The Reason Venture Investors Are Cooling On Supply Chain Startups

The pandemic convinced a lot of big logistics companies like Amazon that ecommerce would be dominant forever. Many startups and venture backers also thought that would be the case. 

But it wasn't and isn't. As a result, venture backing for supply chain has dropped significantly, mirroring the decline in demand for shipping, trucking, warehousing and other modes of logistics transport. This is consistent with performance disappointment in other venture backed sectors as the markets readjust to post-pandemic realities. JL 

Liz Young reports in the Wall Street Journal:

Venture firms that provided supply-chain tech startups with backing at gaudy valuations have been tightening pursestrings this year, pushing businesses to slash costs and to survive in a weak freight market. VC funding for the sector skyrocketed to more than $62 billion in 2021, as supply-chain disruptions during the pandemic put a spotlight on tools to help solve shortages. (But) venture firms concluded 404 deals totaling $5.7 billion for logistics companies in the first half of 2023, down from 727 deals totaling $22.7 billion last year. Freight prices, from ocean shipping to domestic trucking, retreated in the past year as demand waned. Some startups “relied on subsidization longer than they should have."

Venture-capital firms that once provided supply-chain technology startups with hefty backing at gaudy valuations have been tightening their pursestrings this year, pushing some of the businesses to slash costs, cut staff and look for other ways to survive in a weak freight market. 

Thinning investor support contributed to the collapse of digital freight startup Convoy, which ceased operations in October just 18 months after topping out at a $3.8 billion valuation. 

Tech-focused freight forwarder Flexport, shipment-tracking provider project44 and load-matching specialist Transfix are among high-valued startups in the U.S. that have laid off workers in the past year as deteriorating shipping demand eroded reserves that had been built up in a series of big funding rounds. 

Venture firms concluded 404 deals totaling $5.7 billion for logistics companies in the first half of this year, down from 727 deals totaling $22.7 billion during the same period last year, according to PitchBook Data.

 

VC funding for the sector skyrocketed to a peak of more than $62 billion in 2021, according to PitchBook figures, as supply-chain disruptions during the Covid-19 pandemic put a spotlight on tech companies touting tools to help solve widespread shortages. 

The pullback from investors has left some startups pinned between weak freight markets and a lack of capital as they approach the point when investors typically look for an exit around seven years in, experts say.

New York-based Transfix, which uses technology to match trucks to available loads from retailers and manufacturers, bucked the trend last month when it raised $40 million at an undisclosed valuation. The backing came after the 10-year-old startup pushed back plans last year to go public through a merger with a special-purpose acquisition company. 

“I don’t have a crystal ball on when the public market will come back, I don’t really have a crystal ball on when acquisitions are making sense,” said Jonathan Salama, a co-founder of Transfix who replaced Lily Shen as chief executive in March. “For us right now, it’s going to be very opportunistic and we’re going to focus on our business.”

Chicago-based project44, which makes software to track goods moving through global transportation markets, has gone through two rounds of layoffs this year. The company raised $80 million last year at a valuation of $2.7 billion. Chief Executive Jett McCandless said in an emailed statement that the company’s revenue is up 30% this fiscal year, but that the job cuts will help project44 better control costs as it prepares for a public stock offering at some point.

A warehouse in Los Angeles, Calif., operated by freight forwarder Flexport. PHOTO: FLEXPORT

“Investors have increasingly emphasized profitability over growth due to the market challenges,” McCandless said. “We are on course to be profitable with our current capital resources and on the right trajectory for an IPO.”

Other freight technology companies have tried to reset their businesses by aligning operations with more traditional logistics companies. 

Uber Freight, the truck brokerage arm of San Francisco-based 

Uber Technologies

, acquired technology-focused logistics services provider Transplace in 2021 for about $2.25 billion, expanding its revenue stream from straightforward load-matching—similar to the business Convoy was in—into higher-end transportation management.  

Uber Freight counts Uber as its majority shareholder, but also has raised money from venture-capital investors. Lior Ron, chief executive of Uber Freight, said the operation’s software-as-a-service technology now accounts for half its business.

 

“Diversification totally matters,” said Ron. “You need to have a portfolio theory because it’s such a complex market with so much ups and downs, especially if you are a marketplace business that is taking a risk of exposure to market rates, to pricing.” 

Freight-market prices, from ocean shipping to domestic trucking, have retreated in the past year as shipping demand has waned. 

Venture funding helped subsidize many of the startups in their early years to help them offer lower prices to gain market share, said Julian Counihan, general partner at San Francisco-based investment firm Schematic Ventures. But Counihan said some startups “relied on that subsidization for longer than they should have and never did that true test of whether they could operate profitably.”

Still, Counihan said investors continue to look to put money behind promising logistics startups.

“Early-stage venture capital is still very active in the supply-chain space,” Counihan said. The sector is down from 2021, which he called an outlier year, “but it is still a robust and well-invested category with a lot of promise,” he said.