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$87.8B in Supply Chain Investments Captures VC Attention

One sector that venture capitalists believe is ripe for change and disruption is supply chain logistics, where much of the trucking and freight sectors still relies on offline legacy processes such as manual booking and paper records.

According to a study co-sponsored by the American Global Logistics (AGL) and Logistics Trends & Insights on “Supply Chain Technology Investment Outlook” from November 2018, overall supply chain investments are projected to reach $87.8 billion by 2022. AGL estimated that volume using key data points from a June 2018 study on the “Annual State of Logistics Report” from the Council of Supply Chain Management Professionals. The study was produced by consulting firm A.T. Kearney and presented by Penske Logistics.

Companies know that technology is the fuel to improve supply chain know-how. And with tech entrepreneurs looking at where they can disrupt, it’s only natural that VCs follow suit.

There’s a lot of dry powder available for investment, and some venture capitalists see tech-enabled solutions as the next frontier. If they make the right bets, the potential return could be huge. There are benefits to the entrepreneurs too. An investment by a VC in a SaaS (software-as-a-service) start-up can translate to a valuation that’s up to 15 times revenues, and those numbers can help garner attention for future funding rounds.

According to a blog post from Simon-Kucher & Partners titled “Logistics Startups are Booming” from March 2018, the logistics and transportation industry is a trillion-dollar business, and one that could benefit from digitization or automation. That’s a point that hasn’t gone unnoticed by venture capitalists. Simon-Kucher cited equity funding in the U.S. in four areas: on the B2B side, domestic delivery marketplace, freight forwarding and robotics, and companies that focus on B2C in the domestic delivery sector.

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The lifecycle of a start-up for VC investments is similar to that in other sectors, such as retail and consumer brands. A new start-up garners smaller angel and seed investments, while those that have been around longer tend to find more equity support for larger rounds.

In the domestic delivery space, Seattle-based Convoy works with shippers on the B2B side to find the best trucking option. Technology via software allows it to create smarter routes–think reduction in carbon footprints–as well as efficiently batch shipments. In July 2017, it raised $62 million in a Series B round, and followed that with a Series C raise of $185 million in September 2018. The raise was led by late-stage VC firm CapitalG, the investment arm of Alphabet, Google’s parent. It’s the Series C raise that gives four-year-old Convoy a valuation of more than $1 billion, and unicorn status to denote the rarity of successful ventures.

Even bigger is Flexport, a freight forwarder that relies on software to help companies transport goods by ocean and air via online booking. The company in February disclosed a $1 billion round led by an affiliate of SoftBank, an amount that values the company at north of $3 billion.

Given that the sector uses antiquated processes, there shouldn’t be any surprise that it’s also ripe for new competitors to enter the space. A London start-up, Zencargo, is building out a platform that relies on software to move cargo globally. The company last week said it completed a Series A raise of $19 million.

Movement of goods on the supply chain side isn’t limited to just transportation by water or air. For example, Fetch Robotics is helping to automate warehouses. Essentially, robotics “precision pack” orders using wireless communication to move product through grids placed on the floor. Fetch raised $25 million in a Series B round, led by Sway Ventures in December 2017. And on Monday, warehouse automation firm Locus Robotics said it just raised $26 million in a Series C round.

The idea of using robotics in warehouses isn’t new. Amazon back in 2012 spent $775 million to acquire Kiva Systems, then a relatively unknown start-up. Kiva was backed by Bain Capital Ventures and Meakem Becker Venture Capital. As the technology has evolved, the use of robotics and drones also is helping with last-mile delivery. In Asia, online marketplace has been using drones to make deliveries in China. This year saw it begin testing drone delivery in Indonesia.

While there’s been keen interest in the logistics sector by venture capitalists–more than $2 billion and growing–what isn’t clear is how many actually understand what it is they are investing in. They are backing companies run by entrepreneurs who have an idea, but at the early stage there’s obviously no real assets and, perhaps, not much by way of revenues. And more importantly, no profits.

That hasn’t curtailed VC interest. In February, venture capital firm Menlo Ventures disclosed it raised a new $500 million investment fund aimed at Series B and C funding rounds to help start-ups grow into the big leagues. It plans investments of between $20 million to $40 million in companies that do volume of between $5 million to $10 million, with a concentration in sectors such as SaaS, marketplaces and Fintech.

For entrepreneurs, there are risks as well, one of which can result in a flame-out. One example is Shyp, an on-demand B2C shipping player that had a valuation of $250 million in 2015 after completing an equity raise of $50 million. But the company shut down in March 2018, supposedly because it couldn’t find a scalable business model. There’s talk that taking in all those dollars might have caused the company to face pressure from investors to grow, perhaps at a rate faster than it should have.

Much of the VC investment dollars are for firms still in the relatively early stages of their development cycle. And that makes it hard to predict which ones among the current crop will become the key players in the logistics space. And while the economy is relatively stable now, another risk is what happens to the investment cycle when a downturn strikes.