FreightTech investment now that the cheap money is gone

On Jun 17, 2022

The tug of war between bear and bull markets is a natural force that elegantly showcases how contrary economic forces actually complement each other over time.

The past few years brought a global health crisis that left economic engines sputtering, including one of the most important — global supply chains.

However, as quickly as closures happened for health and safety reasons, a competing force surfaced. Locked down consumers pushed demand for goods — often purchased through e-commerce pathways — to new heights, creating a bullwhip of global shipping volume supported by supply chains operating with outmoded technology.

The result was clogged ports and shipping delays that stretched into weeks or even months.

Supply chains’ lack of investment in technology had been laid bare to consumers — and venture capital (VC) began to take notice.

Cheap money, please!

The shove that got that VC ball moving, including general consumer spending, came in early March 2020, when the Federal Reserve cut interest rates down to near zero and set up about $700 billion in quantitative easing programs until it could be “confident the economy has weathered recent events and is on track to achieve our maximum employment and price stability,” according to Fed Chairman Jerome Powell.

Five-year trends for the effective federal funds rate. (Photo: SONAR: FEDFUND.USA)
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In layman’s terms, the government’s monetary policy made borrowing money extremely cheap. Those low interest rates also drove the yield on government bonds to record lows, which meant that capital had to move into riskier assets to generate a return. That’s part of the reason why valuations of unprofitable tech companies soared, and more money flowed into asset classes like venture capital and cryptocurrencies.

This was the giant dead fish in the water that got VC sharks hungrier than most had ever had the chance to be.

Stimulated, locked down consumers were purchasing more online than ever before, yet the supply chains and FreightTech used to bring those goods to our doorsteps were decades behind — giant dead fish No. 2 for VC.

The sharks attacked — fast.

According to Pitchbook, in Q4 2020 North American and European FreightTech companies raised $4.1 billion from VC, up 20.8% quarter over quarter and 48.6% year over year, with much of that focused on getting goods to consumers’ doorsteps through middle- and last-mile technologies.

In 2020 alone, VC injected $12.6 billion into FreightTech startups in 555 deals in North America and Europe. Big deals in that first year included Nuro raising $500 million in a series C led by T. Rowe Price and Uber Freight’s $500 million series A led by Greenbriar Equity Group that would eventually fuel Uber Freight’s purchase of Transplace.

Valuations crept up that year as well, with early stage startups increasing their pre-money valuations by 3.4% year over year to $30 million and late-stage valuations rising to an average $105.6 million, a 4.3% year-over-year increase.

Just as Powell promised, the Fed made little to no movement on interest rates, keeping VC’s appetite rolling into 2021.

In an interview with FreightWaves, Ryan Schreiber, vice president of growth and industry for supply chain industry consultant Metafora, explained the scorching market for FreightTech companies at the time.

“One founder described it to me as saying in early ’21, if you had any revenue, you could raise and at a valuation you preferred,” Schreiber said.

Interviews with FreightTech leaders revealed they felt that way. Many described the fundraising process as “hard to avoid” at that time.

While Q4 2021 deals were up again 7.9% year over year, what was more astounding were valuations. Pre-money valuations for angel and seed FreightTech startups rose 44% year over year, averaging $9 million, early stage pre-money valuations averaged a 28.4% increase to $30 million and shockingly late-stage valuations increased 95.3%, averaging about $120 million.

These big numbers also led to perfect exit strategies for investors who had the opportunity.

… and then came the yang

If the nature of economics is to correct itself, that holds true during pandemics as well.

Most consumers entered 2022 vaccinated and ready to get back to pre-pandemic normalcy. This meant a change in buying habits from goods delivered to their front door to services and travel, drastically affecting shipment volume and turning freight pricing power back to shippers.

The less delightful side of the bullwhip effect became noticeable as large retailers showcased historically high levels of inventory, indicating even greater levels of safety stock being held by their raw material suppliers.

The Ukraine-Russia conflict demonstrated the true impact of the U.S. loss of crude refining, as diesel prices began to hit all-time highs in early spring.

As predicted, these natural economic reactions led the Fed to increase rates in early spring.

Then on Wednesday, the Federal Open Market Committee raised short-term rates 0.75% with short-term borrowing costs now ranging between 1.50% and 1.75%. That’s the largest move the Fed has made since 1994. It even went on to project a rise to 3.4% by year-end as a way to halt economic activity, increase unemployment and hopefully avoid a long-term recessionary period.

This economic sentiment reversal is already evident in VC. The total value of FreightTech deals in Q1 2022 declined 3.6% quarter-over-quarter and 20.4% year over year, with startups raising only $14 billion. Valuations for angel and seed and other early stage deals lightly rose quarter over quarter, while late-stage deals declined. Acquisitions accounted for over 75% of all exits compared to past years that saw a number of IPO listings.

What this means for VC investment in 2022

Schreiber had heard these themes in conversations. One founder said, “You’ve got to have a $1.5 million annual recurring revenue, and you are going to be grateful to get any valuation.”

This is not new for investors, as many of the big names that have raised hundreds of millions of dollars in capital are already exhibiting startup survival behavior through layoffs.

“There has long been this concept that you have to spend the money you raise in a certain timeline. That has changed and you are seeing it in the layoffs,” Schreiber said. “There is more of a focus on the runway. Keep the runway longer to weather the storm. It’s not that any of these companies are making layoffs because they have performed poorly, although perhaps some have. It’s that they need to make sure they are being cash conscious.

“If they are a later-stage company, dilution is going to be a major issue in any future raise. If they are early stage, it is going to be difficult to get a valuation on top of which they can build a successful funding future.”

In regard to the large rise in exits through acquisition, that true need for cash is apparent.

“In these times, cash is king,” Schreiber said. “There are a lot of companies sitting on a lot of cash they have accumulated over the last couple years, and the companies they are targeting need cash.”

Fortunately for FreightTech startups, supply chain disruption as a whole is still fueling investment. According to a McKinsey survey, 77% of senior supply chain executives said their company planned to prioritize investments in supply chain visibility. That coupled with e-commerce sales that Statista expects to grow by 50% over the next four years means there is still a spotlight on supply chain investment.

“There is still a strong demand for supply chain services and technology. … The ebbs and flows of capacity and the rate environment is really what drives most of this space so we can flourish while others flounder,” said Schreiber.

As a consultant to large supply chain companies such as FedEx, J.B. Hunt, Leonard’s Express, NTG, Redwood Logistics, Transportation Insight and Werner Enterprises, Schreiber did offer advice to those thinking about taking investments at this time.

“During these times, many companies end up chasing their tails versus selling the value of their product. So if you have the flexibility on the balance sheet and strong leadership, executing and completing your vision is going to be even more important so you are not burning your runway chasing customers who don’t actually know what they want,” he said.

Meanwhile, his thoughts on raising capital in the current environment are provocative and direct.

“It is undeniable that valuations will go down, at least for a short time,” Schreiber said. “As a result, the biggest advice I would give people is stop giving away your company for no f—— reason. Know why you are chasing capital. The hard part about getting on the hampster wheel of fundraising is you have to stay on it. If you need money, take it, but make sure you have a really solid plan on how you’re going to use it.”