If anyone thought that the $1 billion SoftBank and other venture capital (VC) investors plunged into Flexport in February was the denouement of the digital freight forwarder movement, the reality is investment may only be getting started.
The next step of that movement is more regionalized investment in digital forwarders around the world, exemplified by the $30 million Berlin-based FreightHub snared Thursday in its Series B funding round.
Led by the Moscow-based VC group Rider Global, the round brings FreightHub’s total investment to $53 million, the second most of any digital global forwarder after Flexport’s $1.3 billion. Among the investors in FreightHub is Maersk Growth, the venture arm of the Danish container carrier Maersk Line.
Room for regionalization
FreightHub, founded in 2016, is one of a number of companies to build a global freight forwarder with a systems-out approach, using modern software architecture to automate many of the rote processes forwarders undertake, a model that Flexport pioneered. But despite the global reach of these providers, more and more of them are developing along the same regional lines as traditional forwarders.
In Europe, for example, FreightHub and Barcelona-based iContainers have emerged alongside London-based ZenCargo, which nabbed its own $20 million Series A round in mid-April. In India, there’s Shipwaves and Cogoport. In Central America, Mexico-based Nowports is following in Flexport’s footsteps by taking part in the San Francisco-based technology incubation program Y Combinator. Similar upstarts, such as Brisbane-based Explorate, are taking root in Oceania.
“No one has asked that there only be one player,” FreightHub chief commercial officer Michael Wax told JOC.com. “This is not a winner-takes-all market. In Germany alone, there is so much potential because the market is so huge.”
Wax said FreightHub’s volume tripled from 2017 to 2018, and the company currently serves more than 1,600 shippers, predominantly mid-market enterprises in Germany. “These are companies that are the backbone of the economy here, companies doing more than 1,000 TEU a year, where we are working with them and trying to get more of their volume.”
FreightHub will use the latest funding injection to expand its footprint and workforce, but also to further build out its technology to encompass more of the “end-to-end logistics process,” Wax said. That includes “purchase orders, vendor management, and managing products on the platform,” he said. “Landed cost analysis, what terminals work better for [shippers], having a tool set up to see what kind of exceptions happen, simplifying invoicing, seeing where the customer spends time, this is where you really create value.”
The question now is whether the spread of digital forwarders will mimic the growth pattern of more traditional forwarders. In other words, will digital logistics companies emerge region-by-region to serve local customers because they have the built-in advantage of specific market expertise?
When the VC-backed digital forwarders first arrived on the scene, the sense was that they were trying to immediately overtake entrenched global competitors. But most have taken a different approach — often out of necessity — focusing on certain trade lanes at the outset. iContainers, for example, has focused almost exclusively on imports and exports to and from Spain and the United States only.
“If you think about it, Airbnb didn’t serve every city initially,” Wax said. “It would be possible to show prices around the world, but for us it’s more important to be a leader in reliability rather than portfolio.”
That makes for an interesting dichotomy when it comes to the mindset of VC investors. Digital forwarders, Flexport the most well-known among them, have overwhelmingly relied on VC to fuel their businesses as opposed to bootstrapping or seeking out strategic investment.
VC investors, however, pay for rapid scale and growth, and the presumption was that online service logistics providers would be able to serve a shipper anywhere on the globe with the click of a button. But freight forwarding still requires people with relationships with local transportation providers and customs authorities, among other market specific expertise. Getting competitive rates from ocean carriers also requires a certain concentration of volume.
Two sides of a coin
As Graham Parker, CEO of the software developer Kontainers, put it, incumbent forwarders have the edge on footprint, customer base, and expertise, while digital forwarders tend to have the edge on customer-facing technology. But each is typically missing a piece of the puzzle. The question is, which is harder to build? Kontainers, it should be noted, sells front-end software to forwarders and non-vessel-operating common carriers (NVOs) to help them compete with digital forwarders.
Perhaps the investments in Zencargo and FreightHub, which pale in comparison to Flexport’s but are nonetheless large, are a view into the maturing perspective VC firms have for digital forwarding, i.e., that the market won’t be, as Wax said, a winner-take-all proposition.
Matt Tillman, CEO of the software-as-a-service (SaaS) global transportation management software (TMS) provider Haven, noted at JOC’s LogTech Conference in 2018 that VC-funded companies are able to multiply the revenue they generate into bigger value for customers than those relying on traditional funding methods. He said he is able to turn $100,000 in subscription revenue from a shipper into $1.5 million in value for that shipper because a SaaS provider is valued by VC investors at approximately 15 times its revenue. So that $100,000 invested in Haven turns into $1.5 million in potential investment in the company, money that is reinvested in serving the customer since the early phase of startups is built on rapid growth of topline revenue.
The multiple for digital forwarders is lower, if Flexport’s latest funding round and 2018 revenue is any indication. The San Francisco-based company said it earned approximately $471 million in revenue last year and turned that into a valuation of $3.2 billion (a multiple of 6.8). For reference, publicly-traded freight forwarders are valued at approximately two times their annual revenue at best. Panalpina, acquired by rival DSV in April, was sold at less than one times its revenue.
The other dimension to consider regarding FreightHub’s latest investment is Maersk’s participation. It’s the second such move in recent months by the company’s venture arm to bolster digital intermediaries after the company led a $21.6 million round for New York-based Loadsmart, a digital domestic freight brokerage.
Wax said Maersk was an ideal partner because it “has a significant interest in realizing the potential for digitalization in this market.”
It’s worth considering what the investment in FreightHub means to Maersk’s existing in-house digital forwarding channel, Twill Logistics, which the company launched in 2017. Originally developed under the Damco freight forwarding brand (Maersk’s sister company), the Danish line brought Twill back under the Maersk banner in September as part of an effort to broaden the container carrier’s service reach beyond port-to-port vessel operations.
Twill might well be considered more of a front-end, e-commerce-focused instant rate channel, and not necessarily a direct competitor to some of the more heavily funded digital forwarders, such as FreightHub. Wax said FreightHub is focused on both front-end user experience and automation of back-end operations.
Twill might well be considered more of a front-end, e-commerce-focused instant rate channel and not necessarily a direct competitor to some of the more heavily funded digital forwarders, such as FreightHub. Wax said FreightHub is focused on both front-end user experience and automation of back-end operations.
“The real music starts to play when you have the ability to display this process 100 percent, from the purchase order all the way to the warehouse,” he said. “There are a lot of products out there, but not many serve [small-to-medium-sized businesses]. A lot of initiatives are working on one end [the front end or back end], but not on both.
“If you want to change the way the industry operates, you have to get your hands dirty. You need to redesign the software,” Wax added. “A forwarding company to me is a software company. Your success is really defined by how efficient and reliable your shipments are being processed while keeping compliance in mind. And a perfect system will be intuitive on both ends.”