Betting our VC Fund on a More Efficient Point A to Point B
Previously ignored areas like supply chain and logistics are ripe for venture returns, and our latest investment in Postmates is further proof of that.
On a brisk day in October 2016, a package that only days earlier sat in a warehouse in China managed to cross the globe, clear customs, and arrive on my doorstep in suburban Detroit. I received the delivery notification at about the same time the ink was still drying on our latest supply chain / logistics investment — our fourth in the last two years (and not likely to be our last).
(Truthfully, I was going to start this post with something like “logistics is sexy,” but a quick Internet search shows there is no shortage of such proclamations. Instead, let me back this story up a bit to the very beginning of how we got here.)
Back in 2009 — several decades into careers spanning a variety of sectors, and having noticed opportunities that lie ahead in an urbanized world that would be moving about in new and different ways — my colleagues came together to launch Fontinalis Partners. Today, Fontinalis Partners is a $165 million venture capital firm that invests in “next-generation mobility” (i.e., the efficient movement of goods, people, and services), with focus areas that currently include autonomous vehicles, machine learning / AI, mobility services, automotive cybersecurity, supply chain & logistics, and many others.
Mind you, 2009 was not 2016; “mobility” as we know it today is generally well understood and widely covered by the press. By contrast, 2009 was a period of great economic turmoil when the automotive industry was more focused on cutting costs than growth, but the Fontinalis team thought the opportunity was massive enough to justify launching a firm focusing on this area (the very first of its kind). However, one problem we had in the early days was that we would have conversations with other VCs and industry contacts that went something like this:
Them: You’re investing in what?
Us: Mobility. Think of it like transportation, but broader: it’s any technology or service that makes for more efficient movement of goods, people, and services.
Them: “Transportation technology???” Good luck with that.
It was clear that the discussion needed to be framed a bit better. That opportunity came for us in early 2011 when Bill Ford, Executive Chairman of Ford Motor Company and Founding Partner at Fontinalis , was invited to give a TED Talk on “A Future Beyond Traffic Gridlock.” He touched on several central components of our investment thesis— including a shared, connected, and autonomous future and better use of data for decision making. He also shared a vision of a world that would either make the leap or risk getting stuck in a quagmire of gridlock and inefficiency (we are working to empower that leap).
In the years that followed, the mobility conversation has been advanced at an exciting pace, and meaningful traction is being seen on both the consumer side and enterprise side. Meanwhile, we have continued to execute on our initial thesis by investing in more than 25 mobility companies, including Lyft, nuTonomy, Turo, and Telogis (recently acquired by Verizon).
Why Supply Chain and Logistics?
In venture, size really does matter. Large addressable markets with prominent pain points attract the brightest entrepreneurs, which in turn attract venture investors. Supply chain & logistics qualifies as a very, very large market. As proof, the U.S. Census Bureau reports total business inventories of $1.8 trillion in August 2016 with an average of 42 days in inventory. When you consider that reducing days in inventory by a single day frees up $43 billion of capital that can go towards other uses, you can start to see why this area is garnering more and more attention.
A big market with smart entrepreneurs is a great start, but we are also drawn to the fact that enterprise customers are relatively pragmatic: they care about time, price, safety, consistency / replicability, resiliency / risk, etc. Technologies that deliver superior performance in these areas generally have a receptive audience.
We also see a lot of opportunity in this market being driven by a variety of key trends, including:
- Global e-commerce: The proliferation of global e-commerce means smaller parcels traveling longer distances from their manufacturing / supply source to ultimate end destination. Consumers have also grown accustomed to shorter delivery times, which is now the norm.
- Digitization of supply chain management: The supply chain is becoming increasingly connected and digitized. The days of “paper and Excel” are giving way to cloud-based ERP systems, data analytics, online marketplaces, etc.
- Greater price transparency across all modes: Large companies often utilize freight “bid boards” to get quotes for non-contract shipments. With the advent of more online freight marketplaces, pricing transparency is increasing, particularly with respect to sea and air transport.
- More collaboration: Third-party logistics (3PL) providers are now being looked to for providing greater transparency to their customers (e.g., real-time updates, exception reporting, etc.).
- Supply chain as a core competency / differentiator: A handful of companies have recognized that strong supply chain management can be leveraged as a core competency. Amazon’s fulfillment capabilities are unmatched, allowing it build a Fulfilled by Amazon juggernaut and now sees it launching 40 “Prime Air” cargo planes over the next two years to further extend its leadership position.
In the face of all of this opportunity, there’s a groundswell of technology innovation occurring. Industry-focused accelerator programs like Techstars Mobility and Dynamo Accelerator are seeing an influx of high-quality, early-stage applicants, as well as active participation by industry partners and sponsors who stand to gain from these technologies.
So, let’s revisit briefly:
- Big market (check)
- Strong entrepreneurs (check)
- Receptive customers (check)
- Accelerating pace of innovation (check)
A Few Areas Where We’ve Been Active so Far
Supply Chain Transparency
Supply chain management is a mission-critical function of large enterprises, with billions of dollars of inventory on the line and susceptibility to disruptions being an ever-present risk. Despite this, answering (what should be) simple questions like “where are goods in transit?” and “what won’t make it in time?” and “where are our key risks?” is actually quite difficult with systems that are held together with little more than duct tape and Microsoft Excel.
Enter Elementum, spin-out of Flex (formerly Flextronics) and a new investment of ours in 2016, which is focused on giving large enterprises access to real-time data to enable them to visualize their supply chains, openly collaborate, and react to supply chain developments. Better visibility into the supply chain helps to reduce risk and increase free cash flow by taking tens (or even hundreds) of millions of dollars out of working capital that would otherwise be tied up in buffer inventory.
Asset Efficiency
More than ever before, transportation companies are focused on stretching the utilization of their costly fixed assets and offsetting operating costs. For example, trucking companies have been working with freight brokers for years to minimize their empty leg problems when they don’t have a load to carry on a return trip.
This asset efficiency problem has also existed for decades in the passenger airline industry. While airlines have generally done a pretty good job in recent years of optimizing for passengers — US carriers are currently operating at passenger load factors of 86% according to the Bureau of Transportation Statistics — their air cargo utilization falls far short of the mark (often 40–45% utilization, with significantly lower levels for emerging airlines). We see this as a huge opportunity. After all, these airlines are often capable of carrying cargo at prices lower than traditional air freight options, and each additional piece of cargo represents a valuable high-margin opportunity to complement an otherwise low-margin passenger business. With passenger airlines enabling lower-cost air freight , we think this will help expand the total air freight market as it becomes more price competitive with road, rail, and sea options.
Enter SmartKargo, a portfolio company of ours that has created a cloud-based platform that allows airlines to more easily sell, manage, and track their air cargo — essentially operating with similar capabilities of FedEx and UPS but without the hundreds of millions of dollars of proprietary IT spend that would otherwise be required. Airlines like Alaska Airlines, Hawaiian Airlines, and Cebu Pacific are using SmartKargo’s platform today to do just that.
Efficient Fleet Routing
The last mile of logistics is often the most challenging to manage. Companies try to factor in as many controllable variables as they can — even going as far as one national lawn service provider did that plans its routes based entirely on right turns only (since technicians often park curbside and don’t have time to be constantly turning around). However, with most routes often planned days in advance, things can (and will) change, whether it be due to weather events, traffic, customer delays, etc. Fleets need to do their best to control the controllable and adapt to the uncontrollable.
Enter Wise Systems, a portfolio company of ours that works with fleets to save time and money by automatically planning and scheduling optimized routes using machine learning, prediction, and outside data (traffic, weather, events, etc.), while also allowing real-time adjustments as situations change.
On-Demand, Last-Mile Delivery
In an increasingly on-demand world where users have grown accustomed to being able to get (nearly) anything they want quickly with a few taps of an app, we saw a huge opportunity for a single logistics platform to empower tens of thousands of small- and medium-sized businesses that would otherwise not be able to offer delivery services efficiently. This is why we are excited today to announce our investment in Postmates, the “Instant Everything Store.”
Postmates offers consumers the ability to have more than seven million products available at their fingertips via a nationwide fleet of independent couriers. Also, the merchants in the Postmates network can tap into the company’s sophisticated logistics network to offer quick delivery they wouldn’t otherwise be capable of — in fact, 90% had no delivery option prior to Postmates. This powerful logistics and delivery platform also serves as a chance to create unique experiences for brands like Everlane and MeUndies that lack a brick-and-mortar presence but want to offer their customers the ability to “get it now” by connecting to the Postmates API.
What We’re Hearing from Customers
A company’s supply chain is the lifeblood of its operations, and its mission-critical nature means companies are cautious to hand over the keys to the kingdom — especially to just any startup that shows up on its doorstep. While this means sales cycles may be longer as a result, enterprise customers tend to be receptive to “land and expand” approaches (i.e., a startup secures a revenue-generating pilot with the potential to expand into a full-fledged deployment once the value proposition can be tested and validated); after all, anything that improves operations and saves money is worthy of serious consideration.
Another item for tech companies to consider is that it’s often not sufficient to offer only a single value proposition to the customer (e.g., price). Supply chain personnel are very operations focused; consequently, they tend to be more risk averse than price sensitive. The cost of a supply chain disruption is often orders of magnitude greater than any incremental cost savings. On this point, I recently met with someone in charge of transportation procurement at a Fortune 100 company, and the conversation went like this:
[Discussion centers around saving the company millions on its cross-border freight]
Transportation Director: Do I care about saving money on freight? Of course I care. But I also care about time, reliability, and safety. It’s nice to save a few thousand dollars on a delivery, but if I have to shut down my factory because parts didn’t arrive on time, that’s going to cost me millions. I need to be guaranteed the exact same level of service or better than I currently have.
Understanding risk aversion is key in the selling process, as well as in product development. It’s important to know all of the categories the person making the purchasing decision will be evaluated on in their organization, and to develop product that meets or exceeds the mark on all of those and fits as seamlessly into the customers’ existing operations as possible.
Where to go from Here
We think we’re just starting to scratch the surface on all of the innovation that will be occurring in this market. The following are some other areas we will be keeping a close eye on going forward (to name just a few):
- Freight Marketplaces / Brokerages / Forwarder Models — Several companies are working to bring greater price transparency to global logistics. Will this turn into a terminal monopoly (as is often the case with marketplaces)?
- Connectivity / APIs — Freight visibility has been a challenge for the industry to date, and better connectivity between the logistics provider and shipper is needed (and progress is being made by early adopters). We see greater connectivity throughout the industry as being key enablers of such advancements as dynamic pricing and better load optimization.
- Autonomous Fulfillment & Freight — Whether it’s use of autonomous technology for fulfillment center efficiency (see: Amazon Robotics), or open-road autonomous freight (see: Uber’s recent use of Otto…to deliver beer), we think we’re still at the very early stages of the technology adoption life cycle. While it will likely be some time until we “cross the chasm” to mainstream adoption, we do see the pace only accelerating from here.
- Simulation & Business Intelligence — The next generation of simulation technology, capable of modeling and visualizing changes to a company’s complex supply chain before they are made, will allow companies to make better operational decisions.
As you can see, this is one segment of mobility that is of great interest to us at Fontinalis Partners. If you share this enthusiasm, feel free to reach out to us to discuss further.
Chris Stallman is a Principal at Fontinalis Partners, a mobility-focused venture capital firm with offices in Detroit and Boston. You can subscribe to Mobility Matters, a weekly newsletter put together by the Fontinalis team that recaps recent industry news, funding announcements, and relevant blog posts.
