idea is great, but the founder needs help developing the business model, or how to market the product effectively. A savvy investor will understand where its help is needed.
   “The earlier stage you invest, you’re really banking on the team and the market,” Thau said. “The products morphs incredibly – what you started out investing in is not necessarily what it will become. It has to be compelling at the start but you’re underwriting the investment on the current stage. You’re saying this is great, and imagine what they can do.
   “The best relationships are those where you let them run. Founders have different requirements of their investors. Some want them to leave them alone but hold them accountable. Others want to talk all the time and get feedback about running the business, areas like hiring, sales, a technical feature, go-to-market strategies. One thing that’s universal in early stage is that the board helps the CEO stay on track. They’re in the minutiae, and they sometimes can’t see the forest for the trees.”
   As for some of the specific models that VC funds are investing in, Floyd favors technology providers over service providers, and a lot has to do with gross margins.
   “If service providers have gross margins of 10 to 20 percent, the technology providers are 80 percent plus,” he said. “If you’re a tech-enabled service provider, you’re taking business away from what people are used to, but someone can provide that service cheaper and faster tomorrow. True tech providers will grow more slowly but will have more margin and be more scalable.”
   Which goes to show that not all VC investors think alike, given Flexport’s new cash injection. Petersen told American Shipper the money will go purely toward growth, to allow the company “to be strategic instead of worrying about money week-to-week. We had 18 months of runway left and we were making money, but I didn’t feel comfortable going past 12 months.”
   He added that the money also allows Flexport some breathing room in case global trade really hits the skids next year.
   “I’d hate to be in a place where something macro happens out of our control and we don’t have the money to ride out the storm,” he said.
   The investment also allows Flexport to start to negotiate more preferential rates with air and ocean carriers, build a bigger presence in Asia (where many of its customers source), and also purchase assets like cross-dock facilities.
   Petersen said his full-time job in July and August was spent nailing down the right combination of investors and the right amount of investment. The total amount was more than he had initially planned to seek, but “fundraising was such a big pain, I didn’t want to do it again for awhile.”