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Photo: Convoy

Another one bites the dust: what’s behind the shakeout in digital forwarding

2023 was not an easy year for logistic technology (LogTech) startups. The year was marked by the default of several high-profile “digital forwarders" that once promised to re-invent logistics.

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In December, Instafreight, a leading European digital freight forwarder, announced that the venture was filing for insolvency after having raised EUR 75mn from top-tier investors including Rocket Internet, the European Investment Bank and Shell Ventures. Convoy, a United States (US) startup failed more spectacularly – it had raised USD 1bn and was valued at USD 3.8bn just a year before shutting down the business in October 2023. Startups elsewhere have also struggled – Blackbuck, an Indian trucking platform, sold its European assets to Trukker; and Freightwalla, an early mover in India, shut down in May 2023. Flexport, the best financed of these startups, laid off 20% of its workforce in October last year.

These events are the result of a global correction which started in early 2022 both in the logistics sector, which saw a decline both in year-over-year freight demand over all modes of transport, and in the venture capital industry, which saw global funding fall to a six-year low in 2023, marking a 40% decline from the year prior. Almost certainly, this will not be the end of the trend either, as more of these so far never-profitable companies face pressure to restructure significantly, differentiate, merge or go out of business.

Industry insiders and owners of incumbent freight forwarders will be joining the “I told you so” train. For years, they have argued that these newcomers cannot “reinvent” logistics, an industry still heavily reliant on human touch. “We do digital forwarding services, but customers want us to meet them in person before signing up,” a start-up executive told The Loadstar last year. This confirms our belief that algorithms can take over regular repetitive tasks but not the ad-hoc and complex problem-solving activities which are common in the industry. We see that there is a 70% to 80% of forwarding processes that can be digitized and automated, a potential that digital forwarders can capture. But then why did digital forwarders fail where incumbents continue to operate profitably?

The cheap capital trap

To us, the challenges faced by these (self-)declared disrupters say less about the weakness of the digital forwarding model, and more about the limitations of mainstream venture capital financing on which the disruptors were built. We remain convinced that the logistics industry can benefit from digitalization, but digitalization alone is not enough.

The failed digital forwarders were funded at a time and with money that prioritized exponential revenue growth over profitability; and they were largely run on the simplistic belief that it is possible to “reinvent” a complex self-organizing industry, like logistics and transport overnight.

LogTech startups raised over USD 80bn from 2010-2021, most of it after 2018. This segment of digital road freight platforms and marketplaces was the 2nd most financed during the recent “cheap money” period, receiving over USD 21bn in funding (Figure 1).

Figure 1: Distribution of funding to logistics startups, 2010-2021 (Source: McKinsey).

This abundant funding created inappropriate incentives for the ventures and their management – to go out and “buy” revenue at the cost of margins. And as companies grew quickly, it reinforced the view to other investors that those new entrants were successfully disrupting the market, leading to ever higher valuations from even more investors thinking rapid disruption was possible. Not surprisingly, the funding peak in 2021/2022 coincided with larger rounds and higher valuations (Figure 2).

Figure 2: Median post-money valuation and deal sizes of LogTech VC funding rounds, 2014-2021.

Another exposure in their approach to business was a tendency to allocate very high capital expenditure to research and development (R&D). While R&D is necessary to capture efficiencies, this behavior was also necessary to justify the narrative that digital forwarders are “tech-driven companies” and assumed technology adoption rates divorced from industry reality. However, this led to high burn rates dependent on continuing to raise future capital.

Unfortunately, funding to the LogTech sector generally fell 50% from 2021 to 2022, with funding for road-freight platforms (first and middle-mile brokers), falling even more (70%). Once such funding dried up, so did the prospects of these disrupter.

The true promise in digital-first forwarding

Over the past year, we have mapped over 40 digital forwarders and over 60 transport management system (TMS) platforms across Europe and Asia, covering all modes of transport. We also spoke with multiple shippers and integrators on their operational and technology challenges. This effort was in support of developing a buy-and-build strategy to establish an integrated LogTech leader across Europe and Asia.

Through this effort, we continue to see that digital forwarding can deliver a step change in the industry. But gradually, as those changes are often evolutionary and not revolutionary.

We believe the ongoing industry shakeout will result in the emergence of a 2nd generation more differentiated digital-first operators. These companies will build on the technology foundations of the 1st generation digital forwarders, deploying digitalization where this delivers efficiency gains, while being aware of the limits of technology where a human-centric approach is needed.

Downplaying the human factor was a key failing of many of the 1st generation of digital forwarders.

Logistics is a complex business with a fragmented often in-transparent vendor landscape and a principal-agent problem between the various stakeholders in any logistics and transport chain (Figure 3). It relies heavily on humans, because informal processes and relationships are a prerequisite for managing difficult situation and exceptions. And companies make purchasing decisions based not only on cost, but on trust and a logistics company’s ability to manage exceptions.

Figure 3: Freight industry value chain challenges (Source: Anchor Group)

Examples of changemakers in the logistics industry

The belief that there were quick fixes to the logistics challenges was oversimplistic. Ryan Peterson, CEO of Flexport and perhaps the poster child of digital forwarding, recently himself stated that there are limits to what artificial intelligence and automation can achieve for actors and the industry at large “I still think at the end of the day, there’s a strong role for people with a lot of expertise,” Peterson explains. The human factor cannot be ignored.

Companies that succeed in “reinventing” logistics will recognize this truism and base their technology and business models on it. Below are some concrete but anonymized examples of changemakers we see in the industry:

  1. A European less-than-truck-load (LTL) freight forwarding that increased automation such that 95% of bookings and transport in 2023 were handled without manual interventions. This coincided with gross margins increasing from near zero in 2019 to nearly 20% in 2022.
  2. A European container trucking platform, that matches over 65% of loads automatically, with that number continuing to grow, and backed by a sponsor familiar with container workflows.
  3. An full-truck-load (FTL) trucking platform in the Gulf Cooperation Council (GCC) region, that has grown 3x year-on-year and reduced empty loads by 20-30% in its 3rd year of operations at scale. The company also offers a SaaS-based transport management solution that optimizes freight for the shipper, enabling payback rates of less than one year on the SaaS investment for the customer.
  4. A multi-modal digital forwarder in Latin America, that grew recurring/SaaS revenue to nearly 40% of total revenue within three years of founding, turning itself into a high-margin technology partner to shippers and carriers.
  5. A US-based forwarding aggregator creating dedicated multi-shipper fleets to optimize transport for multiple customers generating significant efficiency gains for everyone involved, including themselves.

How to spot a successful digital forwarding business model?

Based on our analysis, we have identified the following as characteristics of companies that we believe are needed from any 2nd generation digital-first forwarding solution:

  1. A business model that disrupts their own business: Digital-first players are not interested in forwarding gross margins or revenue, except as a means to an end. They are happy to look for more efficient transport, even at the risk of reducing their own revenue – because they can make up for that through the provision of other services, software, or a better customer experience.
  2. Visibility not as a service but as a key enabler of automation and efficiency. Traditional forwarders see real-time visibility often as a value-added service to their shippers. Digital disrupters see it as a means to optimize their transport operations and pass on the resulting cost benefits to their customers and carriers. Successful players will identify metrics for levels of visibility and automation and pursue their incessant improvement.
  3. An industry execution platform. One cannot eliminate efficiencies without bringing multiple value-chain participants onto the same platform and either enabling visibility for better logistics and supply chain management or being the platform on which everything is transacted. This requires multiple routes to market, including as a forwarding service, white-labeled software, or SaaS / PaaS.
  4. Integrated end-to-end service, including capacity. Bringing together capacity with software innovation (AI driven or not), is a unique selling point (USP) for shippers that do not want to deal with the complexity of logistics but want the benefits of scale.
  5. People-centric, intuitive, and easy to use system allowing fast onboarding. Logistics doesn’t work without people and the fun of working with the solution is a key factor. And the same approach will not work globally – for instance, Southeast Asia requires different solutions than the US or Europe. Companies need to deliver technologies oriented to the specific markets and people that will use or interact with them.

The above is not an exhaustive nor exclusive list. Successful companies might display some, but not all of these characteristics. However, it supports the point of the need for a hybrid human-machine model in the forwarding industry.

Conclusion – human-machine hybrids win

Logistics continues to be burdened by inefficiencies across the supply chain and logistics value chains. Decades of technological evolution have not resolved many of the problems, but we believe that digital-first forwarding will eventually drive major change in the logistics and supply chain industry.

Perhaps its biggest potential is as a sandbox for a better way to do business and thereby shakeup the traditional logistics market. Digital-first forwarders are not incumbent to the industry and as such have every reason to look for and create efficiencies that they pass on to their customers.

The industry shakeout that we witnessed in 2023 is not the end of digital forwarding, but rather the next phase and opportunity to focus on and consolidate what is important to eventually bring significant change to a complex industry with a high level of inertia resisting change. From the ashes of the 1st generation of digital forwarders, we expect to see a stronger crop of digital-first players emerging, with the staying power and characteristics needed to disrupt the industry status quo.

These second-generation digital forwarders might not be quite as “cool” as the previous re-inventers of logistics but will have much more impact at the end. Most importantly, experienced and skilled supply chain and logistics professionals, and business experts will have an even bigger role to play going forward.


About the authors

Wolfgang Lehmacher is Partner at Anchor Group. The former Director at the World Economic Forum, and CEO Emeritus of GeoPost Intercontinental, is an Advisory Board member of The Logistics and Supply Chain Management Society, Ambassador F&L, Advisor Global:SF and RISE, and member of Think Tanks Logistikweisen and NEXST. He is Author of The Global Supply Chain and Circular Economy, and co-author of Disrupting Logistics: Startups, Technologies, and Investors Building Future Supply Chains.

Dweep Chanana is Managing Partner at Anchor Group. He has led over 20 industrial and technology M&A, investment and new ventures with leading corporates and institutional investors. He was previously head of venture investments at Momenta Partners, Director, Strategy and Business Development for Family Services at UBS, worked at the United Nations in Kenya on private sector development. An engineer by training, he has also worked at Lucent and Hughes.