How We Evaluate Startups in Shipping and Logistics
When people talk about logistics startups, much of the focus is on is how automated they are (or rather, how not automated). From our perspective, that is not the most interesting question to ask.
It is the most easily observable characteristic — you see the hustle and bustle of many bodies, many of whom are talking on the phone, and you think to yourself, “this doesn’t look like a tech startup.” A valid critique, but it doesn’t necessarily preclude the longevity or disruptive potential of the business.
At their core, most logistics startups are marketplaces; they cater to two sets of customers, the supply side and the demand side, and they strive to provide a product of value as an intermediary. As such, we think about them with marketplace principles, tailored for the logistics space.
Here are the five areas we dive deeper into when we evaluate startups in shipping and logistics.
1. Can you sustainably and reliably acquire the demand side — shippers?
We feel that having a direct relationship with a shipper is preferable to an indirect one. Building your own book of business allows you to get recurring demand and you to grow as your shippers grow. If you get your demand through partnerships with brokers or another third party, then you only have a transactional relationship with the shipper for the shipment and you’re at the whimsy of what the broker wants to throw to you.
Building up demand directly is not easy. One way is to go the outbound route, where you buy customer lists, qualify them, call them and sell them. It’s possible to grow rapidly this way, but it will likely be more expensive to acquire each customer. You might also experience higher churn initially as you might have sold to customers that are not the best fit for your offering.
Another way to go is inbound: paying for ads and augmenting with content marketing, you drive customers to your site where you then convert them. This will likely yield a lower CAC, though you might not grow as quickly. Shippers might have long-time relationships with their brokers and it will be hard to break through that relationship.
The most important thing is to demonstrate that you have found a sustainable and reliable acquisition strategy for your demand, and that you demonstrate recurring and expanding revenue (and profits) from your customer base.
2. Can you skillfully navigate the dynamics of the supply side — carriers and brokers?
As for the supply side, carriers and brokers engage in “coopetition,” where their relationship is simultaneously collaborative and competitive. Carriers don’t like brokers because they take a 15–20% cut of their revenue, but also must rely on them for their value-added services such as coordinating logistics between different asset-owners, customs brokerage, documentation, and so on, as well as niche expertise.
The industry is currently undergoing waves of consolidation, both among carriers (e.g., Knight Transportation merged with Swift Transportation) as well as brokers (e.g., Echo Global acquired One Stop Logistics, Coyote Logistics merged with Access America Transport). Carriers are entering the brokerage business, e.g., Maersk’s Damco launched Twill, and vice versa, e.g., XPO Logistics acquired Conway Freight. To make it even more complicated, e-commerce giants are bypassing brokers altogether, e.g., Alibaba partnered with Maersk to launch the OneTouch booking portal, and Amazon is rumored to be working on the AWS for logistics. Almost everyone are facing margin pressures.
Against this complex backdrop, we probe for whether you deeply understand the dynamics and how you engage in this dance between the carriers and the brokers. In most parts of the industry, it is probably too early to truly disintermediate the latter (unless the startup were to become a broker). There are pro and cons whether you go after a fragmented or a consolidated supply base, so we seek to understand your approach.
3. Do you have attractive unit economics?
In considering the unit economics, you would likely need a high Average Order Value (AOV). In today’s world, logistics is not efficient enough where you can make pennies on the dollar for each transaction. Contrast this with high frequency trading, where you can expect to net a few basis points per trade but you make money because you trade in millions of dollars a week.
This is what makes the long-haul FTL trucking business and the container shipping business easier to tackle, as shippers often pay hundreds or thousands of dollars per shipment.
At the same time, you need to weigh the complexity of your business versus value creation. If you’re tackling LTL or last-mile delivery, for example, then you need to significantly reduce complexity through automation and simultaneously provide a lot of value to your customer so that you can extract an attractive gross margin.
4. How do you structure your business model among the different parties?
Who do you charge? If you’re charging carriers, since they have thin margins, you will need to help them change their cost equation. But if you’re solely focused on carriers, brokers might feel threatened. If you work with brokers, they can help you to get distribution for your product, helping you to lower your CAC. But as the industry moves towards disintermediation, you cannot rely on brokers forever.
At the end of the day, carriers and brokers are often old school and it is hard to change behavior. Shippers can be a good choice, as they can use their wallet to dictate what changes they want to see. There is a natural network effect in logistics businesses as you bring onboard one party, you can also acquire their customers and vendors and so on.
The long-term business model is perhaps more interesting. If your main value is within logistics, will you become a next-generation broker? Or will you build towards a true future marketplace?
If you build an engine to gather interesting and unique data, then you can potentially package it for selling to hedge funds or CPG companies, for example. Alternative sources of revenue helps immensely because they open your possibilities for exits. Although the logistics industry have big players, they are not likely to be the highest bidders. Financial institutions, CPG companies, or the Internet giants can be more lucrative acquirers if you can build a business that is attractive to them.
After speaking to a number of logistics startups, one of the things that I realized is that logistics startups are often messy, their product and business models much more complex than a consumer products company, for example. This reflects the nature of the space that they operate in.
We want to share some of our thinking around what are the key questions to ask and how we approach each topic, hopefully this brings some method to the madness.
This is the fourth article in a series about shipping and logistics. Other articles are:
- Thriving Industries Based in LA That You Would’ve Never Guessed
- The Big and Hairy Problems in Shipping and Logistics
- The Evolution of Logistics: Is the Industry Ready for Your Startup?
- How We Evaluate Startups in Shipping and Logistics
If you’re working on the next big thing in this space, drop me a line first at chang@upfront.com.
