The Evolution of Logistics: Is the Industry Ready for Your Startup?
The shipping and logistics industry is ripe for modernization. It’s a blue ocean (pun intended) for those that figure it out.
The future is easy to envision: you can instantly book transport for your goods, international and domestic, while your vendors and carriers seamlessly execute the transaction. It will be 100% reliable, with zero paperwork for all parties involved, and the process will be continuously optimized by AI.
Now, the billion dollar question: how will modernization happen? In recent years, there has been a dizzying array of startups going to market with the catchphrase “Uber for freight” or “Uber for trucking,” but they actually look very different under the hood.
One such “Uber for trucking” startup, Cargomatic, failed publicly. After raising $15M and growing to 100+ people, everything collapsed by September 2016. New management took over and pivoted the business.
Is the problem with the “Uber for trucking” business model? I don’t think so. For one, I think the startups in the space are actually executing different business models beneath their common confusing moniker. I advocate ditching the term.
The shipping and logistics industry needs to go in phases from the old world to the new. Startups stumble when they prematurely go after a business model that the part of the industry they’re tackling is not yet ready for. Here are what I think these phases are.
First phase: Rise of the tech-enabled freight brokers
Everything is so broken in shipping and logistics. Nothing is in the cloud. Carriers don’t know where their trucks are or the capacity. Truck drivers are new to smartphones. There is a whole industry of middlemen called freight brokers who get paid 15–20% of the total transaction value just for coordinating between the shippers and carriers.
Of course, this is partly driven by the enormous complexity in the business. Ships that carry containers are different from ships that carry corn are different from ships that carry metal. Trucks that drive across the country are different from trucks that drive on city streets are different from trucks that do residential deliveries. Even finding a place to park every night is difficult: 1/3 of long-haul truck drivers in the US use the mobile app Trucker Path simply because it helps them find parking.
So naturally, the first phase is to build a brokerage from the ground up. Become the middlemen, then gradually build technology to optimize and improve own operations. This is the playbook for Flexport in air and sea freight as well as Convoy and Transfix in domestic trucking.
Flexport can operate on a gross margin that is much less than that of a traditional freight forwarder — 13% compared to 18–26% — which reflects the advantage from investing in technology (Goldman Sachs). Nevertheless, these tech-enabled brokers still need to hire large head counts for customer acquisition and brokering freight, though they strive to build tools to give their staff more leverage over time and bend down the cost curve.
Second phase: Digital infrastructure for incumbents
However, despite rapid growth (Flexport grew 16x in 2016), the tech-enabled freight forwarders will never take over the entire shipping and logistics industry — it is too massive and much of the value is asset-based. Transforming the business for the asset owners is the key to unlocking the value, and through it create more value for the other aspects of the industry.
Moreover, the old guard now feel the impetus to innovate. Due to mounting competitive pressures, they are more willing to embark on the arduous process to modernize.
The change starts with fleet tracking and management, such as what Samsara does for trucks and what Armada and Weft do for ships. Tracking and data allow the asset owners to improve capacity utilization, routing, and engine efficiency. There are many possibilities: real-time information enables faster response to changes; understanding driver behavior can link to insurance; if a load was sold mid-transit, then the new customer can take ownership and route the load directly to their warehouse, short-circuiting the trip. Leveraging IoT to make ships and trucks “smart” and introducing technology to non-tech operations are the foundation for doing more interesting things.
Others attacking the “trucking as a platform” thesis attempt to get to the source of truth through software instead of hardware. For example, RoseRocket is building the next-generation Transportation Management System, integrating the existing hardware and systems to finally bring everything together. Apps for truckers such as Trucker Path and TruckMap aim to help drivers in their everyday jobs by helping them find parking or offering turn-by-turn navigation, respectively. In aggregating the fragmented supply side of owner-operator truckers, they can leverage the platform to build other businesses such as freight brokering or freight factoring.
Workflow SaaS software is also an indispensable part of the equation, whether for brokers, shippers, carriers, or other supply chain vendors. Startups are building software to help these parties collaborate better, transmit information electronically and in a standardized manner, thereby reducing the need for phone calls and paperwork. Examples include Turvo, Haven, Fleet, and Shippabo, though they are building different products and attacking the market in different ways.
For instance, Fleet has integrated with different carriers and understands how each price their rates, which, surprisingly, hasn’t been done before. Turvo has been thoughtful about standardizing the data captured at each step in order to do able to do interesting things with AI/ML. These startups do the hard work of creating an integration layer, upon which they can build APIs to share the love.
Successful startups will allow the incumbents to improve the productivity of their staff and the capacity utilization of their assets. Operating on thin margins, the incumbents know that changing the cost equation is the way to survive. Startups that help incumbents improve their workflows can be a trojan horse strategy to break into the market.
Third phase: Disintermediation and reinvention
Only after the industry has built a digital infrastructure can we finally do away with brokers and other middlemen. Shippers and carriers would then be able to transact directly, seamlessly, and instantly.
Eliminating the overhead that brokers charge immediately gains 15–20%. By having full transparency and visibility into each step of the process, we — leveraging machine learning — can continue to improve and optimize.
Then, we can also truly pursue opportunities to build Expedia-style marketplaces.
If “Expedia of freight” sounds like the load boards that started emerging a decade ago, you are not wrong. A quick Google Search turns up a laundry list of names: uShip, Direct Freight, 123Loadboard, Free Freight Search, Get Loaded, Trulos, and more. These load boards wanted to solve the solve the capacity utilization problem for trucks, but they were too early. The infrastructure was not there. As a result, they have mainly attracted brokers, who would post their difficult-to-fill loads on there to see if truckers are willing to pick it up, but not before taking their share off the top. The process remains manual and inefficient.
The next generation of marketplaces to come along will be different. They will be built upon the infrastructure foundation of the startups that have come before. For the first time, they can realize the promise of instant pricing, one-click booking, instant re-routing, and much more. Only then will the logistics industry function in the way we have come to expect as consumers in the modern world.
So which phase are we in?
The journeys of startups in this space suggest that logistics will continue to evolve in this order. Some of the tech-enabled freight forwarders started as more software players, but realized that they need to be more vertically integrated and so proceeded to build a full brokerage. Now, some startups that started as freight brokers are realizing that they can leverage the valuable technology they are building to become the more software-based infrastructural layer.
Which phase are we in? The answer is nuanced. The shipping and logistics market is so vast that different segments of the market are at different phases, so it is important to understand the reality in detail as it applies to the problem you’re tackling.
It is fascinating to watch a huge industry modernize and evolve. If you’re working on something exciting in this space, drop me a line first at chang@upfront.com.
This is the third 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
*Thank you to Santosh Sankar at Dynamo, an early stage fund and accelerator for logistics startups, as well as Eric Gilmore at Turvo, a real-time collaborative logistics platform, for helping me shape this thesis.
