Why Blitzscaling isn’t for digital brokers
Traditional venture investors are paying more attention to freight brokerage, an industry where tech-enabled businesses are rapidly emerging. Digital brokers are just that — “tech-enabled” and not pure play software. They therefore have entirely different unit economics that are not compatible with traditional VC playbooks, which prioritize growth over efficiency. While the increased availability of capital will rapidly modernize a tech-resistant industry, aggressive financing in the space will prevent sustainable business models from taking form.
Though it has flown under the Silicon Valley radar for years, freight brokerage is a $700 billion industry and trucking is the top employer in 29 states. As such, it is crucial that the on-going modernization of the industry be done responsibly. Put in simplest terms, freight brokers exist to help companies that sell goods (shippers) find companies that can physically move said goods (carriers). Most large shippers (Walmart, Coca-Cola, etc) do not use their own fleets of trucks to move the majority of their goods. With that, 97% of carriers on US roads own fewer than 20 trucks. This kind of fragmentation in the supply of capacity makes the process of finding an available one incredibly tedious.
Until recently, shippers’ only option for finding a truck on short notice was time-consuming and antiquated. It required endless phone calls and large sourcing teams. Digital brokers are changing that by replacing phone calls with API calls, automatically connecting shippers with carriers. The opportunity freight brokerage presents to investors is immense — a $700 billion unglamorous and highly fragmented industry is a savory feast for software. Traditionally, VCs would have software eat it by Blitzscaling, a process in which startups do everything they can to capture market share before concerning themselves with profitability. But as David Sacks, the founder of Yammer and Craft Ventures points out, tech-enabled startups have cost structures similar to the businesses they disrupt. Sacks writes, “Although growth solves many problems at startups, unit economics is not one of them.”
This is especially true in freight brokerage. Digital brokers have revolutionized the industry by offering shippers real-time pricing, drastically reducing the cost to transact. Shippers’ transportation management systems (TMS) are integrating with API pricing providers and will eventually show their customers instantly bookable rates, whether they be from Convoy, Loadsmart, Uber Freight or others. This is the trucking industry equivalent of trying to book a room and seeing options from Airbnb, Hotels.com, and Expedia all in one place. Unlike the hospitality industry, however, trucking as a service is more or less commoditized and therefore extremely price sensitive.
If rates are the key determinant in a shipper’s decision to book a load, then gaining market share by offering artificially low rates is meaningless. A broker can grow all it wants by “buying freight,” or charging shippers less than the carrier’s cost of hire. That’s easy. This strategy for growth, however, is not true Blitzscaling, at least not as it was intended. In the freight buying model, investors’ money is spent on sustaining the losses incurred through the broker’s core unit economics, not on the team it hires to scale.
Digital brokers already have instant visibility to billions of dollars of freight through integrations with the TMS that log all of a shipper’s freight demand. In the case of brokerage, this visibility is effectively the same thing as market share. As a broker, simply bidding on everything as the cheapest option to unlock that demand is not sustainable. Doing so results in artificially low prices that eventually lead to correction. Instead, brokers need to achieve a level of automation and visibility into the supply of trucks that allows them to bid more intelligently, bringing right pricing to both sides of the market.
