Investors, as a rule, are always looking for high-growth. In the real world, that means companies in the tech sector, which offer a novel approach to business that can scale quickly, often have an easier time finding money to fund their growth than those on a slower path.
Take the financial tech and freight tech sectors. Both have a huge addressable market and have been traditionally resistant to change – a recipe that makes them ripe for disruption. And both are experiencing explosive growth as a result.
The investor scramble began in earnest for FinTech in 2010, several years before FreightTech began attracting similar investor interest in 2014, according to an analysis by FreightWaves. But setting aside time difference and looking purely at early-stage growth rate, the FreightTech of today is matching and in some ways outpacing FinTech’s same-stage rise.
While FreightTech is currently a more niche space, the size and scope of commercial freight cannot be underestimated. The North American trucking industry alone runs at an estimated annual $725 billion. Maritime cargo transported by the shipping industry represents about two-thirds of the value of total global trade, equating each year to more than $4 trillion in goods, according to the World Shipping Council. Trade is a fundamental part of economic activity everywhere, and exports make up about one-fourth of total global production. Shipping, in fact, is the lifeblood of the global economy.
FinTech is a much broader category. Over the years, FinTech has expanded to include any technological innovation in, and automation of, the financial sector, including advances in financial literacy, advice and education, as well as streamlining of wealth management, lending and borrowing, retail banking, fundraising, money transfers/payments, investment management, and it also now includes the development and use of cryptocurrencies (which inherently also includes blockchain).
The most talked-about (and often most funded) FinTech startups share the same characteristic – they are designed to challenge and disrupt entrenched traditional financial services providers by being more nimble, focusing an underserved segment or providing faster and/or better service.
FinTech got a much earlier start than FreightTech, and while the size and scope of the commercial freight industry is larger than the banking industry, comprising about 8.5 percent and 7.5 percent of total U.S. GDP annually, FinTech is currently running ahead of FreightTech when it comes to attracting investor dollars.
Beginning in the 1980s, and especially in the 10 years since the Great Recession, the country’s largest companies have been forced to operate leaner and meaner. Since the deregulation of trucking in 1980, the logistics industry realized efficiencies and removed substantial costs and friction from the supply chain. In the past five years, FreightTech has emerged as a stand-alone field of its own. The winnowing process from Seed to Series A and B is fierce, though, and as the number of deals shrinks the size of investors’ bets increase. The race is on to buy equity in potential winners. As the marketplace evolved, capital shifted to later stage rounds. The average FreightTech Series B round grew 78 percent from 2014 to 2017 (from $24.5 million to $43.6 million). Overall investment in Series C rounds grew from $123.9 million spread across three deals in 2016, the first year there is a disclosed Series C, to $399.6 million spread across six deals in 2018. The growing emphasis on later stage startups reveals the maturation of the FreightTech marketplace during the past five years.
The most important statistic for FreightTech is that 2018’s venture capital investment through the end of the third quarter was larger than all previous years combined, and more than double the 2017 record of $1.4 billion. The Softbank Vision Fund’s entry into the space helped to strongly increase 2018’s results, as it led the Manbang Group’s $1.9 billion round, which closed in April. Roughly speaking, Manbang is the Chinese equivalent of Uber Freight. In the United States, Convoy’s $185 million Series C round raised the digital freight exchange to a unicorn valuation. CapitalG – formerly Google Capital – participated in both Manbang’s and Convoy’s rounds.
In 2017, FreightTech really came into its own with 132 deals, up from 118 the year before. The sector’s pipeline widened considerably from 66 Seed rounds to 75, and the average Seed round size grew 25 percent, from $1.2 million to $1.5 million. The number of Series A deals decreased slightly from 19 to 17, but the average Series A size grew from $13.6 million to $18.2 million. In 2017, capital noticeably shifted to later stage rounds, as the number of Series B rounds went from eight to 11 (the average Series B deal grew 14 percent to $43.6 million) and the number of Series C deals more than doubled (from three to eight), with the average size remaining stable at around $40 million.
FreightWaves expects further mega-deals like the Soft Bank Vision Fund’s investment in the Manbang Group in the future, as unicorns establish commanding market share and money seeks a home in an aging expansion. Sequoia Capital’s Global Growth Fund III is on track to raise $8 billion this year. Scale Venture Partners, Index Ventures and Lightspeed Venture Partners announced $4 billion in new cash, spread out among six funds. Salesforce Ventures, GV, New Enterprise Associates and Accel are other late-stage venture capital firms that may become involved. FreightWaves also expects more activity from private equity firms and traditional financial institutions as startups mature and make their exits; private equity firms will also facilitate mergers and acquisitions between startups.
For FinTech, the sheer scope and size (and relative head start) of the industry means it is ahead in terms of overall maturation. Therefore, it is unlikely to see a similar growth percentage when compared to FreightTech. According to analysis from CB Insights and Bloomberg’s current reporting, there should be consolidation in 2019. The larger industry players, hoping not to be left behind by the new era of digital finance, are stepping up their hunt for acquisitions. There are numerous startups that have gained enough footing for incumbents to take notice, but have stayed small enough that their acquisition is still feasible. At the same time there is the possibility of some companies going public through initial public offerings (IPOs). Credit Karma and Robinhood are cited as two possibilities, and other large companies may get serious about at least laying the IPO groundwork in 2019. Some analysts, however, say there is little to gain – and often valuation to lose – and that no one is in a particular hurry to go public.
While regulators are beginning to crack down on bad (and good) actors, this isn’t likely to be a significant disruption, and may help foster a new climate of transparency and accountability that many have been calling for. In some cases, investment seems to be moving from commerce to FinTech, especially in southeast Asia, an area which is attracting bigger investments and foreign investors, according to CB Insights. Ride-hailing platforms may end up as the biggest winners in FinTech. Many are also aspiring to be one-stop shops following the likes of AliPlay and WeChat.
What FreightTech stands to gain from having emerged from the shadows of the FinTech landscape is the ability to maximize the value of new and emerging technologies. Machine learning, artificial intelligence (AI), predictive behavioral analytics, and data-driven marketing that take the guesswork (and, in some cases, red tape) out of financial decisions for FinTech are positioned in similar ways for FreightTech. Fintech has been a keen adaptor of automated customer service technology, utilizing chatbots and AI interfaces to assist customers with basic tasks and also to keep down overhead. FinTech and FreightTech can also fight fraud by leveraging information about payment history to flag transactions that are outside the norm, as well as with other cybersecurity plays.
While there are a number of differences between the sectors, there are also a number of tech parallels between the two. Similarly, there is a motivated and increasingly informed investment class, and a growing sense of the need for regulation within the disruption.
We estimate the distinct possibility that in terms of venture capital, FreightTech stands a strong likelihood of surpassing FinTech because of the innovation that surrounds it in terms of automation and electric vehicles. The growth from $100 million in venture capital in 2014 to $3 billion through 2018 indicates a powerful and exponentially faster growth rate already. Part of the problem is that the broader media doesn’t understand commercial freight, and the commercial freight media doesn’t fully understand technology. “We have an opportunity to fix that, and that’s what we’ve set about doing,” said FreightWaves CEO, Craig Fuller, last November at MarketWaves18.
We anticipate the growth cycle to continue. In fact, the core disruption we’re seeing in FreightTech has likely only just begun. Besides the movements of commodities and goods of all kinds, for instance, the transfer and documentation of payments is an essential part of operations. Therefore, much of the investment already made in FinTech – and the disintermediation we’ve already seen – could very well transfer into the innovative leaps in investment strategies for commercial freight.