A recent article in Landline Magazine, authored by John Bendel suggested that ICONIQ might have plans to merge Truckstop.com with Convoy or Uber Freight, on the back of their recent majority investment. This is not the first time I heard speculation that someone in the freight brokerage business might merge with one of the large load boards.
I know the folks at ICONIQ, having spent time with them over the past year as they were doing diligence on the space (this is not unusual: because of the nature of our market intelligence, we spend a lot of time with VCs as they try to wrap their heads around the freight business). I was not aware that they were looking at an investment in Truckstop.com and was surprised that they were the buyer of the worst-kept secret investment in FreightTech.
ICONIQ is among the most respected firms in the Valley and has a track record for making smart bets. It would never do anything reckless or ill-conceived to a business it invested in. Buying Truckstop.com for the purpose of making it into a digital brokerage is almost certainly not in their plans.
On the surface, it seems like a compelling proposition: the idea of taking a large distribution of loads and truckload carriers and combining it with a full-service freight brokerage. After all, between Truckstop.com and DAT, you have the majority of the spot market.
Could you imagine if one of the well funded digital brokerages were able to get their hands on a major load board? How massive would that be?
Except it wouldn’t work.
If a major freight broker (or disruptor) were to purchase one of the major load boards, the majority of the business would evaporate overnight. Load boards generate the vast majority of load postings from freight brokerages. They don’t have a large distribution of freight from shippers.
Only a few shippers, like Amazon (NASDAQ:AMZN), Pepsi Logistics (NASDAQ:PEP) and Koch have functioning third-party logistics services. In fact, as an independent company, Koch’s logistics arm (named KBX Logistics) would be a top 10 freight broker based on gross revenues. Amazon does post freight directly to load boards, but anyone who missed the fact that Amazon might have aspirations to move into third-party logistics has been living under a rock.
These companies, as big as they are, represent a tiny fraction of the loads posted on load boards. Chances are that a brokerage large enough to be involved in such a transaction would likely have an established relationship with those particular shippers anyway.
The brokerages that depend on load boards are fiercely competitive, even inside their own companies. Often the only major differentiator is their relationships, information about the shipper, and experience in playing the market. If they were to post a load to a load board owned by a brokerage, they would end up giving up their advantage in the first two. And you can bet over time that machine learning and artificial intelligence will make the third factor obsolete.
Even if Truckstop.com were to sell to be combined with a benign brokerage with honest intentions, the pure paranoia of the market would rapidly make its marketplace ineffective. Freight brokers are the day traders of the market: emotional, competitive and instinctive. Just the simple idea of someone gaining a competitive edge on them would send them into a rage.
According to details from sources close to the deal, none of the money that was invested in the Truckstop transaction went in as primary capital. This means that the money isn’t to be used for growth, but rather to buy out a large portion of the primary shareholders; namely the founder Scott Moscript and Bregal Sagemount. This is wonderful news for Idaho and New Plymouth, as they have a newly minted multi-hundred millionaire in their backyard. The company is investing in new product and engineering development, but this appears to be coming from the operating cash-flows and working capital of the company.
But it does suggest that ICONIQ’s investment was based entirely on its confidence in the strategic direction of Truckstop and its strength in the market. If it wanted to buy Convoy or Uber Freight (neither of which are for sale, as far as we can tell), it would require a great deal more capital than was invested in the deal.
Convoy’s valuation is well north of $1 billion and there are hints that this number is on the way up.
Uber Freight is part of a company that is pursuing an IPO. Any deal with Uber Freight would have to wait until after the IPO took place, and it is clear from reading the S-1 that Uber believes Freight is a core part of its business. After all, it made it clear that its total addressable market includes the $3.8 trillion trucking freight market. To avoid regulatory issues or investor lawsuits, the company would have to wait at least a year to change course.
So what does ICONIQ have in store for Truckstop.com?
Little has been said publicly, as the deal is so new. But from conversations with sources inside the company and close to the business, we have learned that Truckstop.com is investing millions in developing automated workflow products for the digital age. It wants to be a central marketplace for loads, providing a platform for electronic matching, workflow and payment clearing.
Much like the financial exchanges (NYSE, NASDAQ, DB) that rely on financial brokerages to access the market, ICONIQ likely sees the same opportunity in Truckstop.com: a market where voice brokerages maintain the relationships, provide value-added experiences and tools to clients, but access a central exchange and clearing house.
Truckstop.com already has a large two-sided marketplace built and settlement operations with its factoring company. You can expect more digital offerings to streamline the workflow, and unlike the companies that are trying to kill off the vast majority of voice brokers, Truckstop.com is trying to bring them along into the digital age.