WeWork’s abrupt decision last month to delay an initial public offering, followed quickly by the sudden forcing out of the company’s CEO, raises questions about the sustainability of the business models of so-called disruptors in the logistics space and whether the drive for breakneck revenue growth delivers real value to cargo owners.
The current level of venture capital (VC) investment behind startups is unprecedented in logistics, in terms of both the sums being invested and the experimental nature of the ventures, all of which involve leveraging technology to redefine the market around new business models. So far this year, more than $12 billion in financing has been committed in more than 400 deals across the various facets of the supply chain and logistics sector, according to CB Insights. Among the largest amounts committed to logistics startups to date, according to Crunchbase, are more than $1 billion for the digital forwarder Flexport, $265.5 million for the digital truck brokerage Convoy, $90.5 million to the visibility provider Project44, and $92.7 million for the air and ocean marketplace Freightos.
The WeWork debacle and the lack of a sustainable business model to emerge — at least so far — at Uber suggests to veterans of logistics technology that something in the current environment may be seriously askew. According to some, the idea of putting massive investment behind visionary founders seeking to quickly establish a dominant, impregnable market position while displacing incumbents may not inevitably lead to sustainable value creation for customers and investors.
Instead, startups are often pushed by their backers to make a priority of generating revenues quickly — even if it means discounting services — thereby positioning themselves for subsequent funding rounds that, if achieved, enable earlier investors to either cash out or see their investment grow in value. Some believe the nature of this cycle is undermining the painstaking and deliberate process of building technology products that solve genuine problems, making the current environment resemble a “bubble.”
“It is an issue that VCs tend to drive a zero-sum game with startups. You have founders selling them the unicorn dream and investors that expect them to grow exponentially as a result,” Crux Systems founder Eric Klein wrote in a mid-September LinkedIn post.
The WeWork episode resonated with those in the logistics industry after Flexport in February secured a $1 billion investment round led by SoftBank, the VC investor that previously plowed $7.5 billion into WeWork and is its largest shareholder. SoftBank didn’t invest that kind of money in a traditional forwarder, but rather to stake out a unique position described by founder Ryan Petersen as the “operating system of global trade.” But it remains unclear whether Flexport can break the mold and establish a “Blue Ocean” category all to itself, reaping the benefits of a commanding market position, or whether it will ultimately emerge as just one of several increasingly tech-driven forwarders such as Kuehne + Nagel, Expeditors International, or DB Schenker.
In the United States trucking sector, Loadsmart, Transfix, Convoy, Uber Freight, and NEXT Trucking are battling to dominate truck brokerage through electronic load matching, but they are also using their deep pockets to build market share by providing lower all-in rates to shippers, raising questions about the long-term profitability of their business models. Amazon has most recently entered the space on a pilot basis, placing further downward pressure on the markups traditional brokers would charge shippers for their services. By slashing these markups, these digital startups have less room to turn a profit and must keep expenses as low as possible to survive.
“The venture capital industry has never been as interested in and focused on investing in the space. Yet one can’t help but be concerned that excessive valuations are creeping into that market,” said John Urban, the founder and former president of the international transportation management system (TMS) GT Nexus, which was acquired by Infor for $675 million in 2015, and who now advises startups including Slync.io and ClearMetal.
“At the macro level, I look at SoftBank and others in private equity taking the private market valuation of WeWork and Uber through the roof with seemingly non-productive rounds of funding, wanting to be the investor that dominates a particular sector going forward. This kind of excess clearly impacts venture attitudes across all sectors, and we are seeing it in logistics and supply chain,” Urban said.
“Venture capital’s job is to identify and back entrepreneurs who can build great companies that win and even dominate in their space, but we’re seeing hyper-competition among VCs trying to make winners just because of the size of their investment, backing companies in such a big way earlier and earlier in their life cycle,” Urban added. “One has to wonder, are the best entrepreneurs getting vetted, and has the pendulum swung so far the VCs believe the size of their play creates the value? How much excess is at play in our industry?”