The Future(s) of Freight
Our new investment in FreightWaves reflects our thesis that the time is now for the trucking industry to turn the first wave of digitization into the second wave of analysis & action
In 2009, when we launched Fontinalis Partners — a Detroit-based venture capital firm investing in next-generation mobility (i.e., the efficient movement of goods, services, and people)— we envisioned a future where companies would have real-time access to critical data impacting their industry and the tools necessary to turn analysis of that information into action. This is especially important in global supply chains, which measures into the trillions of dollars and any disruptions or price swings can have outsized impacts on the largest companies globally.
Our firm has also continually been drawn to large but often overlooked segments of mobility, and one industry that fits such a description well is the trucking industry. The U.S. trucking industry is a $700 billion industry that employs 3.5 million people and moves nearly 70% of all goods. However, while strides have been made in employing telematics technology for such purposes as fleet management, the industry’s highly fragmented nature (the top 50 companies only account for 17% of the total market) has meant that it has been slower to adopt digitization as broadly as other industries. We believe that is changing, and it opens up many exciting opportunities on the road ahead.
Wave #1A: Telematics & Fleet Management is Building a Growing Data Set
The last decade has seen many trucking companies adopt telematics and fleet management solutions to track the location of their vehicles, optimize the efficiency of their fleets, track drivers’ hours of service, etc. This has helped turned each truck on the road into an individual data-generating node in a broader transportation network. Fleet operators are starting to amass considerably more data about their fleets and are making operational decisions based off of it.
Wave #1B: The “Uberization” of Trucking is Expanding Price Discovery
Booking spot freight has traditionally been done using phone-based freight brokers (imagine cubical banks of agents calling around to carriers to arrange loads) until the recent emergence of entrepreneurs who look at this and say, “we can automate this better with technology. ” In the last couple of years, a growing number of startups have emerged to better match shippers (think: Walmart, Kraft Foods, etc.) and carriers (i.e., trucking companies) through digital marketplaces. These digital marketplaces (or “tech-enabled brokers,” as some refer to them) allow shippers to do basic price discovery while also increasing carriers’ overall fleet utilization.
Announcing Our Investment in FreightWaves
Since 2015, nearly $2 billion has poured into trucking technology companies, with digital marketplaces comprising the lions’ share of it. As mobility investors, we are often asked why we haven’t yet invested in a trucking technology company. While digital marketplaces are playing an important role in price discovery and helping trucking companies open up to data sharing, their operational impact on the overall industry only extends so far, so we have waited patiently on the sidelines until a company addressing two key pain points (i.e., lack of transparency to support operational decision-making and inability to protect against price volatility) emerged.
Enter FreightWaves.
We are pleased to announce that we have recently led an oversubscribed $3.4 million seed financing in FreightWaves (formerly TransRisk), and were joined in the round by other forward-thinking investors like 8VC, Engage Ventures, Advisors Fund, Breakthrough Fuel, Story Ventures, and Hunt Technology Ventures.
We were drawn to FreightWaves because, at its core (it even comprises its name!), the company is bringing transparency to the industry, as well as tools to manage price risk. It is doing so with a team that we think is unparalleled in the freight tech space.
Transparency: Tools, Insights, and Thought Leadership
Traditionally, visibility into trucking freight has been limited to either very broad industry-level data or narrow historical data from a shipper or carrier’s own footprint. Having tools to drill down further into industry data and examine trends outside of one’s footprint has tremendous value to companies hoping to better understand the near- and long-term movement in prices and supply/demand balance. FreightWaves is developing the “Bloomberg terminal of trucking” by aggregating disparate data sources across the trucking industry (e.g., fuel prices, dwell times, weather data, price indices), mining for correlations, and generating forecasts to empower better operational decision-making. Not only is this important today, but we think it’ll be even more important to use real-time and predictive data to position fleets when they inevitably become autonomous.
The company’s FreightWaves website takes this data a step further and provides industry commentary that dissects key developments and trends, and it has quickly grown to become a go-to source for the trucking industry (a top 3 media site for global trucking & logistics).
Additionally, the FreightWaves team sees blockchain technology having a tremendous opportunity to affect logistics — from smart, self-executing contracts to visibility into the chain of custody of freight (just look at how Cargill used blockchain to allow consumers to trace their Thanksgiving turkeys back to the farmer who raised it). In September 2017, FreightWaves launched the Blockchain in Trucking Alliance (BiTA) to develop common standards, promote education, and encourage collaboration for the adoption of blockchain in logistics. It is filling an obvious industry need, as evidenced by the 540+ companies (including UPS, C.H. Robinson, and others) that have applied to join the alliance since its launch.
What was once a very opaque industry, trucking is now positioned to operate in a more transparent and collaborative manner.
Risk Management: Exchange-Traded Freight Futures
While much of road freight is transported under annual contracts between shippers and carriers (or with third-party logistics companies, 3PLs) — and FreightWave’s data & analytics tools can be very helpful in negotiating these rates as they come up for renewal — both sides of the market are also exposed to volatility in spot rates (essentially the “walk-up” rate). Freight is a capacity-constrained industry driven by changes in supply & demand, so freight prices are influenced by a variety of factors like weather, seasonality, agricultural production, labor availability, economic cycles, and others. In fact, spot rates may fluctuate as much as 40% in a given week on major lanes. And while a short-term spike in pricing may benefit a carrier, it can significantly impact a low-margin retailer trying to rush product into its store (and vice versa if prices drop).
In the aftermath of the late-summer hurricanes, rates along Texas lanes doubled or tripled, and the effects spilled over onto other trucking lanes. While it’s easy to chalk this up as an infrequent occurrence, this is only one example of extreme volatility. When these are coupled with systemic changes on the horizon — such as the looming driver shortage as experienced drivers retire and the electronic logging device (ELD) mandate (which is estimated to reduce industry capacity by approximately 3%) — we see volatility swings increasing as long as the economy stays strong.
Most capacity-constrained commodity markets have a tool to manage this price risk: airlines hedge against fuel price increases, power generators and retailers hedge with electricity futures, and agriculture companies hedge against underlying commodity volatility. In transportation, there is also a benchmark for this type of activity: for the last 30 years, maritime shipping companies and buyers of maritime freight have been hedging using maritime freight futures through the Baltic Exchange.
In late 2018, FreightWaves— in partnership with Nodal Exchange (a derivatives exchange that is one of the largest players in the electric futures market) and DAT (the de facto standard for trucking industry supply, demand, and rata data) — will be introducing the industry’s first trucking freight futures contracts. If futures contracts on trucking sounds crazy, consider this: the trucking industry is 35% bigger than U.S. petroleum and coal industries — combined.
These contracts will provide a hedging tool against price indexes for major shipping lanes; and as the derivatives market for freight futures grows, we believe the physical market for trucking will also see less volatility and industry participants will begin to consider it a fiduciary obligation to hedge with freight futures. We also see increasing the predictability of cash flows as having the added benefit of improving long-term planning and decision-making.
As venture investors, we look for bold ideas that can have an outsized impact on large industries. When Founder & CEO Craig Fuller came to us and told us of his plans to shake up the largely opaque trucking industry and launch futures contracts on a major exchange, we resisted the urge to say, “You’re crazy!”…and instead decided to go long on it.
Chris Stallman is a Partner at Fontinalis Partners, a Detroit-based venture capital firm with $165 of committed capital that invests in innovative next-generation mobility companies. Examples of mobility focus areas include connected fleets, autonomous vehicles, mobility services & marketplaces, and supply chain & logistics. Chris serves on the board of directors of FreightWaves.
