The Duality of the LogTech Venture World
Welcome to the 116th edition of The LogTech Letter. TLL is a weekly look at the impact technology is having on the world of global and domestic logistics. Last week, guest contributor Jonathan Kempe wrote a poetic treatise on cutting through the noise of digital transformation. This week, I’m digging into the two categories of investors and founders in the venture logistics technology market as it stands (no hot SVB takes here, sorry I know next-to-nothing about finance).
As a reminder, this is the place to turn on Fridays for quick reflection on a dynamic, software category, or specific company that’s on my mind. You’ll also find a collection of links to stories, videos and podcasts from me, my colleagues at the Journal of Commerce, and other analysis I find interesting.
For those that don’t know me, I’m Eric Johnson, senior technology editor at the Journal of Commerce and JOC.com. I can be reached at eric.johnson@spglobal.com or on Twitter at @LogTechEric.
A lot of the acrimony typically aimed at the venture capital world, which obviously came to a head during the SVB saga the past week, is centered around the idea that there is one singular type of venture capital person, and one singular type of venture capital-backed founder. Sure, everyone recognizes people have different personality types, but at their core, all VC investors have the exact same mindset and all VC-backed founders have the same ultimate goal.
At least as it relates to the world of logistics technology, that’s just not accurate. I presume you all have other things to do today, so I won’t provide an exhaustive list of “VC types” and “founder types” - I’ll leave that to special Twitter folks who dispense wisdom in 8,000 character tweets. But I will try to boil things down, rather simplistically, into what I’ll call the “duality of VC logistics investment.” By which I mean that there are largely two types of VC investors and two types of founders in the logistics industry.
Investor type 1 is only looking at companies that have the potential to reach a $1 billion-plus valuation. Investor type 2 is happy to invest in the type 1 opportunities when available, but is also comfortable looking for niche markets where a startup can make a radical impact and take a majority of market, even when that position is likely to result in a sub-$1 billion valuation company.
Now let’s look at the founder side of this. Founder type 1 takes venture capital and totally understands the risks involved in doing so, and also understands that by taking such investment, the business is more likely to fail than not. But the founder takes that risk knowing that the upside of succeeding is likely significantly higher than succeeding through other means of starting and growing the business.
Founder type 2, meanwhile, thinks venture capital is essentially another form of growth equity and misunderstands what it means to take early stage capital. They might have taken venture funding during the frothy days of the pandemic - or they might have taken too much money, or at too high a valuation - not understanding what the downstream impacts of that money and attached valuation would be when the economic picture inside and outside of the logistics industry changed.
Let me stop here for a second and say, I doubt a single VC-backed founder would consider themselves a type 2 founder, but the reality is that some proportion of founders in the logistics world are indeed type 2s. It’s just simple math. That said, the average LogTech founder today is more aware than ever of the ins and outs of what taking early stage venture capital means. How’s that for being dimplomatic?
Okay, so I’ve provided definitions. But what does this all mean? What does it mean that some VC investors have the Dark Helmet mentality on growth…
…while others are happier shooting for ambitious, but more measured, exit goals? What does it mean that some founders know this is a go-big-or-go-home game, while other founders think venture investment is merely a foundation toward business building and not a red pill/blue pill type of scenario?
Since we’ve entered a new phase of VC investment into logistics, this is actually critical to understand. As one supply chain-focused VC told me this week: “honestly, venture + startups have been under fire since the start of 2022…layoffs, valuation compression, down rounds, etc.”
Last week, WiseTech Global CEO Richard White put it more bluntly to me: “The cash burn model is no longer viable. You have to have a very clear way to go from a land grab business. As interest rates rise, cash burn companies become less and less sustainable and fundable. If you’re focused on land grab and your product is an inch deep, that means it’s replaceable.”
The duality of LogTech VC right now means that this is a two-tiered market for the foreseeable future. There are the VCs for whom there is simply no other outcome than a 10-figure or higher valuation, and nothing about the current market changes that belief. Those VCs need to be aligned with the founders that share the same view on the upside and downside (I’m not even addressing the issue of whether the founders with that mindset have the product to get them there). That alignment, it should be said, is not perfect right now. There are lots of VCs who invested into logistics technology the past five years believing this to be an industry capable of supporting many $1 billion companies. Again, by definition, it’s not possible all their investments (or potentially any of them) will reach that threshold.
That tier of the market - the $1 billion or bust tier - will narrow in focus and number over the rest of 2023. The other tier, I believe, will expand over this year, with the pragmatic type 2 investors aligning with the type 2 founders who need capital but aren’t ready for a true burn-the-boats approach to business building. To put it more bluntly, there will be a whole lot more VC investor/VC-backed founder relationships that are happy with sub-$1 billion exits than there may have been in 2021. And the ironic thing is, that makes much of the venture logistics market look more like other capital avenues for businesses.
Eventually, the outcome will be that there will be fewer grand slams and a lot more singles and doubles. Which, by the way, is fine for the logistics industry on the buyer side. As I’ve written in the past, this is an industry that doesn’t just gravitate toward fragmentation, it seeks that fragmentation out. Creating new consolidated service and technology titans of industry isn’t necessarily what a logistics manager wants. He or she wants options, competition among service providers, and a technology environment that feels like a warm embrace, not a chokehold.
Here’s a roundup of recent pieces on JOC.com from my colleagues and myself (note: there is a paywall):
Freightos this week held their first earnings call since going public and there was some interesting stuff, most notably around how their model works in a depressed freight demand and rate environment. Dug into that here.
Thought that a new product release around automating the domestic transportation RFP process from Shipwell was interesting from a number of angles: for one, it gave me a chance to look at Shipwell’s aim to provide TMS to the masses, with RPF capability a complement to that; two, it’s part of a broader trend of equipping shippers of all sizes with the ability to procure freight more frequently (often called mini-bidding); and three, I was able to explore a bit about whether Shipwell is a TMS or broker (or both).
Drayage TMS provider PortPro got a funding round in January and last week said it would be providing a container milestone tracking tool for shippers and forwarders, enabling them to touch those markets and also help their dray carrier customers enhance their own ecosystems with key data.
And here are some recent discussions, reports, and analysis I found interesting:
Dave Ross is back with another solid blog.
GSBN CEO Bertrand Chen tackles the topic of where eBLs go from here after being on a panel at TPM23 about the topic.
Photo credit: Caught in the Moment My colleague Cathy Morrow Roberson uses Big Lots’ Q4 earnings as a vehicle to explore the importance of partnerships in logistics. Big Lots’ Global Logistics Director Bob Fredman was on a case study I moderated at TPM23 as well.
Photo credit: Caught in the Moment Kornferry details how the pandemic and the disruptions it caused are requiring that logistics leaders have new skills.
Worthwhile read on the USTR office being sidelined on trade issues as political issues take to the fore.
Logward takes an in-depth look (with some predictions) at what does and doesn’t work when it comes to supply chain digitization.
Eytan Buchman does some research on container line customer surveys…obviously a no-brainer read here.
Some upcoming events I’ll be involved in:
I’ll be in Houston next week for S&P Global’s World Petrochemical Conference, moderating two sessions Tuesday at the Supply Chain, Transportation, and Logistics Summit. The first session will see my S&P colleague Mark Fontecchio talking about his research into logistics technology and what it means to chemical shippers. The second session will dive deep into specific solutions for the chemical supply chain industry, from TMSFirst, Nautilus Labs, and Sedna. Check the agenda here and register here.
I’ll also be leading two sessions at the Journal of Commerce’s Breakbulk and Project Cargo Conference April 19-21 in New Orleans. The first is a session on understanding what the energy revolution means to breakbulk and project cargo shippers. And the second looks at technologies helping to make the industry more efficient. Check the agenda here. And register here. New registrants can use the code ERICJ25 to get 25% off registration.
Disclaimer: This newsletter is in no way affiliated with the Journal of Commerce or S&P Global, and any opinions are mine only.