Commentary: In defense of the unicorns

Flexport’s $935 million series E this week raised eyebrows for a number of reasons: The rich $8 billion post-money valuation, or $7.065 million pre-money, meant that the digital freight forwarder was ultimately priced at 2.14 times its reported $3.3 billion 2021 revenue. 

The announcement provoked an incredulous reaction from transportation industry watchers, including legacy media and competing 3PLs. Just like after other big capital raises by FreightTech startups, we heard the usual objections: The valuation is too high; the founder came from outside the industry; the company has nothing special but is heavily marketed; they’re undercutting rates; FreightTech is in a financial bubble.

Journal of Commerce boss Peter Tirschwell dutifully recited this view in a 2019 LinkedIn post: “For the most part I’m unimpressed by the billions invested in freight startups. … [I]n many startups I fail to see a coherent business model or path to profitability; more frequently, it’s a whole lot of money being unprofitably invested in a founder’s quixotic quest for global domination of some niche market.”

The Tirschwell position, simply put, is that the well-meaning but naive partners at Goldman Sachs and Thoma Bravo are insufficiently focused on profits and have gotten hoodwinked by a bunch of freight brokers. After yelling at the kids to get off his lawn, Tirschwell admitted that “investment in certain areas is driving very interesting innovation.” One of those areas? APIs. Someone should make sure that he knows every FreightTech unicorn has APIs, in some cases extensive libraries with great documentation.

I thought Tirschwell was lagging when he wrote that, but — how should I put this? — since 2019, the situation has evolved. Even without the pandemic that upended supply chains and workforces, making data and automation more important than ever, FreightTech was growing up. As more capital poured into the space, the leading early startups matured into large businesses moving billions of dollars of freight for large, sophisticated customers.

It’s quite possible that the traditional objections need to be updated, that continued data — in the form of consecutive years of interest, valuation information, growth and unit economics — should change the minds of FreightTech bears and startup skeptics.

Zach Fredericks, product group manager at Loadsmart, wrote a Twitter thread on Tuesday with a more nuanced, historically informed take on FreighTech momentum. He started with a provocative analogy: “Supply chain tech in 2022 = fintech in 2010.”

As Fredericks pointed out, it makes sense that venture capital interest and technological innovation would flow upstream from financial payments providers to e-commerce retailers and then to the supply chain actors who serve them. In one sense — capital flows — fintech today is literally a look forward at FreightTech’s future, and in other senses — tech adoption, industry mindset, maturity of the startups — it’s a great, informative analogy for FreightTech’s future.

In that spirit, I’d like to make an argument in defense of the FreightTech unicorns, using the occasion of the Flexport round to take the temperature of the space’s cohort of leading companies. So what does the Flexport series E tell us?

First, the obvious: Perceived winners in FreightTech looking for private capital don’t appear to be suffering too many ill effects from the tech sell-off in the public markets, and indeed are attracting new blue-chip investors to the space. The Flexport round was led by legendary Silicon Valley venture capital firm Andreessen Horowitz. It’s not just SoftBank that’s plowing money into FreightTech unicorns these days: Kleiner Perkins invested in Stord, Greenbriar took a big stake in Uber Freight, and Thoma Bravo led project44’s last round.

There’s a lot of late-stage money taking close looks at FreightTech and deciding to write big checks. Project44 is pursuing a tried-and-true VC model where winners use capital as a moat, raising lots of money and snapping up potential competitors in new geographies and adjacent modes at accretive valuations. That’s worth noting in itself, but the durability of some of the highest valuations in the space also suggests that the tech-enabled logistics business model, not just enterprise SaaS, has started to prove itself out.

We’re a long way from the infancy of digital freight brokerage, for instance, when new entrants in the space noticeably struggled with unit economics. The winning formula, a combination of buying market share, automating matching and pricing, and offering technology to lock in customer relationships, took years to bear fruit, but it has. Operators have learned a lot about how to balance their technology spend and their exposure to the freight marketplace — at least to the extent necessary to look attractive to new money at high valuations. And that investment isn’t happening in a vacuum, because incumbent competitors are also heavily investing in new technology, sometimes building their own and sometimes engaging in strategic partnerships with startups. The widespread acceleration in technology investment we see across the transportation industry today was not by any means a foregone conclusion five years ago.

Now late-stage VC, growth equity and private equity have all underwritten unicorn-size logistics providers at valuations far higher than their incumbent competitors like C.H. Robinson, which is trading at a trough valuation of less than 14 times earnings.

Loadsmart, which raised $200 million from SoftBank at a $1.3 billion post-money valuation in November, was founded back in 2014. Ricardo Salgado now has experience and historical data to bring to investors when he wants to raise capital — the same goes for Convoy’s Dan Lewis and Uber Freight’s Lior Ron, not to mention Ryan Petersen at Flexport.

And it’s not as if unicorn valuations we’ve seen in FreightTech are being attached to speculative cryptocurrency casinos. These are sizable businesses in established, critical industries with formidable competitors. Late-stage diligence processes are more robust than seed-stage investing, which often involves VC associates calling people like me and asking if I think a startup is a good bet. The investors backing the current crop of FreightTech unicorns get access to years’ worth of audited financial data and know what they need to generate attractive returns at scale.

A healthy population of unicorns is good for early stage companies, too. Seed-stage investors have enjoyed big markups and good internal rates of return, even if they haven’t seen many exits. And with the emergence of every new unicorn, capital markets get further data about the size of the transportation market and what’s possible for FreightTech startups to achieve. Eventually, executives and technology and operational talent from early FreightTech startups will percolate through the ecosystem as investors, advisers and leaders.

In sum: Unicorns are good, actually. Their success means that optimistic bets on transportation and logistics getting better are paying off. We’re not in a bubble. The FreightTech winners are real companies executing a lot of business at high levels of service, and collectively have helped revolutionize the way supply chain operators think and work.

Source: https://www.freightwaves.com/news
Editor: John Paul Hampstead, Director, Passport Research