A customized approach to venture capital (VC) investing in logistics has evolved after a few years of trying to overlay an investment playbook from other sectors.
Zach Barasz, director at G2VP, and Ty Findley, managing partner with Ironspring, talked about the advantages startup and later-stage companies find when working with sector-focused VC funds at the FreightTech Venture Summit on Wednesday.
Barasz says the research shows specialized funds tend to have better returns than generalized funds. His VC fund works with later-stage companies that are seeking to sustainably transform and digitize traditional industries like transportation, supply chain logistics, manufacturing and energy.
He said specialist venture investors have a big advantage when approaching companies pursuing their first or next round of investment. An investor with a strong understanding of the industry and significant contacts makes a good partner. Often someone who focuses on a specific industry has a large network of potential new hires for a company that needs to bridge a talent gap.
Findley said that large inflows of capital into the markets, low interest rates and a decline in public listings has pushed investors to the private markets to find higher returns. He said the VC asset class is starting to go through the same transition private equity experienced years ago.
His firm is an early-stage investor in digital industrial innovation in the transportation, manufacturing, construction and energy sectors.
He said the space is getting more crowded with a record number of new venture funds and assets under management and that increased competition will act to compress returns. He sees this as a primary reason to take a specialized approach to investing.
On logistics investing, Findley noted that startup funding in logistics has increased 17x since 2014 compared to other industries, which have seen about a 2x increase.
“As an investor, we have to know much more deeply the customer’s pain point and buying habits so that we can take advantage in that competitive market,” Findley said. The same strategies in other sectors don’t necessarily apply to logistics. “You really have to be going deep and sleeping in this ecosystem.”
Findley said, blitzscaling, or attempting to gain significant scale quickly and potentially at the expense of efficiency, doesn’t work with complex technologies or in mission-critical industries. He said the logistics space saw a large amount of capital flood the market very quickly, with the plan of using playbooks from other industries. That plan often didn’t work. He said lessons have been learned and the approach to logistics is evolving.
On whether there is a difference in investment approach to early- and later-stage rounds, Barasz said the decisions are different. The companies he works with, mostly Series B and later, are usually making huge decisions on future growth paths and where to allocate capital. These decisions can alter the eventual trajectory of the entity, compared to seed rounds, which are usually for companies trying to gain scale.
At either level, he sees a sector-focused approach as advantageous in the competitive environment.
On a post-COVID world, Findley said he thinks the days of blitzscaling and subsidizing unprofitable growth to increase revenue will see some “rightsizing” with investors taking a healthier approach to growth.
Barasz said the pandemic has accelerated trends that were already in place, noting that roughly five years of e-commerce growth was pulled forward in just a few months.