Frozen Assets: Is the Cold Chain Startup Landscape Heating Up?

By: Jamie Daudon

As the summer heats up, we’re all trying to keep ourselves cool. Here at the Westly Group, we’ve also been thinking a lot about keeping goods cool — and all of the energy, materials, and products that go into that process. In other words, we’ve been thinking about the cold chain.

Back in the day, the food and ag industry used ice blocks to keep perishable good fresh while in transit. Dairy and meat farmers had to stay close to urban centers, and the food we consumed was mostly local as a result. Then, in the 1930s, Frederick Jones developed the Thermo Control Model A, an innovative portable refrigeration unit. Several years later, Jones’ Model C was being installed across the country in truck trailers, ships, and planes — revolutionizing domestic food supply and enabling medicine and blood plasma to reach the front lines of World War II.

The cold chain has since quietly grown into a vast web of hardware and software infrastructure. Sized at $50B domestically and $250B globally, the cold chain has a ~17% CAGR and is expected to surpass $1T globally by 2030. Its emissions profile is commensurate with this size, with the food cold chain alone responsible for an estimated 1% of all global emissions.

Since its initial breakthrough in the 1930s, Frederick Jones’ company grew into what is now ThermoKing, a $1B+ annual revenue business and a strategic LP of the Westly Group via its parent company, Trane. Against the backdrop, and with cold chain roots, we decided to dig in. What is driving growth in the cold chain today? What technologies might shape the next century of development? Where can venture investors find opportunities in this space?

The Players: Incumbents & New Entrants

The cold chain can be thought of as two different value chains by product type: Food & Beverage and Pharmaceuticals. The sample incumbent maps below demonstrate the customers and partners that startups entering the cold chain will encounter.

Food & Beverage companies are operating with thin margin profiles across the value chain. Some portions of the market are pushing innovation, while some operate as family-run SMBs. Solutions targeting this market need to improve operating margins, deliver quick ROI, and easily integrate with existing systems to have a chance of broadscale adoption.

Pharmaceutical companies generally have sophisticated cold chain management practices given the importance of maintaining specific temperatures for vaccines, clinical trials, cell and gene therapy, etc. Given the critical nature of their operations, life sciences companies can be risk-averse when adopting novel solutions (think longer sales cycles). However, they also have a higher WTP, making them an attractive beachhead customer.

Our Key Cold Chain Market Takeaways

Though we are no experts, here’s what we understand to be baseline knowledge for investors orienting to the cold chain:

• The cold chain is a sub-sector of the broader supply chain industry, creating tension between product differentiation and attractive market size. The U.S. cold chain market is approximately 20% the size of the domestic 3PL market. As a result, cold chain companies must differentiate their product from larger, generalist supply chain competitors while still addressing a large enough market to be attractive for venture investors.
• The cold chain is growing quickly (but differently) in developed and emerging markets. The ~20% CAGR in emerging markets is driven by an expanding middle class. Emerging markets have limited existing cold chain infrastructure, creating opportunities for startups such as FudSend and Carnotfleet to address capacity limitations. In developed economies, the ~15% CAGR market growth is driven by a shift in consumer diets towards fresh proteins.
• In developed economies, monitoring is the fastest growing segment — and the most investable for venture returns. Monitoring solutions ranging from light hardware (sensors, RFID, and telematics), and software (grid optimization, supply chain visibility, logistics optimization, etc.) are projected to grow from $6.5B today to nearly $30B by 2030, creating headroom for venture-backed startups.
• Willingness to pay within the cold chain correlates to product value. This trend is best exemplified by the pharma/life sciences segment, which is a small portion of cold chain volume, but accounts for 14% of the global cold chain products by dollar value given the high value of payloads and temperature requirements.

Our Areas of Interest

Startups entering the landscape are solving challenges across transportation, storage, and monitoring. On the hardware-based end of the spectrum, companies are developing low-emission transport refrigeration units (TRUs) for trucks and railcars, novel last-mile delivery solutions, or innovative cooling processes. Software-based approaches leverage IoT devices or hardware integrations to monitor energy use in cold storage facilities, track shipment vitals (e.g., temperature, humidity, location), trace supply chains, and optimize logistics processes.

Note: This cold chain map does not cover the different aspects of the entire food supply chain and ag-tech. For a comprehensive map of that space, check out this one put together by Culterra Capital and a recent map by Buoyant Ventures. Generalist companies are examples only (i.e., not a thorough mapping of the space).

The cold chain is also a challenging sector in which to build and invest. The markets can quickly become small and fragmented, the competition can be stiff, and customer margins can be slim. Yet at the same time, the market is growing quickly, there is significant room for optimization, and innovation is key. Here are sectors and trends we’re tracking going forward:

• Differentiated cold storage management (with additional potential applications). Startups are building good businesses optimizing refrigeration electricity usage but we anticipate TAM/SAM challenges ahead. We are looking out for companies with meaningful software-based differentiation, along with companies that have a line of sight to applications outside the cold chain (e.g., industrial cooling).
• Insurance-based business models. Contacts across the industry cited insurance pricing and claims as a pain point within the industry. Leveraging an influx of data for better underwriting and claims can address this pain point while increasing market size. Parsyl is doing interesting work in this space, and we are looking to talk with others going this route.
• Cold chain meets transportation electrification. The cold chain is already an electricity intensive sector, but this will only increase as transport is increasingly powered by EVs, expanding opportunities for on-site charging and VPPs. Ndustrial is among the first developing solutions in this space, and we think this is just the beginning.
• Cold store and processing labor efficiency. While labor was a limited part of our research, it came up in conversations and research as a key challenge for cold storage operators and processing facilities. Automation of labor eases costs and also makes warehouses more energy efficient. We heard innovation opportunities related to robotics for pallet management and software systems managing inventory.

The cold chain is a newer sector for us, so we’re still in learning mode. If you ever want to “chill out” and talk cold chain, reach out and let us know!