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Massive inefficiencies combined with innovative technologies drive VC investments to record levels
Some 70 years ago, the trucking and shipping industries were revolutionized by a seemingly simple but radical idea: the shipping container, which was a standardized box that reduced loading and unloading expenses by 90 percent. Today, the industry is going through no less dramatic of a revolution, also driven by a box. Only this time the box is small and in the truck driver’s pocket.
Trucking generated $676.2 billion in 2016, or nearly 80 percent of the nation’s freight bill, according to the American Trucking Association Trucks also moved over 70 percent of all domestic freight tonnage. Much of this activity is driven by small fleets that lack sophisticated technology and is therefore still organized on pen and paper or spreadsheets. But advances in smartphones, machine learning, artificial intelligence, predictive analytics, big data and graphical UIs are transforming industries such as trucking and shipping as venture investments pour in.
Investments to hit $1 billion
Investors have increasingly taken notice of the trucking space in the past few years as deal activity has risen every year since 2013, according to data from CB Insights. Investments in the trucking space are on track to hit a record $1 billion in 2017, with nearly $600 million raised in the first half of this year compared to $742 million in all of 2016, up from $116 million in 2014.
This begs the question: what do investors find interesting about the transportation space and what opportunities do they see? While there’s a lot of press written about autonomous vehicles, many investors still see commercialization of those investments way out into the future, preferring instead to invest in the current state of the trucking industry.
For Alexander Niehenke, Partner at Scale Venture Partners, it’s the trucks themselves.
“I think the largest opportunity in the trucking industry is tied to their core asset: trucks,” said Niehenke.
“It’s crazy that the balance sheet line item of any truck operator or fleet has little to no technology managing, monitoring or optimizing that asset. It’s even crazier when you think that today every truck driver has a computer on board: a cellphone in their pocket.”
The lack of automation coupled with truck drivers having mobile phones led to ScaleVP’s investment in KeepTruckin, which helps trucking companies manage their fleets and their drivers legally log their hours.
Wesley Chan, Managing Director at Felicis Ventures, said his interest lies in the logistics and supply chain aspects, partially due to his experience at Google Ventures and one of the VC firms’ portfolio companies, Nest.
“Four or five years ago, around the holiday season, there was a shortage of Nest thermostats; they were sold out and Nest was trying to make them as fast as they could to get them in from China,” he explained. “But during their shipping process, the company didn’t have good visibility into where much of their product was after leaving the factory. I kept thinking then that the supply chain was so antiquated.”
This observation led to Felicis’ investment in Flexport, a freight forwarder and customs broker for air and ocean freight.
“In international logistics, Flexport is becoming a clear market leader because they have the technology advantage and a product no one else can build,” Chan asserted.
“They started out with mid-sized shippers that were selling video doorbells and toy cars, and those first customers started getting massive visibility into their supply chain, which led to cost reductions, more inventory and ultimately a competitive advantage over many of their larger companies doing business,” he said, pointing out that a similar company will emerge for the trucking industry.
“The question is how will that shape up in trucking? I think that still remains to be seen. That’s where the excitement is around all of this investment going to trucking, ‘Is there a Flexport in that area?’”
Job growth opportunities
Technology for trucking is emerging, either organically or inorganically. Some of the technology is an outgrowth of need, such as a better way to view the trucking supply chain. Other times it comes through government regulation, such as with the electronic logging device mandate, passed by the U.S. Congress in 2012, which forces all trucks to be outfitted with devices that track, manage, and share records of drivers’ on-duty hours. This mandate went into effect December 18, 2017.
The ELD mandate is not only a major opportunity for startups, said Ajay Agarwal, Managing Director at Bain Capital Ventures, but a game-changer for those driving the trucks.
“90 percent of the trucks today are run by small outfits while only 10 percent are larger carriers. Since Congress has mandated that every truck needs to have an electronic logging device, I think this mandate creates a tailwind driving every single operator to install technology of some kind that will make trucks trackable and visible,” said Agarwal. “This in turn will create enormous opportunities for labor. And this more dynamic labor environment may create opportunities for truck drivers to work part-time and work closer to home. This can increase the pool of available drivers, thereby ameliorating the current driver shortage.”
ScaleVP’s Niehenke has a similar view, but also believes that, as trucking becomes more high-tech, the industry will attract a more tech-savvy, entrepreneurial generation of truckers.
“I would postulate that one of the things that we could see is that as more technology gets brought into the cab of the truck - more connectivity, more software, and more systems, it could create freedom for a next generation of truck drivers to enter the industry,” he said.
“Right now the reason that we have a labor shortage in the trucking industry isn’t because there’s a lack of people; it’s because it’s a really shitty, tough job and you don’t get paid well so most people just exit it,” noted Niehenke. “We’ve artificially created the labor shortage by not paying drivers properly for the difficulty of the job. As technology evolves, it will help drivers and small truck operators be more profitable because they can access better routes, find better customers and run more efficiently.”
The Amazon effect
As with many other industries, trucking is being disrupted by Amazon and it would be hard to overstate just how big of an impact the company has had on the space.
Not only has Amazon changed forever consumer expectations around their deliveries (remember when you had to wait more than a day to get your stuff?) but it’s also looking to reshape the industry directly: last month, it launched an app called Relay, designed to help automate truck delivery by allowing drivers to pick up and drop off packages faster.
“Amazon is really behind a lot of the pressures and desire by other retailers to drive towards getting stuff to show up within a two-hour window since they’ve reset consumer expectations to order something and have it show up the next day,” said Bain Capital’s Agarwal. “People are calling that the ‘Amazon effect’ because Amazon pioneered the idea of visibility, speed, and velocity around the supply chain. Now everyone realizes they’ve got to run their business the same way Amazon does if they want to compete.”
To reiterate this point, Felicis Ventures’ Chan relayed a story about being at a CEO summit with a group of retailers, most of them brick-and-mortar retailers. The biggest worry in the room was how to compete with Amazon in AI, visibility and supply chain, compelling many of them to embrace technologies they otherwise may have dismissed, including working with startups that could help them upgrade outdated systems.
“Amazon is forcing retailers to embrace technology in a way I’ve never seen before, where they’re open now to switching and working with startups and saying, ‘These antiquated systems we’re using from the 80s are no longer appropriate for us,’” Chan explained. “In venture investing, timing is everything. I hear the pleas now to bring in something that can help these retailers compete against this behemoth because the system integrators -- IBMs and the Deloittes of the world -- are used to building these old systems but now can’t keep up or offer any competitive advantage.”
While Amazon is, and likely always will be, a threat to existing industries, it also seems to be serving as a catalyst for trucking to finally get itself into the 21st century.
Trucking is going digital and that’s a good thing
While technology will have dramatic long-term impacts on the providers in the industry - including brokers that arrange transportation, carriers that own trucks and drivers that drive them - it is the customers of the industry that will be the first to feel the positive effects.
Believe it or not, the current process to book a majority of truck freight today involves calling one of the 12,000 freight brokers in the US, who in turn call around to truck carriers to locate an available truck. Clearly such a manual search does not result in optimizing the industry’s capacity, nor is there any uniform technology across the hundreds of thousands of small fleets to give the shipper Amazon-like visibility into the status of their shipment.
It is here that digital freight marketplaces, such as my company, FR8Star.com in flatbed shipping and Uber Freight and Convoy in dry van shipping are riding the growing digital wave to change the game for shippers. By leveraging the data now available from connected trucks and drivers, using mobile apps for tracking and cloud-based marketplaces to connect shipper and carrier, these platforms cut out the inefficient and opaque broker from the transaction to increase efficiency, lower cost and improve transparency for truck shipments. Shippers get the Amazon experience in booking and tracking a truck while carriers run their business more efficiently and give up less profit to middlemen.
In short, there still exist massive inefficiencies across the industry -- whether it’s shippers lacking visibility into their supply chains or logistics providers lacking the ability to manage loads across the highly-fragmented carrier base -- the opportunities today are ripe for the picking. If the simplistic invention of the one-sized container dramatically cut overall costs and enabled more goods to be shipped, imagine what real-time digital transparency and optimization will do.
It’s no wonder venture capitalists are paying more attention than ever before.
Editor's note: Steve Loeb and Bambi Francisco Roizen contributed to this piece.
(Image source: themerkle.com)
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Scale Venture Partners chooses markets for investment based on our insights into trends drawn from primary research with incumbents, customers, competitors and our network of experts. We select companies we think are going after something great.
Our investment strategy makes "scale" relevant to you for two reasons. We operate in markets where you can create large scale success. We work side by side with you to help scale your business to reach its market potential.
Most of our investments are mid to late stage, when the software is being used, the chip is in the fab, and the therapy is being tested on humans. It may still feel early to you. You may be just starting to build out your go-to-market team. It's at this stage that our own practical operating experience drives the best rewards.
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