New York based Transfix has been soliciting investors for a $60-100M Series D venture-round at an $800 million valuation. If the company is successful in closing the round, it will be a significant outlier in terms of revenue multiples put on digital brokerages in the space. The company has been looking for investors that will syndicate the transaction, having identified a lead, according to investors that shared details to FreightWaves familiar with the details of the capital raise.
Transfix is expected to generate $80M in top-line revenue in 2018, up from $43M in 2017 and $16M in 2016. Transfix experienced margins of 12% in 2018, about average for a freight broker in 2018. According to DAT’s Broker Benchmark survey, freight brokerage margins were 12.5% in October 2018.
Margins are the difference between gross revenues (what the broker charges the shipper) and what the purchased transportation expenses are (what the carrier gets paid for hauling the load). This number does not include the operating cost (salaries, software, development, rent) to run the operation. Those costs are netted out after the margin is calculated.
Transfix is based in New York City where the operating costs of running a freight brokerage are much higher than other markets. CEO Drew McElroy credits being based in New York City fundamental to the company’s success, where Transfix can recruit engineering talent easier than the traditional freight markets.
"It seems that most startups are a bunch of logistics guys that are going out and trying to hire a bunch of techies to do something, or it's a bunch of engineer-types and Stanford MBA-types who have never been inside a truck saying, 'We're going to fix your industry folks, don't worry,'" McElroy told Rachel Premack of Business Insider in an October article. "I personally think both of those paths are fatally flawed."
The median base salary for an engineer in NYC is $100,000 and the company is reportably paying $70/sq. ft. to rent 60,000 sq. ft. to house its team of around 100. With higher operating costs and industry average margins, the company needs to stand out of the crowd to successfully raise venture capital at unprecidented multiples.
So far, that hasn’t been a problem. According to Pitchbook data, Transfix raised $42M in July 2017 at a valuation of $227M. Sources said Transfix generated $43M in gross revenues in 2017. To date (not including this round), Transfix has raised $78M.
In the investor solicitation floated last week, Transfix’s valuation threshold would make the company worth 10x of 2018 revenue. Factor in 12% margins and the company would be on track for $9.6M in margin. At an $800M valuation, Transfix would be selling its equity for 83.3x margins.
A company growing to $80M in a five year period (Transfix was founded in 2013) is remarkable for SaaS, and SaaS companies can certainly get a 10x revenue multiple. But freight brokerages (digital or not) are not SaaS and should not be valued under recurring revenue metrics. High quality SaaS companies have margins in excess of 75-80% and operate under agreements that span multiple years. Freight transactions are usually tendered within 72 hours and the business is highly transactional. Even if the company has “contract” freight, there are few agreements in trucking that are “contractual.” After all, any brokerage or 3PL is just one service failure away from losing a multi-million dollar client.
To put these numbers in context, consider Arrive Logistics, founded a year after Transfix. Arrive is a startup freight brokerage that took just $13M in funding and is supposed to hit $370M in top line revenue this year, while experiencing 12-15% margins along the way. Arrive is based in Austin, which has far lower engineering costs than NYC. Software engineers take in $85,000 per year in the Texas state capital.
Another data point of reference is the success of Andrew Siliver, founder of Chicago-based MoLo Solutions, which has nearly reached Transfix’s revenue mark without venture funding. His new freight brokerage will hit the $70M mark in the second year of operation. Chicago also has lower software development costs than NYC, engineers make around $83,000 on average.
Silver certainly has an appreciation for exit valuations of successful freight brokerages. His parents built and sold Coyote for $1.8B to UPS (NYSE:UPS) for revenue multiple of 1x.
Coyote’s UPS transaction is largely credited with kicking off venture capital interest in the freight tech space. That was in 2015, where the entire early-stage venture funding for freight tech was a paltry $351M. In 2018 it should top $3B. (Coyote received funding through private-equity, not early stage venture. The Silvers had to build the early stages of their business the old-fashioned way: with operating margins.)
Convoy, another digital brokerage that became one of trucking’s first unicorns, has also raised capital at eye-popping numbers, but they are largely credited with being a major brokerage model disrupter, willing to experiment through a range of solutions that include guaranteed detention, shared trailer pools, “Dynamic backup”, and other shipper related tools. Convoy is willing to bet it all on the line, following Reid Hoffman’s theory of Blitzscaling (winner take all with high-risk/high-return experimental business practices).
The roster of “who’s who” of tech investors at the encouragement of one of Convoy’s most vocal cheerleaders, Reid Hoffman himself, enable Convoy to enjoy a Silicon Valley bump with a 3x revenue multiple ($360M gross with a $1.08B post-money valuation). Considered high by most industry standards, but incredibly conservative compared to Transfix’s most recent ask. Convoy was started nearly two years after Transfix (2015) and has nearly 5x the top-line revenue. Convoy is based in Seattle, which has higher costs than New York City, but the company is planning to open an Atlanta office that will have far less expensive operating costs. Software engineers rake in about $115,000 on average in Seattle and $92,000 in Atlanta.
Of course, the winners in the future of freight brokerage, might not be venture backed or bootstrap startups. Look no further than JB Hunt (NASDAQ: JBHT). On April 20, 2017, JB Hunt introduced a digital brokerage platform branded as JB Hunt 360. In the 3rd quarter, the 360 operating unit generated $151M in revenue, nearly double what it did in Q1. Taking in the full year, JB Hunt 360 should top the $500M mark for 2018. Not bad for an 18 month-old digital disrupter.
JB Hunt might also have the best home-field advantage in terms of costs among all the digital freight disrupters by being located in Lowell, Arkanas. The average salary for a software engineer is $69,000 and commercial real-estate goes for $20.50/ft.
If we accept the Transfix revenue multiple of 10x, you could value Hunt’s app at $5B. Unfortunately for investors of the Arkansas freight conglomerate, it seems that the market is not giving JBHT much of a digital bump. The profitable $8.5B surface transportation leader is only trading at 1.4x sales. In fact, JB Hunt’s stock price was trading around $88 when they announced the launch of the app. The stock closed on Friday at $90.85, barely up 3% in that period. Granted, all trucking stocks have been major losers since mid-September of this year.
High valuations encourage investors to jump into the space and this is healthy for the entire ecosystem. The risk is that some of these companies will become (or have become) over-funded and over-valued in the venture market and their investors will not find an exit with upside (VC investors are looking for 3-5x their investment). If this happens, it will create a more difficult funding environment for all.
Alternatively, for startups across the space, Transfix successfully closing its round at the $800M valuation target will send a clear message that investors are less focused on short-term metrics in freight-tech and more focused on how these companies will disrupt this massive industry.