Are freight technology startup valuations out of control? How will the showdown between incumbent third-party logistics providers (3PLs) and digital upstarts unfold? How should we characterize the current progress of technology adoption in transportation and logistics?
Freight tech luminaries at Stifel’s transportation and logistics conference in Miami Beach discussed those questions and more on Tuesday. Panelists included Jett McCandless, founder and CEO of visibility solution provider project44, Ori Franco, VP of finance at electronic logging device and fleet management software company KeepTruckin, Drew McElroy, founder and CEO of digital freight brokerage Transfix, and Dr. Philip von Mecklenburg-Blumenthal, VP of enterprise solutions at Freightos, the online marketplace for ocean freight.
Stifel VP and senior analyst Bruce Chan moderated the discussion. One of the most interesting moments came late in the conversation.
“Are valuations maybe out of control?” Chan asked. “Every class of startups is getting progressively higher valuations—how long before we see a profitability mandate?”
“The fact of the matter is that institutional capital needs a place to go,” responded McElroy. “When VCs bet on winners, the impact it has on their downstream limited partners is tremendous. What do VCs look for? Size of the market, quality of the team, and ‘can I believe in this future state?’”
Von Mecklenburg-Blumenthal — Chan took to calling him ‘Dr. Phil’ for short — was more skeptical of venture capital, quoting the names of several VC-backed maritime freight marketplaces that have since either gone under or radically changed their business models. One question that emerged in the discussion (and with audience members FreightWaves spoke to after the panel) was the tolerance for failure appropriate to venture capital.
One argument was that the high rate of failure of venture-backed technology companies meant that venture capital firms were not actually that insightful or discriminating with their money, but were rather making lots of small long-shot bets. Just because a startup secured a multi-million dollar investment did not mean that it was destined for success or that its investors deduced some insight unavailable to anyone else. The other point of view pushed back, claiming that venture capitalists knew what they were doing, that they had a certain appetite for risk but understood that one or two winners could make up for an entire portfolio of failures.
Those two arguments aren’t exactly contradictory. In our view, as freight tech matures, the sector will see fewer and larger deals, and the stakes for winning the space will get higher and higher. It was not all that long ago that there were forty-odd startups calling themselves digital freight marketplaces, but now it’s obvious that some companies have managed to achieve a certain scale and differentiate themselves from others.
To that point, Chan asked McElroy if he thought that Transfix being founded in 2013 gave it an “early mover advantage.”
“I don’t buy that,” McElroy said. “There’s a lot of capital out there, and a lot of companies that are aggressive about focusing on [revenue] growth rather than maximizing gross margins or revenue.”
Clearly, one of the key issues at stake in the conversation was the overall maturity of the freight tech space. Are winners already emerging, or is tech adoption—whether visibility platform, TMS, or digital brokerage—so far behind in transportation and logistics that anything is still possible? Chan displayed a version of the technology adoption chart pictured below and asked McCandless, Franco, McElroy, and von Mecklenburg-Blumenthal where they thought transport and logistics was on the curve.
McCandless said that in his experience, adoption of visibility solutions was in the “early majority” phase.
“Eighteen months ago we were being chased out of offices, but now the top of our funnel is 10x what is was then,” McCandless said.
“I concur,” said Franco. “Five times as many companies are using a TMS compared to 2005 and more companies are looking at software, but we’re in an earlier phase with data science.”
McElroy said that while he’s seen a lot of interest, shippers lack a certain maturity with regard to potential use cases and have to be taught how to realize a return on investment from the data that Transfix brings them. McElroy said that from his perspective, digital freight marketplaces were still in the “early adopter” phase.
“The long tail has started to kick in, but we’re not fully there yet,” McElroy said.
Von Mecklenburg-Blumenthal said that the digital transformation of his industry would take ten to fifteen years, comparing it to online passenger airline ticket sales, which began in 1997 but took more than a decade to reach mature market penetration.
“It’s still a very early stage for air and ocean freight,” von Mecklenburg-Blumenthal said.