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Industry Study

Updates – Industry Study: Ocean Freight Shipping (#Startups)

June 20, 2017 by Brian Laung Aoaeh

Note: This article does not necessarily reflect the opinion of KEC Ventures, or of other members of the KEC Ventures team.

Supplying the world with nearly everything is an enormous and complex job: there are things to discuss. 

– Rose George (2013-08-13). Ninety Percent of Everything: Inside Shipping, the Invisible Industry That Puts Clothes on Your Back, Gas in Your Car, and Food on Your Plate (p. 142). Henry Holt and Co.. Kindle Edition.

Our blog post about startups building software products for the shipping industry generated more interest than I anticipated. Unfortunately, some readers got the impression that we intended to focus more on containerships than on the bulk shipping segment of the industry. That was not our intention, and so I promised I’d spend more time digging into the bulk carrier portion of the market when I published an update.

This blog post will not make any sense if you have not already read Industry Study: Ocean Freight Shipping (#Startups) – which I co-authored with John Azubuike. Also, reading this post or the preceding one will be a waste of time if you do not have a strong interest in shipping, AND in early-stage technology startups building products for the shipping industry.

KEC Ventures is an institutional seed-stage venture capital fund based in New York. We invest between $500,000 and $1,000,000 in seed-stage startups building software products. We have been doing this since 2011. ((For logistical reasons, we are currently focused on investing in startups based in the United States and Canada.))

Together with our new teammate Dylan Reid, John and I have a strong interest in supply chain and logistics startups. We think of shipping and trucking as essential components of that landscape, and so we seek founders building startups in that market. We are also eager to connect with industry insiders with whom we can start building a relationship and hopefully collaborate in the future.

You can reach us at;

  • brian@kecventures.com (@brianlaungaoaeh), or
  • johna@kecventures.com (@jnazubuike).

With those preambles out of the way; on with the show.

What is the relative size of the Bulk Shipping market?

The following chart shows the distribution of commodities traded by sea. It is based on data from The Tramp Shipping Market, a March 2015 update to an earlier report for the European Community Shipowner’s Association prepared by Clarkson Research Services. It is pretty self explanatory; By gross tonnage energy is 38%, metals is 25%, container cargoes 15%, other industrials 12%, and agricultural goods account for 10% of all goods traded by sea. ((Tramp shipping is a combination of the traditional bulk shipping segment with the specialist shipping segment of the market. So in this case one could argue that bulk shipping accounts for 85% of the market.))

For underlying data see; The Tramp Shipping Market, March 2015, Clarkson Research Services

The next chart is based on data from the same report. This time it shows the distribution of investment capital in the freight shipping market. It is pretty self explanatory; Tankers account for 27%, bulk carriers 37%, gas 12%,  and containerships 24%.

For underlying data see; The Tramp Shipping Market, March 2015, Clarkson Research Services

Additionally, Europe accounts for 36% of gross tonnage in the shipping market and 40% of global investment capital into shipping.

This data appears to confirm a comment we heard from several founders building software for the bulk shipping segment; I am paraphrasing – Investors and the public seem to only be interested in containerships but the bulk shipping market is a significantly bigger portion of the market. ((For the purposes of this post it does not make much sense to segment the bulk shipping market more finely, but it is worth noting that liquid bulk and dry bulk differ in some important ways.))

However, the authors of The Tramp Shipping Market point out that in terms of value of goods transported containerships account for nearly 50% of the market. There is no contradiction; bulk ships mostly carry raw commodities that are required inputs for finished goods that consumers and businesses then buy at a significant markup to the total cost of all the input goods, materials, and labor. It makes sense that people know more about the ships that bring their smartphones, sneakers, jeans, and coffee than they do about the ships that transport the cobalt that is in their smartphones and the raw cotton that is used to make their jeans.

What are the biggest opportunities for startups?

This is an interesting question because the answer depends quite a bit on the perspective of the person answering the question. I attended the Connecticut Maritime Association’s Shipping 2017  in Stamford, CT and I was surprised by the number of software vendors offering products for gathering, analyzing, and interpreting data. It makes sense that there’s a large appetite for data; shiping is a complex process that functions effectively based on coordination between many different parties.

Among the startups John and I studied between September 2016 and February 2017 while we were learning about the shipping industry we observed the following themes;

  1. Many startups are building platforms to connect people who need shipping services with parties that can provide the service, or to enable various counterparties in the industry to collaborate with one another on some issue. So far many of those have operated in the containership segment of the market. However, a couple have started to build platforms, often marketplaces, specifically for the bulk shipping market. Shipamax and VesselBot are two examples of startups that are building specifically for the bulk shipping market. ((This is not necessarily a completely new business model in the shipping industry since shipping portals like INNTRA, CargoSmart, and GT Nexus have existed for more than a decade.))
  2. Other startups are building software platforms for gathering, analyzing, and interpreting data for the shipping industry and industries that depend on data related to shipping. Startups in this category which sell primarily to ship operators generally build products that bundle a hardware device with software – no different from the sorts of products that vendors at the CMA’s Shipping2017 Conference were publicizing. In fact a couple of the vendors at the conference were hyping new cloud-enabled versions of their products. I left the conference with concerns about how a startup would differentiate itself from these incumbents. In my opinion Windward seems to be the startup best placed to displace existing incumbents, however it does not appear that Windward is focused on bulk shipping only. Nautilus Labs solves the same problem problem, but is much younger than Windward. ((Nautilus and Windward do quite different things, but both fall within this broad category.))
  3. One product that it appears the industry would gravitate towards is a system of record that connects all participants in the supply-chain, from end-to-end. This would be a platform into which various shipping industry data could be input, and other data can be obtained as outputs . . . Probably most input data would come from other platforms and data repositories, while output data would be fed to different counterparties based on their access rights and information requirements. It seems to me to be a problem suited for a cryptographically-secure, lightweight, multi-tenant, cloud-based ledger or database of some sort that can also provide anonymity for market participants who wish to maintain some level of secrecy from other counterparties with whom they interact through the platform. One can imagine that governments around the world, for example, would want special access rights in order to keep tabs on the movement of goods and people from one place to another. ((Another example, a company like Cargill might want to protect data about how much of a given commodity it is buying from its competitors although it might be willing to provide its own data as an input in exchange an output sith summary statistics related to its industry and the markets in which it does business.))

You can find other ideas about what the future of shipping might look like here; Cargo Drones and Data Swarms: Experts Weigh In on Digital Transformation in Shipping & Maritime, which was published in KNect365 Maritime in March 2017.

What threats does a technology startup face in selling its products to customers in the bulk shipping industry?

While we were studying the freight trucking market and startups building software for that market we came across Debra T. Johnson’s concept of “invisible barriers to innovation” . . . It appears to me that the issues she described might be even more acute in the shipping industry. There are sales barriers, product barriers, and customer barriers which make it considerably more difficult for startups to gain traction in the shipping market than in other markets that startups typically pursue. For this reason one of the things I look for on a team of startup founders building products for so-called legacy industries is that at least one member of the team has deep industry expertise and has a network that will make it considerably less difficult to overcome the invisible barriers that the startup might face as it attempts to find product-market-fit.

Another issue that makes shipping in general different from other industries with which startup founders might be more familiar – in the shipping industry the unit of competition is the individual ship . . . We discussed this in our original post on shipping. Each ship is operated as if it were an independent organization onto itself – which is true in many respects. I do not know how this affects which sales strategies are most effective for vendors selling tech products to shipping companies. I’m working on figuring that out, but one thing I can say is that the startups that can solve that puzzle comprehensively have a better chance of winning market-share over their peers who do not have an understanding of that phenomenon.

But, all is not lost. There is hope; Demographics.

Shipping is one of the handful of industries globally that approaches the theoretical model of perfect competition that students of microeconomics study in college. That means that profits margins are consistently being squeezed, that the threat of new entrants is consistently high, and that intra-industry competition is acute. However, a new generation of executives is entering the industry. These executives are tech savvy and have gained experience in other industries and now want to try new approaches to running shipping companies in ways that they expect will increase their market-share and improve their profit margins.

I will describe one example.

Mark Hassell and I were colleagues at UBS in Stamford, CT for a short while. He spent slightly more than a decade at UBS Investment Bank where he traded exotic derivative products. After leaving UBS he spent some time working at a couple of startups in San Francisco.

Mark’s family has been in the shipping business in Barbados for several generations. Eric Hassell & Son Ltd. is a family-owned group of companies all focused on shipping and logistics with clients that represent containerships, bulk shippers, NVOCCs, research vessels, specialist shippers, and cruise ships. Mark decided to head back to Barbados in early 2016 after he learned of all the opportunities his cousin, who is presently CEO of the company, felt Eric Hassell & Son Ltd could pursue if she had some more help at the executive management level within the company.

Mark now runs strategy, business development, and corporate development at Eric Hassell & Son Ltd. When we spoke about the shipping industry in March, about a month after we published our article, he said the company had grown revenues by about 20% in 2016 – a significant jump over their performance in 2015. He feels they can repeat, or perhaps improve on that performance in 2017. He is eagerly searching for solutions that will enable EHS to reduce operating costs and grow market-share and revenues at a double digit rate for the foreseeable future.

Business is fascinating right now. The local Barbados economy is on its last legs before some IMF-style austerity measures get implemented so I’m in the process right now of thinking about diversification, while still protecting our core business from increasing competition. I’ve been traveling quite a bit regionally – a lot of fact finding and conferences. I’m finding much more insights in face-to-face conversations than via reports and emails.

– Mark Hassell, via email, June 19, 2017 ((Mark’s comment drives home the fact that the shipping industry’s economic fortunes are very much tied to global business and economic cycles.))

In shipping, and also in trucking – and I have observed the phenomenon in construction too, there’s a generational change taking place. Younger family members like Mark are taking over executive management responsibilities from an older, less tech savvy generation. This new cohort of executives have seen the competitive edge that technology can confer on companies that have ambitions of breaking into the upper echelons of their industry, AND, they have the skill and know-how to deploy technology effectively . . . If I were a startup founder, these are the executives I would be approaching and building relationships with from the outset. Often, these executives do not yet run the businesses that their families own, but they play influential roles in determining what path those businesses will follow in the future . . . and it is often a technology-enabled path.

Lest you think the phenomenon I have described above is restricted only to family-owned companies, INNTRA is undergoing a similar shift in management as well as strategy – according to Greg White, INNTRA’s global head of strategy and business development. What does INNTRA do? INNTRA describes itself as the largest neutral electronic transaction platform and, software and information provider at the center of the ocean shipping industry. It began life as a division within A.P. Moller-Maersk Group, the largest ship operator in the world.

To close this update, I will end with some issues that John and I have encountered as we have spoken with startup founders and shipping industry insiders about the industry; ((We would love to speak with you if you have a perspective on any one of these issues as it relates specifically to shipping. They are issues we expect to be thinking about for a long time.))

  1. Can technology completely replace human intervention in shipping, can a technology platform solve the trust issue in shipping? ((Complaints that brokers add no value are common.))
    • Jenna Brown at Shipamax, Mark Halsell, and Constantine Komodromos at VesselBot think the answer is “no”. They argue that rather than being eliminated completely, as software platforms become more reliable and sophisticated, human intervention will shift from routine but time-consuming tasks to complex issues that require more nuanced judgement and to which there is no straight-forward answer because of the associated trade-offs that have to be made. ((This debate is one that is ongoing in the trucking market too. There are many startup founders who say they expect to cut brokers out of the picture altogether. I think the reality is more likely to resemble what Mark, Jenna, and Constantine predict.))
  2. This is one of those industries in which relationships matter, and so in order to gain early traction and achieve product-market-fit startup founding teams need to;
    • Know the industry and its segments,
    • Be known to, and gain the trust of industry insiders, and
    • Understand the nuances of the industry’s relationship to technology and software.
  3. Efficient scale could be a challenge for startups selling products to customers in the ocean shipping industry. Investors should invest time understanding how startup founders intend to overcome that obstacle, if it exists.
  4. Maritime law is complicated, and can be opaque for people who are unfamiliar with its peculiarities. This is a point that was raised as a concern by Michael Rainsford, a former derivatives trader at Morgan Stanley who now advises a number of startups in shipping, trucking, and derivatives. It is unclear how the peculiarities of maritime law will affect software startups that do business with ocean shipping companies.
  5. Fuel efficiency is a big problem for the global shipping industry, but not enough people are talking about it. This is a point of view expressed by Ted Shergalis – a co-founder, and the chief operations officer at Magnuss.  Magnuss adapts wind-powered propulsion technology whose underlying principles were first discovered by the German physicist, Gustav Magnus in 1853. Magnuss marries its hardware with software to generate fuel savings of up to 50% – according to the founders. This is a big deal in the bulk shipping market since fuel costs represent 60% – 70% of operating costs – according to Magnuss founders. ((I have not been able to find data on operating expenses in the shipping industry comparable to what I found for the trucking industry.))
    • Coincidentally, a few days after my conversation with Ted, Maersk, Norsepower, and Energy Technologies Institute (ETI) announced that they would be trialing a version of the technology that Magnuss is building.
    • A version of the hardware component of this system was tested by the German engineer, Anton Flettner, in the early 1920’s but failed to gain commercial traction because of the economic conditions at the time.
    • One gets a sense that this will become more pressing an issue for the industry on the basis of this announcement from the International Maritime Organization’s Marine Environment Protection Committee’s 70th Session which was held from 24 – 28 October 2016. Basically, there are new regulations to reduce Nitrogen Oxides, Sulphur Oxides, and Carbon Dioxide emissions by the industry starting as early as 2020.
  6. One danger that startups building technology for the shipping industry can encounter is the problem of investors who do not understand the nuances of the shipping industry, and so might try to persuade early-stage startup founders to adopt strategies and tactics that the venture capitalists have seen work in markets that are more traditional hunting grounds for early-stage investors. These strategies may very well work when the startup is much more mature, but they can backfire if they are adopted too early. This is an observation that was expressed by Bill Dobie, a technologist who has been building software for the shipping industry since 2000. John and I heard comments along a similar vein when we studied startups building software for the trucking industry.
  7. I expect that we will see more specialized accelerators like Port XL emerge to support founders building startups that are regionally-focused – say, for example, a competitor to Flexport that is primarily focused on serving a customer base in Asia, the Middle East, Australia and New Zealand.

With an estimated $4.5 trillion-plus in capital required to finance transportation assets over the next 10 years, this is a large-scale and wide-ranging investment opportunity.

– Anton Pil, Managing Partner, JP Morgan Asset Management. ((See; JP Morgan Asset Management secures $480m for new shipping fund, Sam Chambers, Splash 24/7. Accessed on June 20, 2017.))

Ocean shipping is an enormous industry . . . By one guess the opportunities in the industry are large enough to support 10 billion-dollar-plus startups. I’m assuming that Flexport has one of those spots firmly in its grip. Perhaps Windward has a strong claim to another. That leaves 8 or 9 opportunities to create a billion-dollar-plus startup focused on ocean shipping.

We are eager to find and invest in as many of them as possible. We’d love to talk to you if you are based in North America and believe you are working on an idea that has the potential to transform the shipping industry to enable it to meet the challenges our world will encounter over the next 50 – 100 years. Even if you are not based in North America, but happen to visit New York sometime in the future we’d be happy to meet for coffee and hear about your experience, if you have some free time and want to chat.

You can reach us at;

  • brian@kecventures.com (@brianlaungaoaeh),
  • johna@kecventures.com (@jnazubuike), and
  • dylan@kecventures.com (@dreidco).

Update: June 20, 2017 at 17:13 to change “Vesselbot” to “VesselBot” based on email from Constantine.

Update: June 20, 2017 at 17:30 to include quote from article about JP Morgan Asset Management’s new shipping fund.

Update: June 20, 2017 at 17:50 based on call with Jenna Brown at Shipamax.

Update: June 20, 2017 at 18:20 based on email from Jenna Brown re: marketplaces vs. platforms and Windward vs. Nautilus. Added footnotes.

Update: June 21, 2017 at 09:45 based on corrections from John Azubuike.

Update: June 21, 2017 at 12:15 to include link to MEPC70 announcement about IMO regs on low SOx, NOx, and CO2 emissions.

Update: June 22, 2017 at 09:20 based on June 21, 2017 email from Mark Hassell re: EHS corrections.

Filed Under: Entrepreneurship, Industry Study, Innovation, Long Read, Market Study, Startups, Technology, Venture Capital Tagged With: Early Stage Startups, Industry Study, Logistics and Supply Chain, Market Study, Ocean Freight Shipping, Venture Capital

Industry Study: Ocean Freight Shipping (#Startups)

February 8, 2017 by Brian Laung Aoaeh

Ocean Freight Cargo Ship
Ocean Freight Cargo Ship | Image Credit: Pixabay

Co-author: John Azubuike (@jnazubuike), KEC Ventures.

Note: This article does not necessarily reflect the opinion of KEC Ventures, or of other members of the KEC Ventures team.

Supplying the world with nearly everything is an enormous and complex job: there are things to discuss. 

– Rose George (2013-08-13). Ninety Percent of Everything: Inside Shipping, the Invisible Industry That Puts Clothes on Your Back, Gas in Your Car, and Food on Your Plate (p. 142). Henry Holt and Co.. Kindle Edition.

Introduction

Although it is largely hidden from the day-to-day experience of most people, maritime shipping is central to the modern system of international trade and the way our world operates.

According to the International Chamber of Shipping, the international maritime shipping industry transports about 90% of all physical goods traded internationally. To give that some further definition, the World Trade Organization estimates that, in 2014, its members collectively exported merchandise worth $18 trillion.

The U.S. Census Bureau estimates that in 2015 seaborne trade in the United States amounted to $1.56 trillion, with imports accounting for about 67 percent of that total.

Despite its size and importance, the ocean freight shipping industry has remained largely untouched by the kind of transformation that software technology has imposed on other markets. That is beginning to change as a number of startups attempt to build products to serve that market. This post represents our attempt to understand the landscape within which such startups operate.

In the rest of this discussion, we will refer to “startups” as distinct from “companies”. To ensure we are on the same page;

  • A startup is a temporary organization built to search for the solution to a problem, and in the process to find a repeatable, scalable and profitable business model that is designed for incredibly fast growth. The defining characteristic of a startup is that of experimentation – in order to have a chance of survival every startup has to be good at performing the experiments that are necessary for the discovery of a successful business model. ((I settled on this definition after reading the work of Steve Blank and Paul Graham.))
  • A company is what a startup becomes once it has successfully navigated the discovery phase of its lifecycle. This is the phase during which relatively fixed organizational structures start being built in order to facilitate the firm’s work on behalf of its customers, employees, shareholders, business partners, and society.

KEC Ventures invests in early stage startups. Therefore our primary purpose in studying the ocean freight shipping market is to gain adequate context for the instances when we might assess pre-Series A startups trying to solve problems in this market. We have not yet made an investment in any of the startups in this market.

In the rest of this post we will attempt to;

  • Describe the ocean freight shipping market,
  • Discuss its market structure,
  • Describe the economics of operating within the market,
  • Describe and discuss the opportunities that startups are pursuing, and finally we
  • Discuss some threats such startups might encounter.

Writing this post is primarily an exercise in learning more about the ocean freight shipping market in order to be better equipped for the conversations we are currently having, and conversations we may have in the future, with startups building products for this market. If we have missed anything please let us know – we lack the expertise and knowledge of industry insiders, but we are willing to invest time in learning. If you are building a seed-stage startup in this market we would love to hear from you. If there are startups in this market we have not heard of yet, we would love to know that too. You can leave a comment in the comments section below, or you can email us directly;

  • Brian – brian@kecventures.com, or
  • John – johna@kecventures.com.

Lastly, we should point out that how we think about the market may not line up precisely with how industry insiders think about it. However, our purpose is to understand the landscape in sufficient detail to become intelligent investors in startups that have set out to solve problems for this market.

What is Ocean Freight Shipping?

Ocean freight shipping comprises the complex set of activities involved in transporting goods of all kinds from producers in one country to consumers in another country, where the two countries are separated by an ocean or a sea.

We have previously discussed freight trucking, and so in this post, we will focus on the maritime-only portion of the activities that surround ocean freight shipping. In the discussion that follows note that there is a blurring of the lines, somewhat, between the categories . . . Sometimes one category can morph into another, and vice versa . . . For example, a containership might be used to transport a comparatively small amount of bulk cargo.

The market may be segmented as follows;

Container Ships: Most merchandise that is transported by ocean freight travels by container ship. Container ships carry their cargo in reusable, standardized 20- or 40-foot long containers that are designed to be easily transferred from the ship to a truck or train without the need to access the cargo directly. The freight capacity of a cargo ship is described in twenty-foot equivalent units (TEUs).

Liner shipping describes the portion of the maritime shipping market that adheres to fixed schedules on regular routes. According to the World Shipping Council there are 500 liner shipping services currently in operation, most in the form of container shipping, accounting for 60% or $4 trillion worth of goods each year. ((See: http://www.worldshipping.org/about-the-industry/global-trade. Accessed Dec. 3, 2016.))

Container ships transport general cargo, or cargo which is poorly suited for bulk cargo shipping operations but which is well suited for containerization. Most general cargo is now transported by containerships.

The chart below shows that there has been relatively steady growth in the worldwide volume of merchandise transported by container ships since 1980. ((This statistic represents the volume of international seaborne trade carried by container ships from 1980 through 2014. Globally, seaborne containerized cargo amounted to around 1.5 billion tons loaded in 2013.))

Statistic: International seaborne trade carried by container ships from 1980 to 2014 (in million tons loaded) | Statista

Overview of Container Trade Values Statistic

Projected container market CAGR between 2015 and 2018
4.4%
Details →

Quantity of loaded freight in international maritime trade
10047.46 m t
Details →

International seaborne trade carried by containers
1,631 m t
Details →

Container penetration in maritime transport
66%
Details →

Estimated value of international seaborne trade
$15tn
Details →
Global Container Fleet Values Statistic

Capacity of container ships in seaborne trade
228 m dwt
Details →

Global cellular container ship fleet capacity
15,406,610TEUs
Details →

Germany’s share of the world container ship fleet
6.5%
Details →
Operators and Ports Values Statistic

Number of ships operated by APM-Maersk
629
Details →

AP Møller – Mærsk’s revenue
$40,308m
Details →

Port of Shanghai’s container throughput
36.5m TEUs
Details →

Statistic: Projected global container market demand growth between 2003 and 2018 | Statista

Bulk Carriers: Bulk carriers transport merchandise that cannot be containerized – mainly raw materials like timber, coal, cement, grain, iron ore, etc. Bulk carriers are equipped with special machinery to aid in the handling of this type of merchandise.

Bulk cargo comes in the form of dry bulk or liquid bulk. Liquid bulk is transported using tankers. Often, bulk cargo is transported in full shiploads.

The chart below shows that there has been consistent growth in the worldwide volume of merchandise transported by bulk carriers since 1980. ((The statistic shows the volume of bulk materials shipped by sea from 1970 to 2008 in billion ton-miles. In 2008, 11.2 trillion ton-miles of main cargo were shipped worldwide.”Main cargo” goods include wheat, corn, barley, oats, rye, sorghum, and soybeans.))

Statistic: Extent of global maritime trade with bulk goods from 1970 to 2008 (in billion ton-miles) | Statista

Tankers: Tankers are similar to bulk carriers, but are designed specifically for the transportation of crude oil and related products. Tankers are classified according to their deadweight capacity (DWT), with the smallest size group being 10,000 – 19,999 DWT and the largest being 200,000+ DWT. Tankers are also categorized according to the products they carry, crude or product. Based on The Tanker Register 2016 by Clarkson Research, the American Association of Port Authorities estimates that as of January 1, 2016;

  • There are 6,085 ships currently in service in the world tanker fleet with an average DWT of 86,211.
  • There are another 945 tankers on order with an average DWT of 106,408.

The chart below shows the amount of crude oil that is transported by the world’s tankers.

Statistic: Transport volume of crude oil in global seaborne trade from 2009 to 2015 (in million metric tons) | Statista

Specialist Ships: These are ocean-faring vessels designed to function in support of other types of maritime vessels or to perform activities related to specific industries. For example, an ocean-going vessel that’s been equipped to transport entire shiploads of motor cars from Asia to North America would fit this category – ships designed to carry cars are described as roll-on/roll-off (RoRo) ships.

A Container Ship | Image Credit: Helmut Jungclaus via Pixabay

Decades later, when enormous trailer trucks rule the highways and trains hauling nothing but stacks of boxes rumble through the night, it is hard to fathom just how much the container has changed the world.

– Levinson, Marc (2016-04-05). The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger (p. 1). Princeton University Press. Kindle Edition.

Taken together, bulk carriers, tankers, and some specialized ships comprise the tramp shipping segment of the market. The tramp trade describes cargo moved by ships that do not have fixed schedules or make planned port calls. These ships are usually engaged on a contract basis for the transport of commodities, namely crude oils, product (or refined) oils, major dry bulks (those comprising greater than two-thirds of the world dry bulk trade such as iron ore, coal, and grains) and minor dry bulk (those comprising the remainder of the bulk trade such as steel products, forest products, cements, and non-grain agricultural products like sugar).
The three types of charters, or contract under which a shipper can engage a tramp ship, in order of popularity, are;

  • voyage charters, under which the ship and its crew is contracted for a particular trip or set of destinations,
  • time charters, under which the ship and its crew is contracted for a specified period of time, and
  • demise charters, under which the ship is contracted but the shipper is responsible for staffing.

The diagram below is a self explanatory depiction of the organization of the shipping market. It is taken from the 3rd edition of Martin Stopford’s Maritime Economics.

Source: Stopford, Martin. Maritime Economics, 3rd Edition.

How is The Ocean Freight Shipping Industry Structured?

Shippers: Any entity that pays to have its cargo shipped.

Freight Forwarders: A freight forwarder functions as a consultant to shippers by arranging and taking care of the details related to the import and export of a shipper’s goods. A freight forwarder does not physically ship cargo. Instead, the freight forwarder is a broker who uses extensive industry knowledge, established relationships, knowledge of the law, and experience to get the best deal possible given constraints set by by the shipper. According to the October 2016 update of the industry profile of Freight Forwarding Services published by First Research, the industry generates annual revenues of approximately $260 billion. ((First Research Industry Profile: Freight Forwarding Services, 10.17.2016. Accessed online via New York Public Library SIBL Branch on Jan. 5, 2017.))

Non-Vessel Operating Common Carriers (NVOCCs): An NVOCC is similar to a freight forwarder. However, an NVOCC may go an extra step and physically handle cargo on behalf of shippers in the sense that they will load cargo onto containers that then get shipped by ocean carriers. NVOCC’s generally will accept partial container loads for shipping on the shipper’s behalf. An NVOCC may own or lease its own containers, but does not own any ships.

Ocean Carriers: These are the companies that actually own the ships in which cargo is transported from one place to another. The relationship between the carrier and the shipper is governed by the bill of lading (B/L), a contract that documents the composition of the cargo, the ownership of the cargo, the terms of the agreement to transport the cargo, and eventual delivery from the carrier to the shipper. ((A bill of lading can be non-negotiable or negotiable. Negotiable bills of lading can be used as the basis for various transactions while the goods are in transit.))

The following chart outlines the world’s leading container ship operators.

Statistic: The world's leading container ship operators as of December 5, 2016, based on total number of ships | Statista

Other participants in the wider maritime freight market include customs authorities, warehouse operators, freight trucking companies, and various entities that are the end customers of the shippers. For example, Best Buy might be the end-customer for shipments of Apple’s iPhones from Foxconn’s manufacturing facilities in China.

As we have stated previously, liner shipping describes the portion of the maritime shipping market that adheres to fixed schedules on regular routes. Charter shipping occurs on a just-in-time basis, usually brokered through the services of a freight-forwarder or an NVOCC on behalf of the shipper. The term “tramping” is used within the industry to refer to charter service.

Oil companies often own or lease the tankers that they use to transport their goods around the world. For example; BP Shipping was established in 1915, and now operates BP’s international fleet of 49 ships made up of tankers and liquid bulk carriers. ((Source: http://www.bp.com/en/global/bp-shipping/careers.html. Accessed; Jan 23, 2017.))

One anecdote we heard suggests there may be at least as many as a dozen intermediaries involved in the process of getting one shipment of goods from one point to another. However, it is not clear if this is broadly true across the industry or of it applies only to certain segments of the market.

What Are The Economics of The Ocean Freight Shipping Industry?

According to the United Nations Conference on Trade and Development (UNCTAD); ((Report by the UNCTAD Secretariat, Review of Maritime Transport 2013.))

“In general terms, the demand and the supply of maritime transport services interact with each other to determine freight rates. While there are countless factors affecting supply and demand, the exposure of freights rates to market forces is inevitable. Cargo volumes and demand for maritime transport services are usually the first to be hit by political, environmental and economic turmoil. Factors such as a slowdown in international trade, sanctions, natural disasters and weather events, regulatory measures and changes in fuel prices have an impact on the world economy and global demand for seaborne transport. These changes may occur quickly and have an immediate impact on demand for maritime transport services. As to the supply of maritime transport services, there is generally a tendency of overcapacity in the market, given that there are no inherent restrictions on the number of vessels that can be built and that it takes a long time from the moment a vessel order is placed to the time it is delivered, and is ready to be put in service.

Therefore, maritime transport is very cyclical and goes through periods of continuous busts and booms, with operators enjoying healthy earnings or struggling to meet their minimum operating costs.”

In Maritime Economics, Martin Stopford further illustrates the economic and financial challenges that shipping companies must contend with when he says; ((Martin Stopford, Maritime Economics, 3rd Edition, Routledge, 2009.))

“. . . the challenge is to create sufficient financial strength when times are good to avoid unwelcome decisions such as selling ships for scrap when times are bad. It is the company with a weak cashflow and no reserves that gets pushed out during depressions and the company with a strong cashflow that buys the ships cheap and survives to make profits in the next shipping boom. It is not therefore the ship, the administration, or the method of financing that determines success or failure, but the way in which these are blended to combine profitability with a cashflow sufficiently robust to survive the depressions that lie in wait to trap unwary investors.”

In order to develop some insight on which to base our understanding of the economics of ocean freight shipping we have relied on the following sources; ((Please let us know if there are more current references on the topic we did not find.))

  1. Konstantinos Gkonis and Harilaos Psaraftis – Some Key Variables Affecting Liner Shipping Costs,
  2. Harilaos Psaraftis, Dimitrios Lyridis, and Christos Kontovas – The Economics of Ships, Chapter 19 in The Blackwell Companion to Maritime Economics, and
  3. Martin Stopford – Maritime Economics, 3rd Edition, Chapters 6, 7, and 8.

Shipping revenues are affected by the interplay between cargo capacity, productivity, and freight rates. Where revenue increases as each of these factors is maximized by the shipping company.

The costs of operating a shipping fleet are determined by the interaction between operating costs – including periodic maintenance costs; the costs of maintaining the sea-worthiness of the ships in the fleet according to regulatory requirements and the shipping company’s own policies, voyage costs, and cargo handling costs.

Lastly, ship owners have to worry about capital costs which are a function of the mechanism by which the fleet has been financed.

Stopford points out that the shipping industry has not adopted an internationally accepted standard classification of costs, making any discussion about costs in the shipping industry confusing and unnecessarily difficult.

The following variables also play a crucial role in determining the profitability of a shipping fleet operator;

  • The mix of different types of ships within the fleet,
  • The age of each ship in the fleet – newer ships are typically more profitable to operate than older ships,
  • The capacity of each ship in the fleet – bigger ships are generally more profitable to operate than smaller ships as long as the bigger ships do not impose disproportionately higher operating and voyage costs on the fleet operator,
  • The fuel efficiency of each ship in the fleet – higher fuel efficiency lowers voyage costs, and related to fuel efficiency is the operating speed of each ship in the fleet,

To further ground our understanding of the economic realities of the ocean freight shipping market, the following data and diagrams from Stopford’s book are helpful.

By comparing average earnings per day with the standard deviation of daily earnings, we get a sense of the extreme economic and financial uncertainty that plagues operators of shipping fleets.

Source: Stopford, Martin. Maritime Economics, 3rd Edition.

In the table below, notice that one way to guard against the revenue volatility that’s evident in the data above is for fleet operators to diversify the types of ships that they buy to compose a fleet. For example, one such fleet might be made up by combining VLCC, Panamax, Handymax, MPP 16kdwt, and Containerships in different proportions that add to 100%. Basically, the fleet operator has to invest in a diversified portfolio of ships in order to protect the fleet from the probability of failure or bankruptcy associated with any one specific ship or class of ships.

Source: Stopford, Martin. Maritime Economics, 3rd Edition.

The diagram below outlines the macroeconomic factors that influence supply and demand in the shipping market. Note that there are several factors over which the fleet operator has no control.

Source: Stopford, Martin. Maritime Economics, 3rd Edition.

The diagram below outlines the flow of cash and services between the 4 primary segments of the shipping market; The freight market, the shipbuilding market, the sale and purchase market, and the demolition market.

Source: Stopford, Martin. Maritime Economics, 3rd Edition.

Sabeen Firozali (@sabeenfirozali) is a Vice President at Comerica Bank in New York, where she invests debt capital in technology and life sciences startups. Her experience as a debt investor spans both public and private markets and across many industries, including technology, healthcare, industrials, energy and consumer. She sent us the following comment, which provides additional context to the economics of the ocean freight shipping market;

“I used to cover shippers like Overseas Shipholding Group (OSG) back when I did distressed debt investing. These companies have pretty complex capital structures (For example; each ship is in a different entity). That required a thorough analysis of the assets and future earnings potential from those assets. In 2012 when I was covering this industry, we were really worried about low spot rates for everything from VLCCs to Panamaxes and also a deluge of fleet supply keeping prices low.

More recently; These tankers are currently levered with debt/EBITDA ratios anywhere from 7x for Teekay Tankers Ltd. (TNK), and  Tsakos Energy Navigation Limited (TNP) to about 3.5x for OSG, and Frontline Ltd. (FRO). That’s why operating efficiencies are so important, because financial leverage is so high. The industry added a lot of capacity between 2003 and 2010 when spot rates were higher (in expectation of higher returns). Now spot rates are much lower and there’s too much supply. However, the supply is new – 70% of the supply won’t need to be scrapped for another 10 – 12 years. It’s a classic supply-demand misbalance resulting in lower revenues. Combine that with high interest payments and you have a scenario where every dollar operating cost elimination really helps the bottom line.”
She sent us this chart to illustrate the point about capacity.
Source: Institute of Shipping Economics and Logistics

This is a double edged sword for startups selling into the market; on one hand shipping companies are highly motivated to find and pay for products that help them operate more efficiently. On the other hand, in the worst case scenario the ships might be scrapped in a desperate bid by some incumbents to avoid bankruptcy. This is not an uncommon occurrence since each ship is an independent entity onto itself, and can be allowed to fail without necessarily putting the holding company at risk.

What Opportunities are Startups Pursuing?

As we alluded to in our post on freight trucking startups, supply chain and logistics is a big market . . . and there are many startups building products to serve that market. This market map by CB Insights lays out the landscape in sufficient detail to provide a sense of the breath of the market for supply chain and logistics software. You can find the accompanying blog post here.

CB Insights’ Supply Chain and Logistics Tech Market Map. Nov. 30, 2016.

Given how far removed ocean freight shipping is from the day to day experience of most people, it should not be surprising that there is a much smaller number of startups building products for the ocean freight shipping market.

Before we get to the startups, the following data and charts from CB Insights helps to paint of the level of interest among investors. Compiling data specifically focused on maritime startups would have been an incredibly tedious and time consuming process. So, we are using aggregate data as a proxy.

Investments in Startups Building Marketplaces

The next three charts focus on startups pursuing marketplace business models, and reflect investments by institutional venture capitalists and angel investors only. Corporate VCs are excluded, for the most part . . . The database query might have failed to pick up a couple. The data is as of Jan. 30, 2017.

As you can see, funding amounts peaked in 2015 while the number of discrete investments peaked in 2016. One way to interpret this is that, to some extent, the 2016 trend in number of deals may reflect a case of “me-too” investments driven by social-proof bias.

Investment Activity – Marketplaces – Venture Capital and Angel Investors ex Corporate VCs, Past 5 Years

Comparing measures of central tendency in the data, notice that there is dramatic jump in the average deal size in Q2 2015 and Q3 2015, but this trend is not reflected in the median deal size.

Investment Activity – Marketplaces – VCs and Angel Investors ex Corporate VCs, Past 5 Years

The deals below largely account for the spike in aggregate funding amounts, and correspondingly, in average deal sizes for Q2 2015 and Q3 2015, respectively, in the chart above.

Marketplace Q2 2015
  • Wish raised $500M from DST Global, Founders Fund, GGV Capital and JD.com
  • Zhubajie raised $418.6M from Chongqing New North Zone Goverment Investment Fund and Cybernaut Growth Fund
  • Funding Circle raised $150M from Baillie Gifford & Co, BlackRock, DST Global, Sands Capital and Temasek Holdings
  • Wallapop raised $100M from Accel Partners, BlackPine Private Equity Partners, Eight Roads Ventures, Insight Venture Partners, NextView Ventures, Northzone Ventures and Vostok New Ventures
Marketplaces Q3 2015
  • Social Finance raised $1bn  from Baseline Ventures, DCM Ventures, Institutional Venture Partners, Renren Lianhe Holdings, RPM Ventures, Softbank Group, Third Point and Wellington Management
  • Thumbtack raised $125M from  Baillie Gifford, capitalG, Sequoia Capital and Tiger Global Management

The next chart gives you a sense of the investors who are most actively investing in startups that are building marketplace business models.

Investment Activity – Marketplaces – VCs and Angel Investors ex Corporate VCs, Past 5 Years

Investments in Startups in Supply Chain and Logistics

The next three charts focus on startups pursuing business models in the Supply Chain and Logistics market, and reflect investments by institutional venture capitalists and angel investors only. Corporate VCs are excluded, for the most part – you’ll notice that the query missed a couple. The data is as of Jan. 30, 2017.

Investment Activity – Supply Chain and Logistics – Venture Capital and Angel Investors ex Corporate VCs, Past 5 Years

Comparing measures of central tendency in the data, notice that there is dramatic jump in the average deal size in Q2 and Q4 of 2014, but this trend is not reflected in the corresponding median deal size in each period.

Investment Activity – Marketplaces – Venture Capital and Angel Investors ex Corporate VCs, Past 5 Years

The deals below largely account for the spike in aggregate funding amounts, and correspondingly, in average deal sizes for Q2 2014 and Q4 2014, respectively, in the charts above.

SC&L Q2 2015
  • New Dada raised  $100M from DST Global, Sequoia Capital China & Greenwoods Asset Management
SC&L Q4 2015
  • New Dada raised  $300M from DST Global & Sequoia Capital China
  • Grofers raised $120M from Apoletto, Sequoia Capital India, SoftBank Group & Tiger Global Management

The next chart gives you a sense of the investors who are most actively investing in startups that are building products for the supply chain and logistics market.

Investment Activity – Marketplaces – Venture Capital and Angel Investors ex Corporate VCs, Past 5 Years

Below is a sample of some of the startups building technology products specifically for the ocean freight shipping market. You may recognize some of them in the market map from CB Insights. There is no particular rationale for the order in which we have arranged them here. Descriptive summaries are either copied directly, or based on information, from each startup’s website. Other data presented below is based on information collated by CB Insights, Traxn, Crunchbase, or Mattermark – with CB Insights being the source that appeared to have the most complete information, where it was available at all, and that data is current as of Jan. 25, 2017.

There are undoubtedly tech startups in this market that we have not yet heard about. Let us know about any we have omitted, but which you feel we should be aware of. Full disclosure, we have done some preliminary due diligence on a couple of the startups on this list.

Fleet

  • Summary: An online marketplace for international freight.
  • Year Established: 2014
  • Location: Portland, OR
  • Aggregate Funding: $4,000,000
  • Representative Investors: 1517 Fund, GrowthX, Hunt Technology Ventures, NFQ Ventures

Xeneta

  • Summary: A real-time price-benchmarking and market intelligence platform for international shipping.
  • Year Established: 2012
  • Location: Oslo, Norway
  • Aggregate Funding: $8,470,000
  • Representative Investors: Point Nine Capital, Creandum, Alliance Venture

Holland Container Innovations

  • Summary: Developed, and markets, foldable shipping containers in order to reduce the cost of empty repositioning.
  • Year Established: 2008
  • Location: Delft, Holland
  • Aggregate Funding: Unavailable
  • Representative Investors: CARU Containers

Kontainers

  • Summary: Makes it easy to book and track container shipments.
  • Year Established: 2014
  • Location: London, UK and New York, NY
  • Aggregate Funding: $1,300,000
  • Representative Investors: EC1 Capital, Northstar Ventures, Partech Ventures

Flexport

  • Summary: A licensed freight forwarder that uses people and software to manage the complexity of international trade.
  • Year Established: 2013
  • Location: San Francisco, CA
  • Aggregate Funding: $91,600,000
  • Representative Investors: Y Combinator, Founders Fund, First Round Capital, Bloomberg Beta, Felicis Ventures

iContainers

  • Summary: A web platform with which importers and exporters compare rates in real time and manage their maritime shipments quickly and easily from beginning to end.
  • Year Established: 2007
  • Location: Barcelona, Spain
  • Aggregate Funding: $8,100,000
  • Representative Investors: Kibo Ventures, Serena Capital, GrupoRomeu

FreightOS

  • Summary: An online marketplace for international freight.
  • Year Established: 2011
  • Location: Hong Kong
  • Aggregate Funding: $27,700,000
  • Representative Investors: Aleph, OurCrowd, MSR Capital

Cargohound

  • Summary: An online marketplace for international freight.
  • Year Established: 2012
  • Location: Sydney, Australia
  • Aggregate Funding: $590,000
  • Representative Investors: Unavailable

Haven Inc

  • Summary: Connects commodity traders, food producers, and shippers to thousands of logistics providers through one platform.
  • Year Established: 2014
  • Location: San Francisco, CA
  • Aggregate Funding: $13,800,000
  • Representative Investors: Data Collective, First Round Capital, Spark Capital

CoLoadX

  • Summary: A digital ocean freight procurement platform built by freight forwarders, NVOCC’s and logistics service buyers.
  • Year Established: 2015
  • Location: New York, NY
  • Aggregate Funding: $240,000
  • Representative Investors: Entrepreneurs Roundtable Accelerator, other undisclosed investors

Octopi TOS

  • Summary: A modern, web-based Terminal Operating System (TOS) built for small to medium container terminals.
  • Year Established: Unavailable
  • Location: Miami, FL
  • Aggregate Funding: Unavailable
  • Representative Investors: Unavailable

WindWard

  • Summary: Provides its customers with real-time visibility into the location of ocean freight as well as what’s happening at sea while the freight is in transit.
  • Year Established: 2010
  • Location: Tel Aviv, Israel
  • Aggregate Funding: $15,800,000
  • Representative Investors: Horizons Ventures, Aleph.

Hive Maritime

  • Summary: Optimizes global trade logistics through improved route management and increased situational awareness.
  • Year Established: Unavailable
  • Location: Cambridge, MA
  • Aggregate Funding: Unavailable
  • Representative Investors: MassChallenge

SimpliShip

  • Summary: A dynamic online marketplace connecting international shippers with NVOCC’s and Freight Forwarders.
  • Year Established: 2014
  • Location: Rochester, NY
  • Aggregate Funding: Unavailable
  • Representative Investors: Unavailable

Shippabo

  • Summary: Puts ocean shipping in your hands. Get hassle free shipping rates and schedule your next shipment instantly.
  • Year Established: 2014
  • Location: Los Angeles, CA
  • Aggregate Funding: Unavailable
  • Representative Investors: Unavailable

AlphaShips

  • Summary: Sources and underwrites maritime loans, that are then offered to accredited and institutional investors.
  • Year Established: 2015
  • Location: Los Angeles, CA
  • Aggregate Funding: Unavailable
  • Representative Investors: Unavailable

New York Shipping Exchange

  • Summary: A market place for derivative contracts – forward contracts, for the container shipping market.
  • Year Established: 2015
  • Location: Montclair, NJ
  • Aggregate Funding: $510,000
  • Representative Investors: Unavailable

Nautilus Labs

  • Summary: Nautilus securely collects, reports on, and analyses raw sensor data generated on commercial ships.
  • Year Established: 2016
  • Location: Brooklyn, NY
  • Aggregate Funding: $780,000
  • Representative Investors: Root Ventures, Bre Pettis, Marina Hadjipateras

MARSEC

  • Summary: A multimodal transport optimization platform applying Industrial Internet of Things and Big Data Analytics to maritime operations.
  • Year Established: 2014
  • Location: Palo Alto, CA
  • Aggregate Funding: Unavailable
  • Representative Investors: Unavailable

ClearMetal

  • Summary: Predictive logistics software for operations in the container-shipping market.
  • Year Established: 2014
  • Location: San Francisco, CA
  • Aggregate Funding: $3,000,000
  • Representative Investors: Innovation Endeavors, New Enterprise Associates, Skyview Capital

AKUA

  • Summary: A multimodal transport optimization platform applying Industrial Internet of Things and Big Data Analytics to bring real-time visibility to cargo owners.
  • Year Established: Spun-out from CyberPoint in April 2016
  • Location: Baltimore, MD
  • Aggregate Funding: Unavailable
  • Representative Investors: Unavailable

Quotiss

  • Summary: Freight management software for freight-forwarding companies. Automates 99% of the freight management process, and automates freight quotes.
  • Year Established: 2016
  • Location: Warsaw, Poland
  • Aggregate Funding: Unavailable
  • Representative Investors: Techstars Berlin

Blockfreight

  • Summary: Blockchain solutions for the shipping market.
  • Year Established: 2016
  • Location: Melbourne, Australia
  • Aggregate Funding: Unavailable
  • Representative Investors: Unavailable

Navarick Corp

  • Summary: Software solutions and data products for the oil industry.
  • Year Established: 2008
  • Location: Vancouver, BC
  • Aggregate Funding: $1,000,000
  • Representative Investors: Unavailable

MainDeck.io

  • Summary: First platform covering the entire dry-docking process, from first inspection to final report.
  • Year Established: 2016
  • Location: Oslo, Norway
  • Aggregate Funding: Unavailable
  • Representative Investors: Unavailable

OpenSea Pro

  • Summary: A marketplace for chartering ships and finding cargo based on the user’s location.
  • Year Established: 2014
  • Location: Scotland
  • Aggregate Funding: Unavailable
  • Representative Investors: Unavailable

Stage 3 Systems

  • Summary: Software for the shipping industry.
  • Year Established: 2010
  • Location:Vancouver, BC
  • Aggregate Funding: Unavailable
  • Representative Investors: Unavailable

eSSDOCS

  • Summary: Paperless trade solutions to automate and accelerate trade operations and finance.
  • Year Established: 2005
  • Location: Valleta, Malta
  • Aggregate Funding: $2,520,000 Debt Financing
  • Representative Investors: Unavailable

PortCall.com

  • Summary: A port or terminal operating system.
  • Year Established: 2015
  • Location: Unavailable.
  • Aggregate Funding: Unavailable
  • Representative Investors: PortXL

SailRouter

  • Summary: An all in one software solution for reducing fuel consumption for merchant ships.
  • Year Established: 2016
  • Location: Rotterdam, Netherlands
  • Aggregate Funding: Unavailable
  • Representative Investors: PortXL

Shipamax

  • Summary: Shipamax enables you to internally share fleet openings & the commercial status of each ship. Details can be accessed in real-time by the whole team, across multiple locations.
  • Year Established: 2016
  • Location: London, England
  • Aggregate Funding: Unavailable
  • Representative Investors: Dynamo Accelerator & Fund

PortXL

  • Summary: PortXL is an accelerator program focusing on port related industries offering an ecosystem of founders, corporate partners, investors and mentors that support and accelerate the entrepreneurial journey.
  • Year Established: 2015
  • Location:Rotterdam, Netherlands
  • Aggregate Funding: Unavailable
  • Representative Investors: Unavailable

While we believe there is a smaller number of startups building products for the ocean freight market, we almost certainly have missed more than we have been able to capture. We are eager to hear about startups we have missed, or to hear about the ideas that people are exploring and hope to launch in the near future.

Everyone loves containers. They see them. They get them. It makes sense. But when you look at number of vessels, container ships are only 10%. They’re inconsequential to bulk, crude, gas/chemical, and cargo. Much more interesting markets to be exploring in my personal opinion.

– Anthony DiMare, co-founder/CEO, Nautilus Labs (via email)

Threats and Opportunities

On a relative basis, if software and automation are “eating the world” as it were, one might argue that the ocean freight shipping market failed to read the memo. However, it ought to be evident from the preceding discussion that there is a small band of entrepreneurs out to change that state of affairs.

While they spare no effort to that end, market analysts at Lloyd’s Register, University of Strathclyde’s Department of Offshore, and QinetiQ have some ideas about what the industry might encounter between now and 2030. The Global Maritime Trends 2030 report is worth reading if this market if any interest to you at all. If that seems too much there’s a more easily digestible summary. ((Accessed; Feb. 5, 2017.))

The report considers three scenarios and how each might be affected by demography, the global economy, demand for resources, and disruptive events. While the rest of the report is very interesting, for the purpose of this study we will highlight the events that the report’s authors believe could be disruptive to the shipping market in general, and hence to the ocean freight market.

  1. Russia joins NATO, and the balance of geopolitical power shifts quite dramatically.
  2. The United States Dollar loses its reserve currency status in a disorderly manner, causing upheavals in the global economy.
  3. There is a major pollution accident in the Artic, causing supply disruptions as well as significant changes to shipping routes.
  4. Geopolitical changes in the Middle East lead to conflict and constrain energy supplies.
  5. Unforeseen technological disruptions make formerly popular modes of marine freight shipping obsolete.
  6. A global economic and geopolitical collapse causes extreme disruptions to trade and commerce.

The technological disruptions that the authors worry most about are;

  1. Clean coal technologies, which have a significant impact of the amount of petroleum related products transported around the world by ocean tankers.
  2. Biofuels become sophisticated and efficient enough to have a significant impact on volume of hydrocarbon-based fuels that the world consumes, leading to a steep decrease in the export and import of petroleum related products.
  3. Deep water exploration for crude oil is curtailed so much that there is a collapse in the tanker market,
  4. Robotics advances rapidly enough to change the manufacturing patterns for various types of consumer goods in ways that adversely affect international trade via containership since large volumes of consumer goods that were previously imported from China and other markets in Asia are now produced in fully automated factories in the markets that were the biggest importers of such good. The containership market suffers significant losses.
  5. 3D printing advances to the point where high end products and goods can be manufactured using this method. Together with the large-scale adoption of automation technologies in factories and the use of robots described above, marine trade by containership takes a big hit. Developing markets start a painful transition away from low-paying low-skill manufacturing jobs to high-skill jobs.
  6. Autonomous ships start to make an appearance in the commercial sector, after being tested for military use and gaining some adoption.

Before we get to 2030, however . . . There are more immediate issues startups and investors operating in this market have to be aware off. Below we highlight some of them.

  1. Industry turmoil during times of frailty in the global economy can have a disproportionate impact on startups that sell to customers in this market because the customer base is highly sensitive to declines in international trade. Demand for the products and services that startups selling to this market will fluctuate with the business cycle. Industry consolidation is a concern. Also, consolidation within the industry during periods of declining trade may materially shift the balance of power within the industry in ways that could be disadvantageous to startups selling products and services for the shipping market.
  2. Business practices within the ocean freight shipping market are not as transparent as the practices in other markets that startups often engage with. For example, historically, the industry has maintained the practice of registering ships under a foreign flag – a “flag of convenience”, that differs from the nationality of the ship’s owners. Opponents of this practice argue that it encourages bad behavior within the industry since ships are often registered in jurisdictions with very lax regulations – Panama and Liberia are among the most popular, for example. ((See: List of flags of convenience – Wikipedia.))
  3. Price negotiations between shippers and carriers are confidential. This can be problematic if a startup’s revenue model is dependent on knowing this information.
  4. Piracy is an ongoing concern for the industry.
  5. Employees in the maritime freight industry in the United States are heavily unionized.
  6. Threats from tech sector incumbents are a real concern.
    • Recent articles in MIT Technology Review, Bloomberg, and the Wall Street Journal discuss Amazon’s entry into supply chain management. It has established new sea and air cargo shipping operations, including registering Amazon China with the Federal Maritime Commission. That may be a possible first-step on the path to becoming a full-fledged freight forwarder as is explained in this blog post by Ryan Petersen at Flexport. The threat is such that journalists who follow that market feel that UPS and FedEx may also be under pressure if Amazon succeeds.
    • Alibaba has also been making forays into this market. Most recently it has caused a splash with the news that it is partnering with Maersk, the world biggest shipping company, to sell cargo space on containerships operated by Maersk. This article published by Quartz says: “The service reduces dependency on some tasks performed by freight forwarders—middle-men between merchants and shipping lines—and streamlines the export process for merchants. Users can lock in cargo space on certain routes by pre-paying their deposit, Maersk told Reuters. Freight forwarders’ services, such as documentation and customs clearance, can be provided through the OneTouch platform, Maersk said.” The rest of the article is worth reading just to get a sense of the scale of Alibaba’s ambitions for this market. ((This article on the Maersk-Alibaba tie-up provides more context, and some commentary from Maersk executives on how they are thinking about their market; http://www.lloydsloadinglist.com/freight-directory/news/Maersk-Alibaba-tie-up-%E2%80%98no-major-threat-to-forwarders%E2%80%99/68345.htm#.WJog17YrLfA))

We believe that entrepreneurs succeed when they take advantage of a threat or opportunity that others do not notice. Are there any we have missed? If yes, please tell us. ((One opportunity I did not find discussed is the application of industrial internet of things technologies to engine maintenance and monitoring in the ocean freight shipping market. This was somewhat surprising. This article from Deloitte University Press discusses broad IoT opportunities in transport and logistics.))

Amazon Enters Shipping – MIT Technology Review

Automatic Identification System (AIS) – A Key Technology?

The overwhelming majority of maritime carrier vessels have their positions, speeds, and trajectories tracked by Automatic Identification Systems (AIS). AIS systems are usually composed of Very High Frequency (VHF) transmitters and receivers, GPS receivers, maritime electronic links, vessel sensors and display systems. AIS systems are ubiquitous because of Regulation 19 of the International Convention for the Safety of Life at Sea (SOLAS) Treaty. SOLAS was enacted in 1974 by the International Marine Organization (IMO), the United Nations special agency tasked with regulating shipping for its 172 Member and three Associate countries. The purpose of AIS is to provide safety at sea by increasing visibility and capacity to plan around surrounding vessels. The regulation applies to any ship with greater than 300 tonnes of gross tonnage registered in an IMO country.

Traditional applications of AIS include collision avoidance, fleet monitoring, security, search and rescue, and cargo tracing. Should startups begin to experiment with ways to disrupt the maritime freight industry, AIS could prove to be a useful system on which they can build.

Transparency is the first step toward building a highly predictable marine shipping infrastructure. Transparency into a ship’s location allows carriers and brokers to more accurately estimate the arrival of cargo. There is still a ways to go towards that end. In 2013, annual container lines schedule reliability, a measure of the percentage of ships that arrive within their delivery window, fell between 67% and 83%.

Further, the effects of weather and ocean currents complicate the estimability of vessel arrivals. However, we believe that maritime freight would serve to benefit from;

  • Systems that would help carriers more accurately assess transit times and eliminate delay days, 
  • Systems that can use AIS data to draft charter-parties and serve the spot market, 
  • Technologies that bridge communication between maritime and trucking companies so that both may better serve shippers, and
  • Services that lend door-to-door transparency to cargo for shippers.

AIS infrastructure can provide a foundation to future advances in cargo transparency and freight accessibility for shippers.

A depiction of AIS – Source: Zinnos, Inc.

Wrapping Things Up

Writing this post was primarily an exercise in learning more about the ocean freight shipping market in order to be better equipped for the conversations we are currently having, and conversations we may have in the future, with startups building products for this market. If we have missed anything you feel is important please let us know.

We know how frustrated founders feel when early stage investors (a) do not know anything about a market in which they profess to wanting to make investments in, and (b) make no effort to learn enough about that market in order to have substantive discussions with the founders about what the founders hope to accomplish, and the merits of an investment in the specific startup that founder is building. We do not want to be that investor, we believe in doing our homework.

If you are building a seed stage startup in this market we would love to hear from you. If there are early-stage startups we have not heard about yet, we would love to know that too. If you invest in or have invested in seed-stage startups pursuing any of the opportunities we have described above, or others in the ocean freight shipping  market, we’d love to collaborate with you on future investments. If you are a shipping industry insider . . . We’d love to hear from you as well.

You can leave a comment in the comments section below, or you can email us directly;

  • Brian – brian@kecventures.com (@brianlaungaoaeh), or
  • John – johna@kecventures.com (@jnazubuike).

One last thing. We’d like to express our thanks and appreciation to Britie Sullivan and her teammates at CB Insights for all their help obtaining data that we could not easily gather on our own for this article, and also for the freight trucking article before this. She answers our questions patiently, and often gives us more than we expect. This article is much better because of the data and insights she helped us obtain.

 Additional Reading

  • Ninety Percent of Everything: Inside Shipping, the Invisible Industry That Puts Clothes on Your Back, Gas in Your Car, and Food on Your Plate.
  • The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger
  • The Path Between The Seas: The Creation of The Panama Canal, 1870 – 1914

Industry Links

  • World Shipping Council: Additional Resources Page
  • Federal Maritime Commission
  • Institute of Shipping Economics and Logistics
  • American Association of Port Authorities
  • Lloyd’s Loading List
  • World Maritime News

Update: February 8, 2017 at 19:47 to include comments from Sabeen Firozali, and to add footnote about IoT applications to engine Mx.

Update: February 9, 2017 at 05:19 to include Nautilus Labs and MARSEC to list of startups, comment from Anthony DiMare, and link in footnotes to IoT in transportation and logistics article from Deloitte University Press.

Update: February 9, 2017 at 11:16 to include AKUA and ClearMetal, also edit Nautilus Labs’ summary.

Update: February 9, 2017 at 18:51 to correct Sabeen Firozali’s comment. It originally referred to interest rates instead of spot rates. Spot rates were higher in 03-10 and they are directly tied to revenue; higher spot rates lead to higher revenues. When spot rates were high, lots of companies invested in building ships.

Update: February 9, 2017 at 19:31 to correct the aggregate funding amount raised by CoLoadX from $40,000 to $240,000 based on information provided by the co-founders.

Update: June 20, 2017 at 17:22 to fix date typo in updates; change “2016” to “2017”.

Filed Under: Entrepreneurship, Industry Study, Innovation, Investment Themes, Investment Thesis, Long Read, Market Study, Startups, Venture Capital Tagged With: Business Models, Early Stage Startups, Industry Study, Innovation, Logistics & Supply Chain, Long Read, Market Study, Ocean Freight Shipping, Technology, Venture Capital

Updates – Industry Study: Freight Trucking (#Startups)

December 31, 2016 by Brian Laung Aoaeh

Brick by brick . . . Solve it one step at a time.

Note: John Azubuike (@jnazubuike) and I are currently conducting research on software startups in the ocean freight shipping market. We expect to publish that towards the end of January 2017.

Our blog post about freight trucking startups opened the door to numerous conversations that we may never have had, with people who know more about the freight trucking market than we do. This update is my attempt to augment our original article with some of what we learned from those conversations. If it comes across as somewhat unpolished, that’s because I decided arbitrarily that I should not let 2016 end without this update being published.

So without further ado . . .

  1. The barriers to success for startups pursuing the “Uber for freight-trucking” business model is even more fraught with danger than we were able to convey in our article. It is even more clear to us that brokers do a lot more than field a couple of phone calls, and that assuming it will be easy to cut them completely out of the picture is probably a dangerous assumption. We heard numerous anecdotes about the difficulties freight trucking services marketplace startups are facing . . . Yes, that including some that have been lionized by the tech press. Presumably, many are running on borrowed time.
  2. Compliance is as acute a problem as we have imagined. In fact, Walmart Transportation was hit with a $55 million settlement only 5 days after we published our article. Many settlements and fines do not attract the attention of the news media. If Walmart is stumbling, imagine how tough it must be for less sophisticated trucking companies to stay abreast of the complex state and Federal regulations. Compliance software that is easy to deploy, and easy for fleet managers and truck drivers to use is a necessity. A number of new entrants into the market are taking that path. Notable among them; San Diego, CA-based Platform Science whose co-founders previously ran OmniTracs, the fleet management software division of Qualcomm that was sold to Vista Equity partners for $800 million . . . in cash.
  3. Ty Findley, a member of the GE Ventures team covering Advanced Manufacturing, Logistics, and Supply Chain pointed us to the 2015 patent lawsuit between Fourkites and Macropoint, two developers of Fleet Management Software that enables fleet operators to track and trace the activities of individual trucks. In this lawsuit Macropoint accused Fourkites of violating patents held by Macropoint. The court ruled in favor of Fourkites; dismissing the Macropoint patents as invalid under the United States Supreme Court’s Alice Corp. vs. CLS Bank Int’l ruling of 2014. It will be interesting to see what forms of intellectual property prove most valuable in this market. If you have an interest you can read my work on Economic Moats in order to understand how we think about these issues.
    • Chicago-based Fourkites – announced that they closed a $13 million Series A round of financing led by Bain Capital Ventures in October 2016, and
    • Cleveland-based Macropoint – announced a $44 million growth equity round of financing from Susquehanna Growth Equity in November 2016.
  4. Based on her years of experience with technology innovation in the freight trucking market Debra T. Johnson of Eco-Edge discusses what she calls the “invisible barriers to innovation” that impede the success of startups in this market. She groups them under; Product, Customer, and Sales. Overcoming all of these invisible barriers to innovation requires founding teams that have; strong technical experience in order to build a product that works for this market, AND sufficient industry experience in order to build trust, and win credibility with potential customers.
  5. Stefan Seltz-Axmacher of Starsky Robotics sent me the following comments by email – modified, and paraphrased for clarity. Starsky is a Y Combinator startup.
    • The huge inconsistencies in data about the industry are really frustrating. It would help to know what the most authoritative sources of industry data are.
      • I agree. We generally relied on data from industry associations, and then we extrapolated to fill in the gaps we wanted estimations for. Our estimations could be wrong. We relied mainly on: OODIA Foundation, and American Trucking Association. Data from the Bureau of Transportation Statistics is more difficult to parse if one is in a hurry. We did not have access to proprietary sources of data on the industry, but some times I wonder if they are any more accurate than data that is available from public sources.
    • The market map was a bit odd in terms of how you classified some of the startups, some of the startups may have been misclassified.
      • I agree. We expected this to be the case, since the way an investor thinks about a market is often not entirely congruent with how others see it. Our market map was only an approximation about how we think of the market – for example, we would group “truck automation” together with “automated cars” . . . Since the way we see it the key outcome is “automated land transportation” which can then be applied to trucks and cars – by the same startup/company, with adequate modifications to account for the structural differences between a truck and a car. Think smart-phones versus tablet computers; iPhone versus iPad. Or, think laptop computers versus tablet computers; MacBook Air versus iPad. That being said, we’ll take another look at the market map when we feel it makes sense to give it a major update. There are many startups we did not know about when we put it together.
  6. Craig Fuller, CEO/Managing Director of TransVix stopped by our office to tell us about what they are doing to solve the dynamic assignment problem using the contract theory approach by building a derivatives market for trucking, rail, and containers. If you believe their estimates, this could be a $1.4 trillion opportunity in the United States, and possibly an $8.0 trillion opportunity globally. Yes, you read that right. Trillion, with a “capital tee”. Craig shed further light on some aspects of the trucking industry that we did not fully understand. He also laughed at me when I told him I had developed a headache as we were trying to unravel some of the mysteries of the maritime freight shipping market. He gave us some good ideas for paths along which we might conduct some research.
    • The only other startup I know about that’s pursuing a somewhat similar business model is the New York Shipping Exchange.
  7. We also heard directly from startups based outside the United States that are building software for domestic freight trucking markets in; Israel, Brazil, Germany, India. We heard anecdotes about startups in the Middle East and Eastern Europe.
  8. These news reports caught our attention in the days and weeks after we published;
    • Amazon Launches Uber-Like App for Truck Freight – December 18, 2016,
      • Intriguing, because of the relationship with Convoy – Bezos Expeditions is an investor in Convoy’s seed round, and the co-founders Grant Goodale and Daniel Lewis are both former employees of Amazon.
    • China’s Uber for Trucks Huochebang Fetches $1 Billion Valuation – December 21, 2016, and
    • Uber Launches Uber Freight – December 27, 2016.
  9. Daniel Burrows, founder and ceo of XStream Trucking, a seed-stage tech startup – thinks about the problems in the freight trucking problem from the fuel efficiency side of the profitability equation. Fuel costs account for as much as a third of the operating expenses of a truck fleet. The team at XStream reports that its technology can generate fuel savings of between 2.5% and 8%. You can see the potential for those savings to add up to something significant for the industry when you consider that, according to the American Trucking Associations; ((Source: http://www.trucking.org/News_and_Information_Reports_Energy.aspx. Accessed on Jan. 03, 2017.))
    • Trucks consumed 52.3 billion gallons of fuel for business purposes in 2011; 37.2 billion of that in diesel fuel and 14.8 billion in gasoline,
    • The industry spent $143.4 billion buying diesel fuel in 2011

This seems to be a market that will remain active for sometime to come, and we are eager to see what new developments occur as time progresses.

We’re studying startups building technology for the ocean freight shipping market. We expect to have made enough progress to publish it in a few weeks. Stay tuned. Better yet . . . Send us ideas; @brianlaungaoaeh and/or @jnazubuike.

Update: January 3, 2017 at 17:30 to include insights from Daniel Burrows at XStream Trucking.

Filed Under: Industry Study, Innovation, Market Study, Startups, Technology, Venture Capital Tagged With: Business Models, Business Strategy, Competitive Strategy, Early Stage Startups, Industry Study, Innovation, Investment Analysis, Logistics & Supply Chain, Startups, Strategy, Technology, Venture Capital

Industry Study: Freight Trucking (#Startups)

November 23, 2016 by Brian Laung Aoaeh

Embed from Getty Images

Co-author: John Azubuike (@jnazubuike), KEC Ventures.

Note: This article does not necessarily reflect the opinion of KEC Ventures, or of other members of the KEC Ventures team.

Note: Updated on October 2, 2019 to remove charts from Statista because the data has been moved behind Statista’s paywall and no longer adds any value. I’ll look for relevant data when I have time. (Brian)

Introduction

In 2015, the United States freight trucking industry collected gross revenues of $726.4 billion. That accounted for approximately 82% of the total for freight carriers. The freight trucking market is so large because trucks play a critical role in moving merchandise of all kinds between points of production and points of consumption. They also move merchandise between different types of freight carriers – rail, maritime, air.

This post synthesizes what we have learned about the industry since Brian started becoming interested in startups trying to solve problems for the United States trucking market in the summer of 2014, and since John joined KEC Ventures a year later.

In the rest of this discussion, we will refer to “startups” as distinct from “companies”. To ensure we are on the same page;

  • A startup is a temporary organization built to search for the solution to a problem, and in the process to find a repeatable, scalable and profitable business model that is designed for incredibly fast growth. The defining characteristic of a startup is that of experimentation – in order to have a chance of survival every startup has to be good at performing the experiments that are necessary for the discovery of a successful business model.
  • A company is what a startup becomes once it has successfully navigated the discovery phase of its lifecycle. This is the phase during which relatively fixed organizational structures start being built in order to facilitate the firm’s work on behalf of its customers, employees, shareholders, business partners, and society.

KEC Ventures invests in early stage startups. Therefore our primary purpose in studying the freight trucking market is to gain adequate context for the instances when we might assess startups trying to solve problems in this market. We have not yet made an investment in any of the startups in this market.

In the rest of this post we;

  • Describe the freight trucking market,
  • Discuss its market structure,
  • Describe the economics of operating within the market,
  • Describe and discuss the opportunities that startups are pursuing, and finally we
  • Discuss some threats such startups might encounter.

Writing this post is primarily an exercise in documenting what we know in order to identify gaps in our knowledge so that we can fill in those gaps. So if we have missed anything please let us know. If you are building a seed stage startup in this market we would love to hear from you. If there are companies we have not heard of yet, we would love to know that too. You can leave a comment in the comments section below, or you can email us directly;

  • Brian – brian@kecventures.com, or
  • John – johna@kecventures.com.

What Is Freight Trucking?

Freight trucking comprises the handling and transportation of goods of all kinds – providing an important link between producers and consumers. There is an industry adage: “If you bought it, a truck brought it.”

The market can be segmented as follows;

For-Hire: This segment of the market is made up of companies that provide freight trucking services to other companies for compensation. Participants in the for-hire trucking market are subject to state and federal regulation in the United States.

In-house: In-house freight trucking keeps freight trucking within the confines of a company’s business model rather than outsourcing that activity to a for-hire trucking company.

Truckload (TL): This form of freight trucking involves the movement of merchandise that fills an entire truck container.

Less-Than-Truckload (LTL): This form of freight trucking involves the movement of merchandise is too small to fill an entire truck. This means that a number of shipments for different customers can be combined to fill a truck, and the cost of transporting the merchandise is apportioned among the different customers. LTL can be further categorized into parcel carriers and dry van shipping. Parcel carriers carry merchandise made up of units weighing 150 lbs or less. Dry van freight involves shipping merchandise in a standard trailer that is adequate for shipping many different types of good and merchandise.

General: This form of freight trucking involves the movement of any merchandise that does not require specialized equipment.

Specialized: This form of freight trucking requires specialized equipment to move merchandise. Some examples; flatbed trucks, tankers, refrigerated trucks, and hazmat trucks.

Local: This form of freight trucking restricts activity to within a metropolitan area. Local trucking services are characterized by same-day trips, or by trips serving a region within a 150-mile radius of the freight trucker’s operating base.

Long-Distance: This form of freight trucking provides freight services between multiple metropolitan areas, and often crossing several states. Long-distance truckers generally serve regions that are beyond a 250-mile radius of the freight trucker’s operating base.

Intermodal: This involves equipment that can shift between different modes of freight transportation without the need to directly handle the merchandise that is being transported. In this case, merchandise is containerised to make it easy to move from ship to rail to truck for example. Intermodal freight trucking interacts with container ships, railways, cargo aircraft, pipelines, and barges. Intermodal freight trucking is critical in the formation of land bridges.

How Is The Trucking Industry Structured?

According to the American Trucking Association’s Trucking Trends 2015 the United States’s trucking market is characterized by the following statistics:

  • In 2015, trucks moved 10.49 billion tons, or 70.1%, of all domestic freight.
  • Freight trucking collected $726.4 billion in revenues, accounting for 81.5% of all freight transportation spending in 2015.
  • There were 3.63 million Class 8 trucks in operation in 2015. ((Class 8 trucks belong to the highest Gross Vehicle Weight Rating (GVWR) assigned by the US Department of Transportation (US DOT).))
  • The industry employs more than 3 million truck drivers.

Approximately 80% of all trucks in the trucking market belong to fleets with 50 trucks or fewer, 97% belong to fleets of 20 trucks or less, and 90% of the market is represented by fleets with 6 trucks or less. Estimates suggest that there may be as many as 1,200,000 companies in the US trucking market. The largest 50 companies account for 40% of total industry revenues. Owner-operators represent about 10% of drivers in the trucking industry. ((Owner-operators own and operate their own trucking business. Most own 1 truck and 1 trailer.))

About 50% of the freight trucking market operates in the for-hire segment. We assume that the vast majority of owner-operators exist in the for-hire segment. Roughly 15% of the for-hire freight market is LTL, while the remaining 85% is TL.

Brokers serve as a liaison between shippers and carriers by matching the unique needs of the shipper with a registered freight trucking carrier capable of fulfilling the shipper’s needs within established and agreed constraints. By some estimates, truck freight brokers earn as much as $50 billion or more in revenues each year.

What Are The Economics Of The Trucking Industry?

Freight trucking is a challenging business that is characterized by net margins of 7% or less, with most carriers earning margins of about 5%. The main operating expenses that carriers have to contend with are; ((2014 estimates, developed from American Transportation Research Institute’s An Analysis of the Operational Costs of Trucking: 2015 Update.))

  • Fuel Costs: 34.2%
  • Truck/Trailer Payments: 12.6%
  • Repair & Maintenance: 9.3%
  • Truck Insurance Premiums: 4.2%
  • Permits & Licenses: 1.1%
  • Tires: 2.6%
  • Tolls: 1.3%
  • Driver Wages: 27.1%
  • Driver Benefits: 7.6%

Other cost-drivers in the trucking industry include;

  • Driver shortages and workforce retention issues,
  • Federal and state transportation regulations,
  • Environmental regulations, and
  • Technology for fleet management.

What Opportunities Are Startups Pursuing?

Startups are pursuing opportunities in the freight trucking industry for a number of reasons;

  • First, it is a huge market.
  • Second, industry outsiders perceive it to be highly inefficient and hence, ripe for “disruption”.
  • Third, from a technologist’s perspective, there’s a lot of room to apply technology to fleet management and operations, freight brokerage, and compliance.
  • Fourth, it is highly fragmented – making it an attractive candidate for the types of software platforms that have already transformed the way business is done in other markets.

Before we discuss the opportunities that startups are pursuing, it may help to get a sense of the investment landscape in which such startups are competing for capital.

Based on the data from CBInsights in the 2 charts that follow, we see that there has been a significant increase in the aggregate amount of capital investors have deployed into startups in the freight trucking market each year since 2009. We also see that this trend is reflected in the average and median deal size, respectively. The data is as of mid-November 2016.

Funding to trucking startups has steadily increased YoY since '09 and is up more than 27% since 2015
Funding to trucking startups has steadily increased YoY since ’09 and is up more than 27% since 2015.
Average and Median deal size are both up significantly this year as well.
Average and Median deal size are both up significantly this year as well.

To put the data from CB Insights in context, a quick search on AngelList yields 149 startups described as “trucking startups” with 522 investors. A cursory inspection of that list suggests that most are based in the United States, with a few in other parts of the world such as the United Kingdon, India, Canada, the Middle East, Bulgaria, Germany, and Brazil – the opportunity is global.

Some of the more notable investors in freight trucking startups include; the United States Energy Department’s Advanced Research Projects Agency – Energy (ARPA-E), SandHill Angels, Band of Angels, Nokia Growth Partners, Intel Capital, UPS Strategic Enterprise Fund, Volvo Group Venture Capital, Institutional Venture Partners, Pritzker Group Venture Capital, Kleiner Perkins Caufield & Byers, GM Ventures, Capital One Financial, Wells Fargo & Company, Google Ventures, Index Ventures, Sequoia Capital, Harrison Metal, Accel Partners, DFJ Growth Fund, Draper Fisher Jurvetson, Andreessen Horowitz, Bessemer Venture Partners, FirstMark Capital, Fidelity Investments, SV Angel, Goldman Sachs, Lowercase Capital Benchmark, First Round Capital, Industry Ventures, Wellington Management, Founder Collective, BlackRock . . . etcetera etcetera – investors believe that big companies will emerge from the startups in this market.

Broadly, the following categorizations can be used to discuss the areas in which startups are most active. ((Startups listed are obtained from CBInsights, as of Nov 15, 2016. The authors developed the categories into which the startups are grouped. With only a few exceptions, each startup is listed under the category the authors believe represents the majority of each startup’s business activity based on publicly available information.))

  • On-demand Commercial Trucking Services: These startups match shippers directly with carriers by cutting out the freight brokers who act as middlemen in the industry. Brokers can command fees as high as 40%, or more, of each transaction. Also, the process by which a broker connects a shipper with a carrier is manual and time-consuming. On-demand trucking startups build apps that promise to remove the inefficiencies that arise from dealing with a broker. Typically such startups say they are “disrupting” the truck freight brokerage market. Some of the startups in this category are; Convoy, Cargomatic, Cargo Chief, Deliv, Keychain Logistics, Kanga, Optimal Dynamics, RenRen Kuaidi, Roadie, Schlep, and Transfix. ((On-demand trucking apps and electronic load boards fulfill the same function, though people think of them as different. Electronic load boards aggregate carrier capacity listings, as well as shipper loads, in one web-portal that freight trucking market participants can access.))
  • Freight Tracking & Fleet Management: These startups provide telematics solutions that enable truck fleet operators to track the location of vehicles in their fleet in order to increase the overall efficiency of their operations. Some of the startups/companies in this category are; Fleetmatics, Telogis, Teletrac, Cloudmade, Drivefactor, Peloton Technology, OmniTracs, OnFleet, Convey, Supply Chain Integrity, Traansmission. The product that truckers pay for is often a bundle of hardware and software, with a monthly subscription for the software.
  • Compliance & Safety: These startups provide hardware and software products that enable freight truck operators comply with state and federal regulations in the United States. The benefit to fleet operators is that these products minimize the number of times a fleet is found non-compliant. They do this through; Compliance related safety reporting and monitoring at the individual driver level, compliance related safety reporting and monitoring at the fleet-wide level, and efficient reporting and monitoring through the reduction of paper and pencil record-keeping, and the creation of electronic audit trails for safety and compliance. Non-compliance can result in the grounding of an entire fleet while the operator tries to fix the problem identified by regulators. Some of the startups in this category are; Big Road, Keep Truckin, Trucker Path, GreenRoad Technology, SmartDrive Systems. The product that truckers pay for is often a bundle of hardware and software, with a monthly subscription for the software.
  • Delivery Platforms & Last-Mile Parcel Delivery: These startups build platforms for large enterprises and for small-and-medium sized businesses to enable them to offer shipping price comparisons, on-demand pick-up and delivery, and other services related to shipping merchandise and products to end-use customers.  Some of the startups in this category are Darkstore, Dispatch, Kanga, Doorman, Rickshaw, Bringg, Narvar, Shyp.
  • Autonomous Vehicle Platforms (Trucks): These startups develop and build automation technologies and platforms for the trucking industry with the goal of lowering costs, improving safety, and generally increasing efficiency and productivity in the freight trucking industry. Typically, a software-focused startup partners with an established truck manufacturer to build and test a self-driving system. The Chinese government is encouraging this nascent market as a means of tackling some of the problems that confront its freight trucking industry, where, for example, driver-related costs account for about 40% of operating expenses. According to CB Insights, the following startups fall in this category; Mobileye, Otto – which was acquired by Uber, Peloton Technology, Drive.ai, Quanergy Systems.

First Analysis Securities Corporation estimates that: ((Howard Smith and David Gearhart, Internet of Things/Machine-to-Machine: Fleet Management Solutions. January 2014.))

  1. Fleet management software generates about $5.5 billion of revenue globally, with growth estimated at 21% compounded annually between now and 2023, bringing the market size to $37 billion in 2023.
  2. Fleet management software in the United States generates about $1.6 billion of revenue, with growth estimated at 19% compounded annually till 2023, growing to $8.6 billion.
  3. They estimate a theoretical global market size of $92 billion and $11 billion for the global and US markets respectively, suggesting 6% and 14% penetration in those markets respectively.

Freight Trucking Software Startups

Threats

To a naive observer, the opportunities in the freight trucking market appear ripe for the taking of early stage startup companies intent on “disrupting” it. Moreover, it would also appear that incumbent players in that market are slow, lumbering, and clumsy organizations incapable of keeping up with the threat that startups pose. While some of that is true, there exist a number of threats that might take some early-stage startups and their investors by surprise. Below, a broad outline of those threats that we pay the most attention to when we encounter such startups.

Nice-to-Have or Necessity?

As a result of the thin margins earned by freight truck operators, products targeted for sale to owners of truck fleets must be seen as necessary for ongoing operations as a result of regulatory changes, or as a demonstrable catalyst for increased profitability. In the latter case, the startup that seeks to sell the product must be in a position to quickly provide a return-on-investment to a fleet operator after the decision has been made to adopt the new product. Closely related to this is the issue of ease of use;  Can individual truck drivers or fleet managers learn how to use the product quickly, with little or no training? In markets that have frontline workforce characteristics similar to that of the freight trucking market, psychological lock-in to incumbent products is extremely strong. As a result, attention to UI and UX design is an important determinant of success or failure.

As an example; The Federal Motor Carrier Safety Administration (FMCSA) enacted a regulatory change in December 2015 that mandates and requires automatic electronic logging devices on all commercial vehicles. All trucks have to become compliant within 24 months of the adoption of the new rule. Industry estimates are that 125,000 – 150,000 trucks need to be brought into compliance every month during that 24-month grace period. Once the grace period ends, noncompliance will incur fines and other penalties that could go as far as the grounding of entire fleets for each incidence of noncompliance that inspectors discover.

Trustworthy or Trustless?

The insistence by early stage startups that they will “disrupt” the freight brokerage market overlooks the most important function brokers play; They are arbiters of trust between shippers and truck operators. By using a broker, the shipper outsources the headache of vetting the freight truck operator to whom the shipper’s merchandise will be entrusted while it travels between locations. Furthermore, brokers and shippers have completely aligned interests since both groups stand to suffer adverse consequences if misbehaving truck operators are allowed to remain in business without the implied threat that they stand to lose a significant amount of business. It is not clear if shippers feel that their interests are aligned in the same way, or as strongly, with the interests of truck operators.

Startups pursuing a business model predicated on eliminating freight brokers need to have thought about how they will solve this problem, or if they will solve it at all.

Truckers have a love-hate relationship with brokers. But what I learned is—brokers aren’t going anywhere anytime soon because brokers own and manage the relationship with shippers. And a point that cannot be overstated—shippers, too, have complete faith in and reliance upon their brokers.

–  Jason Cahill, Why The WSJ’s “Reinventing the Trucking Industry” story got it wrong. Jason is the founder of Traansmission, a Brooklyn, NY-based startup in the freight trucking market.

By some estimates the freight brokerage market is worth more than $50 billion in annual revenues. Given the popular perception that brokers are an unnecessary part of the industry, we expect that several startups will continue trying to eliminate brokers altogether.

Will The Startup Solve The Dynamic Assignment Problem?

The dynamic assignment problem arises when customer demands for a service arrive continuously and randomly over a period of time, requiring a dispatcher to assign and send a service agent to satisfy each demand request. The number of service agents is limited relative to the potential number of random customer demands. The fulfillment of each task imposes a cost on the dispatcher, and extreme surpluses or shortages of tasks or service agents impose system-wide costs that can result in system-wide failures.

The dynamic assignment problem is a resource allocation problem. More specifically, it is a problem of allocating resources in an optimal manner, given uncertain conditions.

It should not be difficult to see why this problem arises in the freight trucking market. On one hand, shippers randomly demand freight services, to move merchandise between locations. On the other hand, freight carriers must satisfy that demand in a manner that maintains trust and meets shippers’ expectations.

The Stochastic Optimization Approach

Professor Warren Powell of the Computational Stochastic Optimization and Learning (CASTLE) Labs at Princeton University has studied the problem of optimization under uncertainty extensively. Specifically, the Transportation and Logistics Laboratory at CASTLE Labs has been working on trying to solve this problem for those markets since 1981. Their work spans stochastic fleet management in trucking, rail and air, real-time dispatching, routing and scheduling, and spare parts management, among others.

In his paper; A Stochastic Formulation of the Dynamic Assignment Problem, with an Application to Truckload Motor Carriers, he delineates the dynamic assignment problem in freight trucking into a supply management problem and a demand management problem.

The supply management problem is a capacity management problem related to serving the customer – in this case, the shipper. To solve this problem, fleet operators must;

  • Assign different drivers to handle different shipping requests,
  • Reposition idle drivers and trucks from one region to another in anticipation of future shipping requests,
  • Determine how a load of merchandise should be handled once it has been picked up by a driver – move the load directly to its destination, hold it temporarily till a new driver can be assigned to move it to its final destination, or move it to its final destination using a relay network of drivers.
  • Manage the flow and inventory of trailers that will be needed to move freight.

It should be obvious that driver management is an important dimension of the capacity management problem. This observation is further supported by the fact that driver-related costs account for 34.7% of the operating costs of a truck. Solving the driver management requires giving consideration to;

  • Driver work rules,
  • Driver pay,
  • Returning drivers home,
  • Driver skills, and
  • Driver quality.

The demand management problem arises because the shipper calls the carrier, or vice versa. Prof. Powell divides shippers into 3 broad categories;

  • Primary shippers – the carrier has an obligation to move any merchandise that the shipper needs moved,
  • Secondary shippers – the truck operator is obligated to move merchandise for that shipper only in certain traffic lanes, e.g. only southeast freight, and
  • Tertiary shippers – the carrier may accept or reject a request to move the shippers merchandise.

To solve the demand management problem, carriers must solve for 2 aspects of the fleet management problem;

  • Load acceptance or rejection, based on real-time capacity constraints or fleet-balance considerations, and
  • Load solicitation, to correct short-term surplus capacity in certain regions that the carrier serves.

Solving the fleet management problem requires that carriers have a means of quickly;

  • Assessing the profitability of loads tendered by secondary and tertiary shippers – “spot” loads as they are known in the industry,
  • Anticipate areas of surplus or shortage within the carriers’ fleet of trucks, and
  • Make trade-offs between current and future demand, especially if future demand may come from a primary shipper.

Given the low-margin nature of this business, it is not difficult to see why these considerations matter. The difference between a year that ends in the black and one that ends in the red may amount to relatively no more than a few loads of merchandise. ((This is a reality I encountered in the general aviation industry, between 2008 and 2012.)) A product that solves the profitability problem and the optimization problem has superior chances of surviving the vagaries of this industry. This suggests that a startup that incorporates stochastic optimization into its freight trucking platform has a better chance of success over the long term than its counterparts that do not.

You can read more about the work being done at CASTLE Labs on this application of stochastic optimization in the papers listed below;

  • An Approximate Dynamic Programming Algorithm for Large-Scale Fleet Management: A Case Application
  • Approximate Dynamic Programming Captures Fleet Operations for Schneider National
  • Sensitivity Analysis of a Dynamic Fleet Management Model Using Approximate Dynamic Programming
  • Incorporating Pricing Decisions into the Stochastic Dynamic Fleet Management Problem

The Contract Theory Approach – Real Options

Professor Warren Powell’s approach is one way to solve the dynamic assignment problem. Another approach is proposed by Mei-Ting Tsai, Jean-Daniel Saphores, and Amelia Regan in Freight Transportation Under Uncertainty. This approach applies concepts from financial derivatives markets and real options theory to craft Truckload Options. A truckload option is an option to buy or sell freight services on a specific route, at a predetermined price, on a specific date. ((A derivative contract is a contract whose value is based on the value of an underlying asset.))

A truckload call option gives its holder the right to buy freight services on a specific route, at a predetermined price, on a predetermined date. The decision to exercise the call option will be made by the holder based on information available leading up to the exercise date. A shipper will exercise the option to buy freight services if the strike price of the truckload call is less than the spot price, otherwise, the truckload call is allowed to expire. The total cost to the shipper is the option premium plus the cost of shipping.

A truckload put option gives its holder the right to sell freight services on a specific route, at a predetermined price, on a predetermined date. The decision to exercise the put option will be made by the holder based on information available leading up to the exercise date. In this case, a freight carrier will exercise the option to sell freight services only if the strike price of the truckload put is greater than the spot price, otherwise, the put will be allowed to expire.  While put options are possible in theory, in practice they are unlikely to be widely used.

Generally, options are less beneficial when uncertainty is low, and this is also true for truckload options when system-wide demand uncertainty is low. However, Mei-Ting et al argue that the system-wide benefit of truckload options is positive. This suggests that there may be some competitive advantage to be derived from implementing a truckload option pricing mechanism as part of an on-demand trucking services marketplace.

A Rake Too Far?

The argument may be made that expecting a startup that operates an on-demand freight services marketplace to solve the dynamic assignment problem is asking too much. After all, such marketplaces mainly target owner operators.

Based on our back-of-the-envelope calculations, owner-operators probably represent 5% of the overall freight trucking market. Given the economics of operating a truck, it seems to make sense for startups to think about how a product might eventually migrate beyond that initial customer base in order to include operators of small, medium, large fleets, and possibly freight brokers too. In other words, the minimum viable product does not need to solve the dynamic assignment problem. But, if the startup is to survive and become the big, dominant company in its market, it ultimately needs to solve the dynamic assignment problem. Doing that will eliminate, or minimize, the probability of deadheading which is a source of much of the friction in the spot market. ((Deadheading occurs when a truck is operated while it is empty. Such a trip is described as a dead leg.))

Will Freight Services Marketplaces Offer Freight Factoring Services, Directly Or Through A Partner?

Given the economics and structure of the freight trucking market, it is not difficult to understand why owner-operators and some fleet operators will find services that enable them to sell their accounts receivables assets in order to meet cash needs as part of a multi-sided marketplace highly desirable. In a typical accounts receivable financing transaction the receivables are sold at a discount in exchange for certain cash. Alternatively, the accounts receivables can be used as collateral for a short-term loan. ((Technically, accounts receivables factoring is the outright sale of the asset. Invoice discounting – assignment of accounts receivable, is using the asset as collateral for a short-term loan.))

Typical services would include; credit checks, credit risk management, freight insurance, accounts receivables collections and management, receivables financing . . . as described above.

According to Factors Chain International, in 2015 factoring revenues amounted to $104 billion. The domestic only portion of that market was 84%.

Everything being equal, a freight services marketplace that also offers these kinds of financing options should win over its counterparts that do not.

Cargomatic is forced to pivot from its "Uber for Truckers" business model.
Cargomatic is forced to pivot from its “Uber for Truckers” business model.

Wrapping Things Up

Estimates suggest that the global transportation services market is worth $12 trillion annually. In the United States, that market is believed to exceed $1.0  trillion each year. As we have already stated, freight trucking accounts for more than $700 billion of that total. Thanks to the friction, inefficiency, and opacity that characterizes the market startups will continue building products to solve problems that freight truckers and their customers face. Some of the business models that these startups implement will face more threats than others as they attempt to navigate the path from discovery, to becoming big and market-dominating companies. But, the opportunity exists, and it is big, and it is global . . . and holds tantalizing promise for the startup founders and venture capitalists who succeed in solving the puzzles it presents.

Writing this post was primarily an exercise in documenting what we know in order to identify gaps in our knowledge so that we can fill in those gaps. If we have missed anything you feel is important please let us know.

If you are building a seed stage startup in this market we would love to hear from you. If there are early-stage startups we have not heard about yet, we would love to know that too. If you invest in or have invested seed-stage startups pursuing any of the opportunities we have described above, or others in the freight trucking market, we’d love to collaborate with you on future investments.

You can leave a comment in the comments section below, or you can email us directly;

  • Brian – brian@kecventures.com, or
  • John – johna@kecventures.com.

Update: November 24, 2016 at 07:30 to include data from AngelList and representative sample of investors from CB Insights.

Filed Under: Entrepreneurship, Industry Study, Investment Themes, Investment Thesis, Market Study, Technology, Venture Capital Tagged With: Early Stage Startups, Entrepreneurship, Freight Trucking, Industry Study, Innovation, Investment Analysis, Logistics & Supply Chain, Market Study, Markets & Industries, Startups, Technology

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