A decade on, logistics industry still awaits proof that VC is a welcomed partner

The demise in November of freight broker Convoy was a seminal moment for the logistics industry, not just in 2023, but across a phase of investment into logistics technology that stretches back a decade.

In some ways, Convoy's situation was an anomaly - market forces in the truckload world conspiring to bring down a company that had raised nearly $1 billion in venture capital. But in other ways, Convoy's demise was not unusual at all in the world of VC; it's just reality that the majority of venture-backed businesses fail.

And the question going into 2024 is whether Convoy was an outlier or a portent of things to come among venture-backed software providers or technology-focused logistics providers. Underpinning that question is this cold hard fact: There is not a single example -- yet -- of a venture-backed logistics startup achieving the outcome typically desired by venture investors.

Look at the five most prominent names in this category in terms of name brand recognition and venture capital raised - Convoy, forwarder Flexport, visibility providers project44 and FourKites and freight rate software vendor and marketplace Freightos.

Flexport went through a high-profile leadership struggle in September, as well as several rounds of layoffs. Convoy has been shuttered. project44 and FourKites have had numerous rounds of layoffs over the past 15 months, as well as C-level reshuffles. And Freightos, which went public on the Nasdaq in early 2023, has seen its share price languish amid a struggle to be profitable.

Stretch this out further, and you'll find companies like the European forwarder Forto, on-demand warehousing technology provider Flexe and trucking technology provider CloudTrucks, which have all raised copious amounts of venture capital and have laid off staff in 2023.

Lack of alignment

Does venture capital actually work in logistics? Are the sales cycles too long to align with growth expectations of venture investors? Is the industry too fragmented for any one software provider or digitally native intermediary to take a dominant share? Is the profit margin high enough in logistics to support scores of high-priced programmers? None of these questions have yet to be fully answered, but maybe it's still too early to know.

"Flexport seeded in 2014 and Convoy in 2015," said Santosh Sankar, managing partner of supply chain-focused venture capital firm Dynamo. "We're just at the edge of the proverbial '10 year' period when you'll see venture-backed companies have a major liquidity event for their investors -- either [acquisition or initial public offering]. Some of the largest outcomes these days can take closer to 14 or 15 years."

Sankar said founders raising too much capital was a problem since it can "actually reduce the optionality for an exit."

"There is a market for $400 to 500 million M&A exits if a company hasn't engorged itself on investment," he said.

Let's expand this out. Venture-backed companies aren't the only ones to reduce headcount or make leadership changes in 2023. Maersk said in November it would be letting go of 10,000 people over 2023 and 2024 - around 10% of its global workforce. Logistics management software vendor E2open moved on from CEO Michael Farlekas at mid-year amid its faltering share price. Less-than-truckload carrier Yellow filed for bankruptcy in August.

Common denominator: overhiring

But the high-profile, venture-backed companies that have struggled over the past 18 months seem to have a common denominator - hiring too many people off the back of explosive growth during the pandemic. Relatively easy access to capital during COVID-19 meant companies were expected to grow fast, and hiring -- in areas like sales, marketing, human resources and product development -- was seen as a way to meet those lofty growth targets.

"The business model can be tough because rates and volumes can shift seemingly overnight and one shouldn't overextend when times are good, which generally requires deep cuts when times get tough," Sankar said.

Going into 2024, there has been much speculation about which venture-backed entities are effectively "zombie companies," ones whose expenditures (or burn, in the parlance of the startup world) doesn't align with revenue. Are those companies the "walking dead," waiting for a similar fate as Convoy? Will they get acquired for a fraction of their pandemic-era valuations?

Many companies - and their investors - would have hoped that a handful of well-backed companies had gone public by now. Yet Freightos is the only one to have done so, and so there is a lack of public benchmarks upon which public markets can judge five- to 10-year-old logistics technology companies that might have gone public by now.

Additionally, venture capitalists making investments today also know that a dearth of quality exits is affecting which companies they will back, how much they will invest and at what valuations. Not only has there yet to be any splashy initial public offerings among logistics technology companies, there haven't been any nine- or 10-figure exits, either.

The grand bet many venture investors make is actually about high-stakes hedging. The theory is that backing a number of promising, early-stage companies will yield one or two that emerge as truly dominant in their categories. The unspoken reality is that the remainder - the companies that don't hit it big - are left to die or be acquired for a fraction of what they might have been valued at their peak.

"The growth-at-all-cost mentality leaving the broader startup ecosystem is a healthy one that should support growth in brokerage or forwarding businesses," Sankar said. "Supply chain startups have an added complexity because it is impacted by the freight cycle -- containers, trucking, warehousing -- as much as the venture or broader capital markets. This isn't dissimilar to fintech businesses having to deal with rate environments around savings and lending."

A decade into the venture capital phase of logistics technology, and the industry still awaits its first sign that the model actually works.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.