Where’s The Investment At? A Take On Venture Capital In The Supply Chain.
Venture capital was comparably easier to come by during the pandemic than today. VCs are now realizing what works and what does not in this vastly fragmented industry.
A hearty welcome to the 71st edition of The Logistics Rundown, a weekly digest that aims to put some perspective on what’s brewing within the logistics industry. This is a space where we religiously dissect market trends, chat with industry thought leaders, highlight supply chain innovation, celebrate startups, and share news nuggets.
After what seemed like forever, we saw a logistics startup go the SPAC way, as freight booking platform Freightos went public — right when global freight demand is easing. For a startup-turned-public company, Freightos didn’t raise a ‘lot’ of VC money to begin with. At $80 million in total investment raised before the SPAC deal, Freightos’ jump to the stock market might have more to do with the difficulty of raising more capital than its eagerness to turn public. In comparison, Flexport, one of the more visible supply chain startups, has raised $2.4 billion and is yet to go public.
This newsletter isn’t about Freightos, though; it’s about VC money — or the lack thereof. While venture capital firms had initiated interest in the supply chain before COVID-19 struck, their conviction to back the industry hardened at the height of the pandemic, which saw supply chains garner mainstream attention. Investors saw massive potential in an industry riddled with challenges and inefficiencies, looking to get in the game by tossing a whole lot of cash at logistics startups that showed promise.
But after two years of unprecedented retail demand, growth seems to be flatlining, and so have startup growth stories. Several VCs were forced to reckon with the fact that while supply chains have many inefficiencies and redundancies, not all of them need removing. “Startups grew way too quickly, and were under tons of pressure to meet VC expectations and justify their large valuations,” said Camille Manso, principal of corporate innovation & venture at Silicon Foundry.
Several VCs were forced to reckon with the fact that while supply chains have many inefficiencies and redundancies, not all of them need removing.
Consumers are expected to save their dollars in the wake of climbing interest rates and high inflation. With the pandemic behind us, the consumer base is expected to spend more on services, which will further dent the retail economy. Plateauing demand has resulted in startups losing freight volume and customers, shaving headcount, and pulling out from markets.
This is also a story that SPACs share. While they were hot in 2021, SPACs have nearly disappeared from the public eye today. Ironically, companies going the SPAC route in 2021 did it to make hay in the stock market, while today, SPACs are considered an exit route for companies running short of runway.
“VCs are now looking back at that period and working out how many companies performed after they went public. There’s certainly a lot more due diligence done today,” said Manso. “In 2021, VCs found themselves in a very competitive environment, often leading them to shortcut the diligence process. But as some investments blew up on their faces, as with many on-demand delivery startups, VCs are now looking harder at where their money is going.”
It’s no surprise then to see VC investment is down. While Manso contended it was roughly down by half year over year, she pointed out that the supply chain industry has not taken a big hit. One of the reasons happens to be the availability of corporate venture capital (CVC).
Manso works with several CVCs at Silicon Foundry, and explained that large global corporations are interested as their operations inevitably see activity within the supply chain. “Be it tangible goods or even services, there’s supply chain involved. And corporations have a lot of say in what problems are crucial and need an urgent look into,” she said.
Be it tangible goods or even services, there’s supply chain involved.
While supply chain problems were seldom more pressing than during the pandemic, the heightened VC activity in that period saw CVCs fall behind. This was largely due to organizational red tape and due processes that needed following, stymying their chances of being at the right place at the right time. Manso observed that this is especially true of investment arms of corporations that were not separate entities from their parent organization. The exorbitant valuations sought by startups were another red flag for CVCs, as high price tags stopped them from participating in financing rounds.
However, as sanity returns to the investment ecosystem, Manso believes CVCs are taking a cautious approach to back companies. “The fragmentation in the supply chain makes it harder to discern pain points, and so investors are working more closely with end customers to have a better sense of what will actually solve the problem, the highest priorities, and what gives them the highest RoI.”
Once there’s clarity with the problem set and over solutions that show promise, VCs (including CVCs) scour the market for potential companies to invest in. The common metrics VCs look at are the founding team’s integrity, the solution they bring to the table, and their total addressable market. “Is this the right team to scale a VC-backed company? Of all the many ways to solve a specific problem, do they have a winning product? And is the market ready to accept the solution? Investors look for hard answers at this stage,” said Manso.
The common metrics VCs look at are the founding team’s integrity, the solution they bring to the table, and their total addressable market.
VCs tend to spend quality time understanding the size of the addressable market, as it isn’t only about the size of the existing market. Take Uber, for example. While it was reasonable to expect Uber to take market share from the taxi ecosystem, it would have been difficult to predict the domino effect that followed — where more and more people engaged with ride-sharing, ballooning the initial addressable market. Cab capacity increased as well, as people owning vehicles jumped into the market as owner-operators.
“VCs also spend time digging into references. They look at the advisors the team aligns with, and chat with existing customers of startups to understand why they picked them as a vendor,” said Manso.
When asked about the segments that attract VC funding within logistics, Manso pointed to reverse logistics. “The rise in e-commerce has increased returns exponentially. Brick-and-mortar shopping had around 10% returns, which increased to 30% with e-commerce. The reason this is an attractive investment area is the mounting cost challenges retailers have with returns,” she said.
The rise in e-commerce has increased returns exponentially. Brick-and-mortar shopping had around 10% returns, which increased to 30% with e-commerce.
“A lot of investment dollars go into enterprise software for the supply chain, like visibility providers and rate benchmarking platforms. Personally, I’m also excited about micro-fulfillment, and it’s something that’s seeing traction as well.” It’s worth noting that some verticals could potentially see headwinds with raising funding, like on-demand delivery startups and electric vehicle companies. While these verticals have excellent solutions, they’ve not performed to investor expectations or weren’t profitable enough in the market.
Overall, the trend is moving towards early-stage startups, contended Manso. “We’ve seen later-stage startups get stuck recently, and exit activity has decreased significantly. M&A activity is also a question mark at the moment, as many targets weren’t hit. I believe it will pick up over 2023, but we see more and more VCs focusing on early-stage startups, as later-stage companies are closer to the public market, and the market isn’t great right now.”
The Weekly Roundup
President Biden’s State of the Union address calls for continued efforts to increase American production capabilities in an effort to raise manufacturing capabilities, particularly semiconductors and microprocessors while reducing the dependency on foreign entities. Since taking office, 800,000 manufacturing jobs have been created in the US.
Relief efforts in Syria and Turkey are being hindered by severe damage to logistics infrastructure caused by the massive earthquake last Monday. In addition to roads, bridges, ports, and airports being damaged, snow and icy weather are further complicating disaster relief and search and rescue operations.
Maersk just had its most profitable year since its inception, with a net profit of $29.3 billion. However, the celebrations are short lived as its newest outlook has plummeted to $2 to $5 billion for 2023. “We are not heading back to normal, as we knew it before the pandemic, but a more volatile and unpredictable world,” says CEO Vincent Clerc.
Concerns of a post-Lunar New Year COVID spike are causing concern among supply chain managers. However, some believe these concerns might be overstated and that the impact from a spike won’t be nearly as detrimental as previously thought.
…said who?
”We’re not doing this for practice, so the intention is to get it done.”
- John Nardi, president of the Shipping Association of New York and New Jersey, which represents ocean carriers and terminal operators at the port, commenting on starting early contract talks with the local dockworkers’ unions.
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The VCs are running scared from the bloodbath that happened in 2022. The inflated valuations of many non-profitable startups (which continue to be non-profitable) and the idea of growth at the cost of profits has taken a justifiable toll on the confidence of the VCs. It'll take some time to nurse them back into a 'healthy risk taking' cycle. In the oft repeated adage "Logistics win the wars and not tactics". Similarly, the businesses are also logistics dependent. Efficiency of logistics can be ignored at 'heavy' costs to all the stakeholders in a supply chain. There is always scope for improving the delivery of goods to the user and efficiencies will become more important even during egregious economic situations; especially during such circumstances. Let's see how much time it takes for some of the smartest people in the world to "see the light". We're waiting!