Downturn, what downturn? Why logistics tech remains one of the hottest scenes in the global economy
It’s fair to say 2020 has been rough for many but Reuters Events: Supply Chain has been exploring an area bucking the trend: Logistics tech
The numbers have been unprecedented, as GDP has plummeted in many major economies and jobless rates have skyrocketed. It can therefore be easy to be pessimistic in these times, especially as many of us feel worn out with the current news cycle, but when it comes to logistics tech, hope is flourishing.
Companies have been forced to awaken to weaknesses in their day-to-day operations and understand the disruptive cycles that can damage their operations. They now have to face down trends suddenly accelerating as a result of COVID-19, like growing e-commerce rates, the increased need for automation or rising barriers to trade.
The strain 2020 has put on supply chains has caused many in leadership positions to awaken to the idea of the supply chain as a competitive advantage.
This is pushing them to look for new and innovative ways of monitoring, managing and operating their supply chains. This is where a host of new tech companies are stepping in and hoping to take up the slack.
Reuters Events: Supply Chain sat down with entrepreneurs in the space to understand the dynamics driving investment into logistics tech and how the scene has changed across the course of 2020.
A great time to be a logistics tech start-up
“Logistics technology is one of the hottest verticals on the planet right now.” That’s the opinion of Julian Alvarez, Founder & CEO at freight forwarding software provider Logixboard, and he is not alone in his positivity regarding the prospects of innovators in the logistics space.
“I think we are probably one of the most resilient industries the one can invest in in this stage of the pandemic,” believes Jose Anson, CEO of Upido, a company working on solutions for the last mile. “I think it’s one of the few sectors that are really winning out of this crisis.”
Miles Varghese, Co-founder and CEO of freight collaboration platform Cargologik, has seen “More and more VCs saying they are ‘interested,’ in supply chain,” technology ventures.
The numbers back this up. According to McKinsey research on investment into logistics start-ups, 93% has come since 2015 with a 76% compound annual growth rate between 2014 and 2019, underscoring how new this area is and how quickly the tides of investment, which have been to the tune of $26 billion since 2014, can ebb and flow.
In Alvarez’s opinion, “Start-ups have managed exceptionally well in their efforts to disrupt and enable the current ecosystem, and are the drivers of innovation for the logistics industry. It's a great time to be a lean, agile, and innovative company in this massive industry.”
Although immediately after the pandemic broke globally in early 2020, there has been caution and some withdrawal from investors, there is still appetite for the right company.
In “The beginning it was tough,” says Anson. “The first week after the crisis hit was quite difficult because [it generated] uncertainty … because our partners may not have felt sure if this was the right time to invest or to sign a contract for services.” However, as the weeks passed the situation rapidly began to improve as “The value of our services are way more relevant than just one or two years ago now.”
The silver linings playbook
One of the critical features of the disruption of supply chains in 2020 for logistics start-ups has been a greater depth of understanding of the need to improve the way in which we transition goods from source to customers.
This has come from both organisations evaluating their supply chains and the investor community as growing trends present before the current environment arose have now crystallised into fundamental shifts that will transform our economies and societies.
“When I first went out to raise a seed round, VCs were like, ‘What are you talking about? Why would anyone take a million square foot warehouse and turn that into a 2,000 square foot warehouse in Manhattan? How is that ever going to work?’ There was a lot of doubt,” remembers Ben Jones, CEO and founder of micro-fulfilment enabler Ohi. This meant their initial round of funding was hard work, where they “talked to probably over 100 different VCs before we found our lead.”
Fast forward a few years and “Suddenly micro-fulfilment is a known quantity. People understand that this is the future of fulfilment, the future of commerce…. I think certainly from that perspective, people understand the pain point that we're solving for and they understand the solution that we have,” leading Jones to “feel pretty confident” for their next round later this year.
Anson notes investors “can really witness what this crisis is entailing in terms of consumption, and consumer behaviour. Probably the grass is better than one or two years ago, or even three years ago. It is such a great opportunity for all of the logistics tech start-up ecosystem to show its value to potential investors, and they [investors] understand it better and better every day.”
Capital returns
This is not to say that everything is plain sailing across the board for logistics tech start-ups right now.
The roiling events of 2020 have focused the minds of VCs. Alongside the economic crises that have come out of the shutdowns necessitated by the pandemic, there have been plenty of burnt fingers recently. High-profile darlings on the investment community, such as WeWork and Wirecard have come tumbling down, and others face persistent and growing calls to define when they will finally, at last, become profitable.
“There's still a lot of cash in the market, but there's definitely a lot of VCs who are sitting and waiting to see how this plays out,” says Jenna Brown, Co-founder and CEO of document automation firm Shipamax.
Investors therefore are now more keenly focused on the fundamentals behind companies and less enamoured purely by spectacular headline growth.
“Probably for the last 10 years, the perception in VC has been just focus on growth, focus on growing top line revenue, and worry about the unit economics later. I think what what's happened in the market is as, as those companies that were started in 2011, 2012, and 2013 have kind of matured, people have realised that they've never really managed to get on top of the unit economics,” says Jones. “So, I think certainly what's changed in the market now is VCs are much more focused on gross margin. You have to be gross margin positive. You ideally need to be 60%, 70% gross margin [positive], even at an early stage, or at least have a route to 60-70% gross margin in the near term. I don't think VCs are going to accept any business that's [says] ‘Yeah, we're going to be negative gross margin for the next four years, but we'll make up for it because we'll have huge gap.’ I think those types of businesses will definitely struggle.”
“In supply chains I think investors aren’t as “crazy” as your traditional venture capitalists. They don’t want to fund companies burning cash generally, and now it seems to be the case even more,” says Varghese.
Anson agrees that “Investors are … putting more weight on profitability and financial sustainability,” leading them to “prioritize those companies that are not trading on heavy losses for four years, but those that can really provide sustainable profits and, and be resilient to the next crisis.”
“I actually think a lot [of start-ups are] going to go under within the next two to three years,” thinks Varghese “and may not have even had the opportunity to pivot or are aware as to how to properly do that - especially when you have investment capital behind you. You better hope those investors are understanding and strategic enough to help you power through,” he warns.
However, “The right companies will get funded” states Jones, “but some companies that perhaps in the past would have been found funding, will probably find it harder because I think investors are focusing more on the kind of the deals that they think are going to be winners, rather than taking a punt on a business that maybe they're not quite so sure about,” as they would have done in the heady days of five or eight years ago.
Varghese thinks that this will be felt most heavily at the very early stages. “The downside is that if you’re a seed stage company now, what may have took 100 angel conversations may now take 150 or 200, because angels are also backing away a bit. At least, this seems to be the case anecdotally. So, for seed stage companies right now, I think it’s exceptionally difficult. It’s already tough to ask someone to take a huge bet with their personal capital on you, even tougher during a pandemic and with an industry particularly susceptible to such risks.”
He suggests the answer is to show “traction”.
“They want to see that the market is willing to pay for your solution. It doesn’t have to be a crazy amount of money at the seed stage, but there needs to be a strong positive indicator of market interest. Show some upside, some positive interest from the market, and have a strong story to tell as to how you’re going to scale into the market, and you should be in a good position to raise I feel.”
Even though there might be some caution and increased scrutiny from investors, in Alvarez’s opinion, there’s no denying “Logistics is one of the most appealing verticals for investors right now, and this only seems to be increasing. We're seeing investors starting to focus on SaaS solutions that can scale much more efficiently with better margins and valuations than their technology-enabled logistics service counterparts. I expect this to be a long-term change.”
“I think the best in logistic tech is yet to come,” says Anson.
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