Freight Exchanges, Digital Freight Forwarders, Forwarding SaaS: A VC perspective

In recent years, the logistics space has seen the birth of a realm of startups , that try and match shippers with carriers. This piece attempts to structure the different business models in this sector and elaborates on their viability and competitiveness. Readers will notice a slight focus on Europe and Germany specifically, but I believe that most of the following is applicable to other geographies too.

1. Freight Exchanges

Freight exchanges like the German TimoCom were the first step in the digitization of a sector, perviously dominated by classic freight forwarders, acting as middlemen. Freight exchanges allow shippers and carriers to list tours on offer sorted by location, weight and size, as well as vehicle needed. No specific matching is done by the freight exchange itself, so they could be compared to a B2C classifieds model taken B2B. Monetization usually works via a monthly license (think EUR 20 per license) purchased by a user. Some smaller players try to lean towards a transactional model instead and take a small share (app. 0.5%) of the transport costs (not the GMV).

Both, the subscription-based and the transactional model, face their own share of challenges.

The subscription-based models need to manage churn to keep their LTV high. For the incumbent players (such as TimoCom) this is not too difficult, given the slow pace of innovation in the logistics sector and the high degree of lock-in associated therewith. For new entrants, however, this entrenched position of the local incumbents makes it almost impossible to obtain a decent market share with sustainable CACs.

The transactional models not only struggle with the subscription-based competition but also with users executing the transaction off the platform. Some ventures try and reduce this risk by offering ancillary services to their users such as payment processing and document management but these services often cut into the already thin margins of the startup.

2. Digital Freight Forwarders

The main characteristic of digital freight forwarders, in particular when comparing them to freight exchanges, is that they become the only contractual partner of shipper and carrier and are hence liable for the logistics services to take place as promised. For that risk (i.e. them not being able to deliver as agreed and thus becoming liable for damages) they consequently command a premium which usually takes the form of an uptick on the price they get quoted by the carrier (usually approx. 10%). Digital freight forwarders come in many shapes and forms, the most frequent differentiations being:

• Air vs. Sea vs. Long Haul vs. Short Haul : Most ventures focus on certain means of transportation. Cargo.One focuses on air cargo, FreightHub on air and sea cargo and Sennder only offers long haul trucking (>200km distance) services. Some smaller ventures focus on short-haul and thus often target the B2C sector, e.g. eBay sellers or moving companies.
• FTL vs. LTL: The differentiation between Full-Truck-Load (FTL or FCL for sea cargo) and Less-Than-Truck-Load (LTL or LCL respectively) concerns the filling rate of the truck or container. If only FTL is offered shippers need to “rent” an entire truck or container, irrespectively whether the load is sufficient to fully fill the truck. LTL offerings instead combine several smaller loads into one truck/container. This entails a higher degree of coordination since the freight forwarder needs to properly plan when to load and unload which cargo and thus commands a higher premium. But platforms with enough traffic to build a dense network of potential loads and an algorithm powerful enough to structure the cargo in the optimal way can benefit from such increased gross margins.
• Transparent vs. non-transparent pricing: While some digital forwarders enquire different prices from their network of carriers but then quote a single price to the shipper, others explicitly show the different carriers and offers (including their margin). Some of these transparent platforms may not even qualify as digital forwarders under the definition used in this post, if they do not enter into a contract with the shipper themselves but merely broker contracts with carriers. In that case they can rather be seen as freight exchanges that also provide matching services to their users. Non-transparent platforms may be less appealing to shippers but allow the digital forwarder to play with its margins if possible.
• Realtime prices vs. delayed quoting: Usually digital forwarders are able to quote shipping prices via their platform in realtime either by automating their connection with the carriers or by being able to predict the quotes they will receive from the carriers. If they fail to do so but are only able to quote shippers with a delay of several hours they will probably not be able to withstand the competition of their faster peers.
• Spot vs. Contract: Most ventures in the space start with occasional jobs for shippers and fill in when cargo is not covered by the long-term contracts many shippers have with the non-digital incumbent freight forwarders. Since these revenues remain uncertain and unpredictable, most ventures attempt to convert these occasional “spot” contracts into longer term logistics contracts. However, in order to be able to adequately service these contracts, digital forwarders need to have access to a larger network of carriers than most early stage startups do.

Summing up, the best spot for a freight forwarder is offering several means of transport , being able to reliably and profitably offer LTL in addition to FTL, offering realtime price quotes to shippers and having signed long-term contracts with major shippers.

3. Forwarding SaaS

Ventures such as Shippo decided to pursue a different path than the freight exchanges and forwarders. They usually target shippers and integrate their cloud-based software with their customers’ systems. Customers can range from smaller eCommerce sellers to large manufacturers and retailers. Most software provides shippers with a customized interface in which they can book and track shipments. There are different pricing models being used ranging from monthly licenses to package pricing for a number of parcels. The appeal of these models from an investment perspective is that if they do well, they will eventually “own” the customer instead of the shipper. Generally, the software will allow shippers to freely choose their carriers from an array of options. But nothing really prevents the software provider from steering the user towards a specific option the way Amazon is doing for eCommerce retail customers.

4. Outlook

While there are not many new freight exchanges entering the market, digital forwarders are currently making news on a weekly basis. Germany has lately seen large investment rounds into FreightHub, Sennder and Fliit. From Spain and UK OnTruck and ZenCargo respectively are pushing into neighboring countries and US-based Flexport, fueled with over USD 1bn in invested capital, opened a German office in 2018. Faced with this competitive landscape smaller ventures in the freight forwarding space often argue that “this is not a winner-takes-it-all-market” and point to the fragmentation of the traditional non-digital forwarding market. While there is some logic behind this argument, it tends to ignore the fact that the vast majority of these startups are burning cash and thus have a limited runway. The larger ventures are rapidly taking the large retail accounts (think Amazon, or P&G) as far as these are willing to work with new entrants so that smaller ventures are left with a very fragmented shipper landscape that will take a large (or very efficient) salesforce to sign. Thus, the smaller digital freight forwarders are likely to reach the end of their runway eventually while the larger players will compete over ancillary services (financial services, inventory, predictive demand analysis) to steal more customers from the traditional incumbents.

For the SaaS it will be interesting to see which ventures manage to attract large shippers as customers besides the smaller eCommerce shops and how the market entry of Amazon’s freight brokerage service will affect the existing players.

Jan Claudio Muñoz is partner at m2p ventures (www.m2p.ventures). m2p ventures sources, executes and manages early stage start up investments for investment funds and corporates.