WeWork Or Not, Logistics Technology Can Work

“WeWork’s abrupt decision last month to delay an initial public offering… raises questions about the sustainability of the business models of so-called disruptors in the logistics space…”

Journal of Commerce, 10.10.2019

Not so fast.

WeWork’s valuation swing raised serious questions about how technology companies are financed. But comparing the two and writing off logistics disrupters is a major disservice to both tech companies as well as the companies that must compete in the current logistics environment.

Here’s why.

First, as an asset class, venture capital can and does (on average) work well, when done right.
Huge valuations and large capital investments can and do make sense in loss-making companies, provided they are commensurate with both the opportunities and discounted for risk.
Many of the world’s greatest companies, like JD.com, Google, Whatsapp, Facebook, Xiaomi, and Spotify, made losses and were supported by venture capital for years. After all, that’s the whole point of venture capital.

But first, a word on WeWork.

It’s cool to hate on WeWork. Today.

But before January 2019, when Softbank deferred a large WeWork investment and more so after its S1 was revealed in August 2019, WeWork was seemingly unstoppable.

A lot of people were (justifiably) apprehensive about the business model’s viability, but, for the most part, people – even industry insiders – were blown away by the company’s success. A massive 6,500 word Wired article in June 2018 dedicated only 5% of the article to naysayers. Meanwhile, the brand’s allure was enough to attract even large companies that had their own offices. Nearly 25% of all WeWork tenets at the time were enterprise organizations.

It was, as Neumann said, a movement.

Still, building an $8 billion dollar company isn’t trivial and WeWork clearly did do some things very right – like delivering value to customers, telling a great story , and fostering brand affiliation.  But the momentum came to a grinding halt when troublesome corporate governance and questionable capital efficiency were revealed.

However, conflating these problems with logistics tech as a whole doesn’t make sense.

But let’s talk technology.

To understand why logistics technology companies are viable, it’s important to understand how venture capital could ever see high returns when dealing with high valuations. It stems from three core areas:

1. Tech-Enabled Capital Efficiency
2. Aggregated Supply and Demand
3. Customer experiences

Tech-Enabled Capital Efficiency

Technology can scale profitability exponentially.

Put simply, if a widget company needs three employees to service 200 companies, widget expert costs increase with revenue. But with software, improved unit economics kick in enable indefinite scaling at practically fixed costs. Facebook is a great example. In early days, Facebook’s VC backing supported fixed costs, like R&D and salaries. However, today, just ~40% of sales support fixed costs. The rest is net profit that can grow as more ads are displayed or sales cost increase.

In other words, venture capital funding backed initial fixed costs that are now more than covered by revenue.

Aggregated Supply and Demand

Technology’s ability to scale is further amplified by platform businesses.

Companies like Uber and Alibaba aggregate massive supply and demand. These economies of scale are also partially available to vendors, which improves available supply and, in turn, attracts more buyers. For example, by selling on Amazon, a small business can now access over half of all US households, lowering sales and marketing costs while growing the market opportunity. Airbnb is an even more interesting example, enabling access to the entirely untapped resource of empty apartments. In this case, funding enables an initial customer land-grab, enabling long-term growth.

Vastly Improved User Experiences

Technology’s ability to provide an impeccable user experience is uncontested. There’s a frequent claim that “great customer experience” means a human on the phone. Yet Amazon strives to be the most customer-centric company in the world by building technology that mitigates the need for customers to speak to vendors. Here, VC backing can provide the necessary capital to develop and improve a customer experience that attracts customers at scale.

Unpacking Logistics Tech’s Opportunity.

In the US, logistics accounts for about 8% of the GDP. In developing countries, it’s close to double that. This creates a massive addressable market, ripe for change. Despite progress to date, most logistics-dependent business, forwarder, or carrier would admit to the potential for improvements.

So there’s a market…and there’s opportunity.

In the context of Freightos, the potential is anything from lacking transparency and speed in global freight rates to offline air cargo pricing. But the potential also exists in tracking (90% of the calls to a major cargo airline are “where are my goods”?), in last-mile efficiency, in fuel efficiency, warehouse optimization, and more.

As carriers increase direct to shipper sales, digital freight companies expand, and giants like Amazon double down on logistics, business models will evolve. This will create new ways to connect the amalgam of diverse players – shippers, forwarders, carriers, customs brokers, last-mile companies, manufacturers and government agencies.

Finally, the logistics market will expand.

Political events aside, the technical barriers to access logistics services have dropped dramatically. Historically, 97% of US importers were small or midsize businesses. With the new opportunities provided by technology companies like Alibaba, Amazon, and, yes, Freightos, there’s a ripe new market emerging.

The Bottom Line

WeWork’s valuation drop stemmed from a combination of internal governance issues as capital efficiency. For the most part, the business model wasn’t fundamentally new, the degree to which technology was driving incremental revenue was not significant. But that’s not the case with logistics tech, where, for the most part, real technology is being implemented to solve really big problems.
Sure, unrealistic valuations don’t help anyone. But while it raises eyebrows when an upstart gets tens or even hundreds of millions of dollars in capital investment, massive industries with huge technology potential is exactly the scenario venture capital is built for.

WeWork or not, logistics tech works.