WeWork debacle reveal logistics startups' sustainability challenge

WeWork debacle reveal logistics startups' sustainability challenge

More than $12 billion in financing has been committed to the supply chain and logistics sector in 2019, according to CB Insights. Photo credit: Koshiro K/Shutterstock.com.

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?”

Contact Peter Tirschwell at peter.tirschwell@ihsmarkit.com and follow him on Twitter: @petertirschwell.

Comments

Comparing WeWork and Uber investment funding to global logistics is in my view a complete disparate argument! The wireframe for global trade integration with supply chain is a complex dynamic industry as Flexport is only just beginning to realise it’s nightmare and challenges to configure! 1b is just the beginning and the burn rate will compound for sure! Plug and play acquisitions will bring its own tribulations as well. Freight Forwarders have a colossal compendium of experience and expertise from moving a 250 ton lathe to a Ferrari glass windscreen, these are just 2 very different requirements but happen every day all over the world. Integrating the entire process is a mine field and no one company has all that expertise in house, even the large Forwarders may struggle! How do you digitise the entire process ? Unfortunately the old experienced freight forwarders who have the knowledge gained over decades are fast retired and undervalued as computer operators try to press the right key to get a possible answer ! Customer Service people have very little training nor expertise! So even if you have a digital program connecting some of the dots it’s not going to work in 80% of the requirements but then maybe 20% is enough but there again why invest billion $ to do what a regular cargo system can do ... we hv developed our program for less than 1m and it can do 80% not 20% That’s because our company has the know how and expertise from many years on hand boots on the ground...we tell programmers how to do it not the other way around ! John O’Brien www.ecomglobalsystems.com

Comparing WeWork and Uber investment funding to global logistics is in my view a complete disparate argument! The wireframe for global trade integration with supply chain is a complex dynamic industry as Flexport is only just beginning to realise it’s nightmare and challenges to configure! 1b is just the beginning and the burn rate will compound for sure! Plug and play acquisitions will bring its own tribulations as well. Freight Forwarders have a colossal compendium of experience and expertise from moving a 250 ton lathe to a Ferrari glass windscreen, these are just 2 very different requirements but happen every day all over the world. Integrating the entire process is a mine field and no one company has all that expertise in house, even the large Forwarders may struggle! How do you digitise the entire process ? Unfortunately the old experienced freight forwarders who have the knowledge gained over decades are fast retired and undervalued as computer operators try to press the right key to get a possible answer ! Customer Service people have very little training nor expertise! So even if you have a digital program connecting some of the dots it’s not going to work in 80% of the requirements but then maybe 20% is enough but there again why invest billion $ to do what a regular cargo system can do ... we hv developed our program for less than 1m and it can do 80% not 20% That’s because our company has the know how and expertise from many years on hand boots on the ground...we tell programmers how to do it not the other way around ! John O’Brien www.ecomglobalsystems.com

I can't wait for the comments to this story.