On digitizing B2B markets and building trust relationships with founders
Why we invested in cargo.one
Yesterday, we announced that we led cargo.one’s $3.2M seed round alongside Stockholm-based Creandum and with participation from European’s leading air freight carrier Lufthansa Cargo (see the PR here).
A good occasion to write a few words about what convinced us to jump on board but also to reflect quickly on how digitisation reshaped the airline industry, in the passenger market 20 years ago and now in the B2B market. The post ends with some quick words (and anecdotes) about our preferred way to build trust relationships with founders prior to investing in their business.
Let’s start with a little bit of history
As consumers, we’re now used to being able to book plane tickets online. But, not so long ago, the only way to buy airplane tickets was either to go to the counter of an airline at the airport or to go through the closest travel agency, down the street. Remember that?
What made booking airplane tickets so simple came from two innovations: online travel agencies (OTAs) and GDS systems. In short, OTAs changed the market dramatically by offering tickets online from multiple airlines on one single platform without relying on an actual (human) travel agent. For the first time, passengers could book tickets themselves. These online travel agencies could also offer better prices than their offline counterparts because they had much lower cost structures. The first OTA is Expedia and was started by Microsoft in 1996. But this was mainly an innovation for the consumer. On the airline side, (O)TAs still had to connect with carriers to get access to availability and prices of tickets. They started doing so through digital channels by connecting to what took the name of Global Distribution Systems (or GDSs), like Sabre or Amadeus. In short, a GDS is a single database that travel agencies could connect to with read and write access to book tickets from multiple airlines.
Where are we in the air freight markets?
Now, the cargo market is structured very similarly but … the digitisation of the industry is as advanced as it used to be in the consumer market in the 90s. Between airlines and shippers are what we call freight forwarders. They are regulated entities that can commercialise carriers’ capacities to shippers. As Expedia changed distribution on the demand side of the consumer market in the 90s, we’ve observed the emergence of new players (called “digital freight forwarders”) that are the B2B version of OTAs in the B2C market. Interesting examples are companies like Flexport, Freighthub or their French equivalent Ovrsea, who are all trying to get a chunk of the 300Bn+ freight forwarding market.
But, as of today, freight forwarders, be they digital or not, still access prices, capacities and book through multiple phone calls and emails to each single airlines, even to each of their commercial departments. Think about the number of communication flows to book one single ticket. In addition — and it probably explains why it is still lagging behind its passenger counterpart—the air freight market requires a much more complete software suite because the demand is much more complex or granular. Building only a GDS, as a single database centralising airlines’ available capacities and prices is itself not enough to disrupt GSSAs or “General Sales and Service Agent”. These GSSAs are the intermediaries carriers currently rely on in order to do a number of things such as selling air freight capacity, managing it or supporting customers’ ongoing requests. They even sometimes do accounting for carriers.
Enter cargo.one
cargo.one is the first booking platform for freight forwarders to benchmark prices and book air freight capacities online, in real-time in a transparent way. They connect directly into carriers’ back office and streamline capacity and prices, which is then made available through an easy to use online interface or via an API that can be integrated into freight forwarders’ Transport Management Software.
Why it is exciting?
10x better AND cheaper
The best way to build an “enduring, multi-billion dollar business” is to build a 10x better AND cheaper product. These opportunities are very rare but happen here and there. Compared to the status quo (sending faxes, emails, and phone calls to multiple offices), there is very little doubt that a single benchmarking and booking platform is 10x better. But beyond that, cargo.one allows both parties, airlines and freight forwards, to respectively distribute and buy capacities in a much more streamlined way, which translates into significant cost reduction; a top priority in the industry. This excerpt from Lufthansa Cargo’s latest annual report is telling in that regard:
Trending towards higher market efficiency with dynamic pricing
As of today, about half of the market is sold on long-term contracts while the other half is sold on the spot market. On the one hand, freight forwarders tend to buy capacity in advance — most often at higher prices — in order to secure capacity when it is most needed (e.g. Christmas peak season). On the other hand though, airlines have little interest in selling too much capacity in advance as it prevents them from doing yield management (which is a great way for them to maximize revenue).
As a result, these dynamics prove to be inefficient from a market equilibrium perspective because airlines end up selling too much capacity at suboptimal prices. Theoretically, for both the demand and the supply side, being able to buy at the right price on the spot market should lead to a better market optimum. After all, isn’t it what has happened in the passenger market?
Unlocking supply?
The best marketplaces unlock a supply which was not available before. Uber in the US turned a lot of people into cab drivers thereby increasing liquidity in the marketplace. More supply, lower prices, higher demand. It’s not yet certain that such a dynamic would happen BUT most of the air freight market is driven by the passenger market as 90% of air freight flies in the belly of passenger flights. Assuming that airlines can streamline capacity faster via digital channels and that freight forwarders can place bookings more easily, chances are that the load factor of planes could increase. At least, it’s not the lack of demand in this market that will prevent it. See the chart below:
Opportunity to build additional value through software?
Lastly, being at the intersection of carriers and freight forwarders also offers many opportunities to add value by building additional software bricks. Among others: revenue or inventory management. We, at Point Nine, have been on the hunt for great opportunities to build SaaS-enabled marketplaces for a long time now(see post here). Isn’t it a great one?
But most importantly….
As seed investors, we trust that people are the key drivers for success. I’ve gotten to know Oliver, Moritz and Mike for a very long time now as I was the first intern of their previous company 5 years ago—actually joining even before Moritz did! We became friends since then while we kept on discussing many (hundreds of) new business ideas. From a German version of Grammarly to cargo.one, we’ve spent long hours discussing what was the right opportunity for the team, who has built extensive great B2B sales and product expertise through their previous startups. When the opportunity for cargo.one emerged, it was clear that it was the right one.
I also have a profound admiration for them as individuals but most importantly as a team. So…I also always knew that we would find a way to work together again. This is it!
Needless to say that we did not run any personal references …and that Pawel, myself and the rest of the P9 Team could not be more excited to get onboard!
✈ Safe travels cargo.one ✈
