The Stratifying VC Approach to LogTech

Welcome to the 35th edition of The LogTech Letter, a weekly look at the impact technology is having on the world of global and domestic logistics. Last week, I looked at the problems of being conflicted, versus biased when it comes to writing about logistics technology. This week, I’m ruminating on how venture funding into logistics and supply chain is stratifying.

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@ihsmarkit.com or on Twitter at @LogTechEric.

I often think of this newsletter as trying to illuminate some aspect of the logistics industry for investors, or some aspect of the venture business for logistics practitioners. If this can serve as common ground, then I’ll have accomplished something. So in that light, I think it’s time for a frank discussion of what I see as venture capital’s evolving mindset on logistics startups.

Let’s flash our minds back to the mid-2010s. The venture capital world was just beginning to get to grips with what the logistics industry was, what was potentially attractive about it, and whether any area of it could scale to the extent that it would provide 1,000x returns on early stage investments.

Two things defined the venture landscape at that point: a relatively facile comprehension of what inherently caused fragmentation in logistics; and a failure to identify that logistics providers were hustlers and wouldn’t simply let a technology wave overtake them without a fight.

Very quickly, though, investors learned those things, and that has reshaped the theses that underpin continued investment into the space. You could argue, and I will in this newsletter, that VC investor expectations have actually evolved rapidly. That those expectations, in large part, are now more rational than they get credit for.

Some funds, especially those focused mostly or wholly on supply chain, have a pretty high hit rate, even if many of those hits are singles and doubles, rather than grand slams. That math is just as difficult as what we consider traditional venture bets - it’s just as difficult to be pretty right about nine out of 10 early stage companies than it is to be wrong about nine and wildly right about one.

Ultimately, as one founder put it to me, “for VC investors, it’s about the size of the market, and whether they believe the founding team can take a sizable chunk of that market.”

All this is to say, venture capital into logistics (and more broadly, supply chain) is not a monolith. Funds actively try to differentiate themselves, but sometimes that differentiation happens by chance. So let’s dig into what I see as the five types of LogTech startups VCs tend to back these days. The ratio of each type of these companies that a specific fund backs will help founders identify what type of fund they are - ie, looking for a grand slam or happy to amass a bunch of RBI doubles.

From talking with a range of founders who have attracted, are seeking, or are thinking about seeking venture funding, here’s the spectrum I worked up:

• Pre-product (pretty self-evident, but this is a company that has an idea but no product that’s actively being sold, much less piloted)

• Pre-customer (this company has a product, doesn’t yet have paying customers, but does have some pilot or beta groups about which they are gauging interest)

• Hyper-growth mode (this is the prototypical VC use case, a company with a product and some paying customers, nowhere near profitable, but with an innovative idea that needs rocket fuel and founding team that just won’t be denied)

• Established-but-unprofitable/time to scale (this company is further along than hyper growth mode, but is languishing in the unprofitable zone because something is holding it back, and there’s a chance that a VC is the one to unpick that lock)

• Profitable business/ready to scale (likely a bootstrapped business that has already found product/market fit, has established customers and is profitable, but wants to expand faster than its free cashflow would allow)

That spectrum, I suspect, captures most of the startups in the logistics space these days. It also captures how VCs in aggregate have adapted their thinking to invest in a broader range of startup types. Whereas most VCs would have concentrated on the hyper-growth startups, now some will invest selectively into those other types as well. You can argue that investments into non-hyper-growth startups means VCs are abandoning the core idea of venture, but everything has gotten a little blurred due to the amount of capital that needs to deployed.

One thing to think about when it comes to VC right now is that, despite the seemingly endless number of technology providers out there in the market, the supply of people ready to invest at present often exceeds the number of backable companies looking for investment. That makes a truly backable business in one of these categories a scarce commodity and thus creates a ton of competition between VCs to get access to the choicest deals. None of this is any secret in the always hyper competitive VC world, but it seems to be reaching a fever pitch now as capital is looking for effective places to be deployed. But it may be new to the logistics industry, especially those that haven’t been through the fundraising rat race before.

It’s a seller’s market, but also one in which sellers actively pursue specific buyers, ones with clout and reputation for enhancing early stage businesses.

One last thing to think about. It’s been hammered home to me over the past couple years that who a founder picks as an investor has big ramifications. There’s the growth expectations, the guidance, and the introduction to potential customers and partners. But there’s also the perception. Being aligned with some early stage investors just carries a different weight in later funding rounds. It will be interesting to see how those dynamics carry through to this new stratified world of investing. As one investor recently put it to me, “we’re having to look for these deals for profitable businesses ready to scale because it’s so competitive for us.”

Here’s a roundup of pieces on JOC.com the past week from my colleagues and myself (note: there is a paywall):

• So many funding rounds in LogTech, it’s getting hard to keep up. Today, Chain.io announced a $5 million round to help it scale its software integration platform. Founder Brian Glick penned this column a couple weeks back and it’s worth checking out.

• Torch Logistics, a broker that focuses on short-haul truckload, nabbed a $3.5 million seed round this week, led by Maersk Growth (which has been very active in North America). Founder Abtin Hamidi is a vet of XPO, Echo, Cargo Chief and Cargomatic.

• OpenEnvoy, which has developed an API-based invoice auditing tool, raised a $6.5 million seed round. Co-founder Matt Tillman previously founded Haven and freight is one of the industries OpenEnvoy has initially focused on since launching Q420.

• Another interesting development comes courtesy of Charley Dehoney, who was named CEO North America for FreightMango, a new forwarding marketplace. Dehoney has experience in startups and the brokerage world and is an investor into the logistics industry himself. 

• The visibility market, as I’ve written about a lot in recent months, is flaming hot these days. And Gartner has added fuel to the fire, putting out a Magic Quadrant on the space for the first time. I spoke with the lead analyst for them on transportation visibility Bart De Muynck about some developments in the market he’s seeing.

• I dug into Maersk’s 4PL ambitions as it continues apace with its technology and logistics services product developments.

• The factoring company and lender eCapital has rolled a bunch of brands it acquired the past four years under one banner. I chatted with their CEO about why non-bank-backed lenders have become so successful, and where the market is going.

• Finally, my colleague Cathy Roberson did a great job analyzing how last mile technology providers and 3PLs are giving shippers alternatives to UPS, FedEx, and USPS.

And here are some recent discussions, reports, and analysis I found interesting:

• Probably the best piece I’ve read about the difficulties in automating global logistics as well as what constitutes true innovation in the space.

• Steve Banker digs into the latest developments on Amazon’s logistics and transportation ambitions.

• Who has benefited, from a e-commerce perspective, from the pandemic-fueled boom? 

• Apropos of this week’s topic, here’s a pretty good summation of what still makes the VC math work.

• My colleagues at IHS Markit do a great job here of breaking down of the importance of cloud-based data management in the maritime world.

• Weekly moving update: still not moving to Florida or Texas.

Some upcoming events I’ll be involved in:

• I’m moderating a panel on AI in logistics at this event next week. Still time to register to join.

• The JOC Breakbulk and Project Cargo Conference is happening May 25-26. Check the agenda here. I’ll be moderating a session on project logistics digitization.

• Registration is open for the IAPH World Ports Conference June 21-25. I’ll be involved in various technology-related elements of the program. MSC CEO Soren Toft and Hapag-Lloyd CEO Rolf Habben Jansen will both speak. Don’t miss out!

Disclaimer: This newsletter is in no way affiliated with The Journal of Commerce or IHS Markit, and any opinions are mine only.