Freight-tech startup future: bright or blight?
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The 2019, when the valuations of various freight transport related startups were sky high and every little innovation was hailed as a revolutionary change, felt so “century ago” by March 2020.
To understand what will be valuable in freight tech space, it is necessary to speculate on what will be happening with the economies and the trade. Here are a few guesses. Each country undertook different strategies around the lockouts and introduced restrictions on movement of freight and people transporting the freight at different times. Easing of those restrictions will also happen at different times and there will be no synchronization between countries when it comes to which restrictions will be eased at any given time. Lockouts dampened and reconfigured demand for goods, making transport and warehouse capacity forecasting complicated due to lack of similar history to learn from. Compliance will become more complex with addition of new health and freight handling certificates varying from country to country and in some cases between administrative regions of the same country. Networked services cancelled by transport companies over the last 4 months will not be restored all at once and some A-B or loop services may not even come back at all. There will be many other changes, but let’s just take only the above into consideration.
Rather than dissecting current and future value of specific technologies, I focused on key problems faced by the startups and assessed the future of few distinct segment of freight management, so that companies thinking of engaging startups in those challenging times can make better selection decisions.
According to various surveys, early-stage funding for startups is drying up, shrinking by about 20%, even if there is still cash available to be invested. The investors are clearly edgy and more choosy, but most freight-tech startups don’t have enough cash from ongoing sales to stay afloat and invest in growth, so significant injections of new cash are vital. The pandemic quickly sifted those startups into “worth keeping alive” and those “not worth additional investment”. Anything vaguely related to the virus pandemic response is still getting investors’ attention, but “non-essential” innovation ends up in the “next day” pile. To understand it, think about essential freight services where people would normally be working in close proximity or frequently contacting each other. Among the freight tech startups, not many will be able to hitch their story to the virus and essential service criteria. In my mind, autonomous delivery, autonomous warehousing/distribution and robotic process automation remain in contention. Product source assurance and tracing is hot too, as thanks to unscrupulous suppliers of medical supplies and equipment in exporting countries, substandard and fake parts keep entering the essential supply chains. Knowledge about freight handlers and their health status at the time of specific interactions with specific freight will gain urgent importance.
When the startups universe booms, skilled hi-tech workers choose the sides quickly as greater freedoms and promise of cashing in on an IPO riches easily win against slaving for larger, stodgier tech companies. In the world affected by lockouts and exclusions, the situation reverses, as working for cashed up companies like Amazon, Alibaba, Microsoft, or Apple is decidedly more comforting than working for a startup running out of cash at frightening rate. The uncertainty enveloping the immediate needs and the fuzzy future over the next 12-18 months give well-capitalized tech companies a chance to selectively poach skilled workers uncertain of their day-to-day existence at grounded small plays.
The scope of the problem tackled by a typical freight tech startup is driven by a simple philosophy – find a defined market which seems to be behind on digitalizing, then define a hole in that market that could be filled by a technology the founders are familiar with. Some of those holes may not be as critical, so find one friendly company that promises to use it, then relentlessly knock on potential investors’ doors using that key early prospect as a proof point of the overwhelming need for a solution, or more specifically, your startup’s solution. Sustaining industry’s interest in the solution is possible, as long as new prospects keep signing up to give your solution a test run. In the fully globalized world of trade full of companies interested in getting ahead of the competitors, hitting a potential prospect is like shooting a fish in the barrel. In the pandemic response-driven world of closed borders, physical and soft restrictions on freight movements and people moving that freight, and wholesale shutdown of services serving the freight economy, that agile model of throwing something together and seeing what works and what doesn’t is fraught with failure at every step. Appetite for risk among the testers and the buyers may remain low over the next 12-24 months. Urgency of immediate and noticeable results will get prioritized ahead of long term uncertainty of outcome. even if theoretically delivering bigger payout to the buyer and the investors. Let’s say that anything long term offering a cosmic leap – is out, and anything short term with immediate benefit of delivering rapid, tangible benefit in this uncertain world is in.
Every startup experienced the “let-us-try-before-we-decide” attitudes and the endless pilots requiring extraordinary amount of attention committed to making the prospect satisfied and willing to spend their money. Working jointly with the customer, often at the same physical location is often required to ensure smooth path to internal acceptance of the proposed innovation. Social distancing, domestic and international restrictions on movement of people, and cancellation of travel options that will last throughout 2020 put stop to activities requiring personal contacts. Selling, demonstrating, piloting, implementing, and supporting over video calls and remote computing is not the strong suit of every startup, so lack of flexible selling model will doom companies that were not prepared for operating in such challenging world.
To keep this article short, yet informative, I had to group the startups in some way. The most interesting groups discussed in this article may not be perfect and you are welcome to have your own opinion on that. The key is to evaluate viability of those groups with the investors for continuing injections of new cash pushing further R&D, not capability of any individual startup within the group to attract new rounds of funding.
This group includes marketplaces matching shippers and transporters; transport management platforms, and „digital forwarders”.
This category seems to hold interest of investors and attract funding on the basis of thinking that where there is overcapacity of supply, technology is better at finding deals on cargo routings. The shippers don’t waste time searching themselves and are fine with the service fees collected by the digital middlemen. Expect startups continuing to enter the marketplace space in road transport and to a lesser extent in sea transport. Just like in the case of Uber Freight and Convoy, investors will be looking at the size of the network (number of drivers) and network growth rate without the startup(s) giving out much in signing up promotions and customer sales promotions. The pandemic had also brought to light needs to certify and assure the health of the workers traveling with and touching the freight, as well as certification of safety of the cargo itself. Capacity matchmaker platforms with the capability of collecting, maintaining and presenting on demand those assurances in digital format would be much more valuable, as long as fear of pandemic reoccurrence remains high. There will be good exit strategies from these investments, as larger companies will also try to grow by acquiring smaller companies with solid regional networks. However, valuations vary greatly and head to head competitive differentiations will be important (e.g. Convoy vs Transfix or Sennder vs FreightHub) in mapping out investor’s exit strategies.
Above the matchmakers are supply chain orchestrators. That was always a much harder gig as newcomers like e.g. Haven, FLEXE and various incumbent transportation management systems (TMS) experienced. Since responses to pandemic varied so much from country to country and from week to week, orchestration of supply chain decisions based on analysis of history made less sense. It became apparent that supply chain orchestration solutions have to provide capabilities meeting two competing objectives: supporting real time reactions which can have myriad of long term unpredictable consequences, while using the same algorithms to maintain performance in slow moving supply chains which are not as affected by logistics roadblocks put up overnight. Learning and acting without sufficient or certain data is not the forte of current orchestration solutions, so I would expect some startups wanting to give it a go, but time required to prove it works may discourage investors looking for faster payoff on their investments. Still, good investors’ exit strategies exist in this space, as demonstrated by transactions of INTTRA (sold to E2Open) or Kuebix (sold to Trimble).
Last, but not least is the layer of a “digital forwarder” pioneered by Softbank’s investment Flexport. Thus far, being “better” by virtue of their better use of data and significantly higher profit margins than the less digitalized peers has not proven to be a great advantage in the days of upheaval across supply and demand. Having solid relationships, rather than fast APIs, has proven as efficient and as important in obtaining scarce capacity, preferential routings and preferable transit times. With incumbents remaining unperturbed by presence of Flexport, and not really pushing dramatic innovations on their own, I would not expect investors willing to give it another go at this scale of funding until a more convincing case for a different type of freight forwarder materializes.
Visibility (cargo and equipment)
Lockouts of workforces and factories exacerbated imbalances in equipment (container, tank, pallet) and the need to find it quickly and close by to where it is needed. Since laden equipment becomes empty and available at some point, startups capable of tracking both and offer services in finding specialized equipment as it is moving around are doing good trade and will keep attracting investors and new entrants trying to disrupt earlier entrants and captive innovations. Predicting when a particular piece of equipment becomes empty and available is as important as picking up and scheduling transport to demand location. In times of restrictions on movement, facilitating the transaction as well as physical repositioning should produce spike in revenues and margins, something that keeps investors interested. Startups doing only one side of the trade (finding empty container, but not offering tracking laden) will progressively lose value. When it comes to cargo tracking, the pandemic delivered perfect proof points for medical and personal protection equipment supply chains needing the same protection and backward tracability as food supply chains, but will the interest in having solid solutions for this last long enough for specialized startups and their investors to enter is less clear. At this moment, any healthcare provider is happy to receive donations of protective masks and hardly anybody checks if they are good enough for the quality standards required. Once peak demands go down, so might the interest of innovators.
Sensors/Internet of Things
This category was hot for a while with Traxens, Identec, Impinj at the front of the pack. Sensors alone are not sufficient to make freight-related decisions, so it will be interesting to see data analytics/machine learning specialists trying to acquire sensors builders and create better mousetrap for investors and potential buyers.
Warehousing was already on its way to become a robot-land. Predictions of 25% of warehouses globally being entirely or partly operated by robots within the next few years could be adjusted upwards thanks to the pandemic. Warehouse robotics is a crowded, fragmented field that will not be easy to consolidate due to proprietary technology making the robots to operate and communicate. Seegrid and Locus Robotics got off to a good start on autonomous warehouse robotics equipment, but turnkey lights-out mini-fulfillment centers pitched by Fabric or Intelligrated would be of equal interest to investors given explosive increase in e-commerce volumes, which will persist long after the lockouts end.
“Not so automated” Last Mile Delivery
The e-commerce volumes are sky rocketing. It may be that people are buying more things on the web out of sheer boredom. Browsing virtual stores is painless and the credit card is not due until the 1st of the month. Delivering all these packages takes army of people, not machines. That army is now cheaper than ever thanks to many other less skill demanding jobs being mothballed. Investments in Doordash, Postmates, Loggi, Bringg and thousands of others in this category look good if you just look at the volumes, but competition is fierce, so profits could be minimal and shrinking, if there ever were any profits in the first place. Amazon offering people to leave with $20,000 to start their own local delivery business did a great job increasing number of competitors and lowering the fees that those businesses can negotiate. The startups pitch delivery optimization algorithms as a differentiator, but math is open to all and any advantage can be wiped out in a matter of weeks, if the competitor(s) are determined enough. This is the business of racing to the bottom on fees, so serious investors may want to collect returns quickly and exit for greener pastures.
Automated/Autonomous Last Mile Delivery
Breaking the chain of infections requires that humans stay apart. That is hard in the process of delivery of goods. Touching the stylus of the handheld terminal to sign for the package is fraught with danger of virus transmission. Handling any form of COD payment at the door as well. Unattended delivery left farther away from the buyer’s door attracts thieves. Accosting a slow, ambling delivery robot seems like a child’s play. Drone delivery in dense urban environments remains a challenge, but that is exactly where the fear of virus is greatest, the number of infections is highest, enforcement on people’s movement strictest, and e-commerce order deliveries most popular. I am afraid that with the massive unemployment on the way, the door-to-door delivery services (see previous section) will attract enough desperate drivers, bikers and walkers to keep the deliveries cheaper than the cost of developing autonomous drones and robots fulfilling the same task. Can companies like Starship or Matternet continue attracting new investments in light of little economic sense to develop sophisticated computing and sensing on a vehicle that delivers a single parcel? Does it make more sense to invest in company like udelv which is trying to do the same in van-sized units? Fear of touching something that was touched by someone unknown before may persist in some societies for months, so investors and companies experimenting with those delivery technologies should think hard on how much they are willing to invest.
Well, this article could go on and on, but at 2,000 words it has been a test of your reading patience already. Looking forward to your comments and hearing your ideas on what type of freight tech startup to put my money on.
Kris Kosmala works on innovative applications of mathematical optimization to solve real-life business planning & execution problems. All his writings draw on real-life business experiences with his clients.