Tradeworks.vc

Logistics (using a broad definition) accounts for around 13 percent of gross world product (GWP) – around $10 trillion – which makes logistics perhaps the most necessary evil in the world.

Logistics is characterised by high capital, labour & energy intensity, a very long tail of SMEs and being hopelessly antiquated – with notoriously poor service. Some of the most famous names in logistics still rely heavily on manual processes and decades old tech, e.g. featuring AS400 “green screens”. While much logistics data has been digitised – the fax has mostly been replaced by digital data silos like email, pdf and spreadsheets – we’re still far away from digitalisation, and few companies have embarked on a digital transformation (see box).

Logistics is hardly synonymous with technological innovation in large part because of a strict safety culture that makes risk-taking very difficult. Market volatility and a trading mentality also play a role – when markets are down, there’s no money to invest in innovation; when markets are up, everybody makes money regardless. This is unfortunate, because logistics technology (LogTech) is one of the three main drivers (together with economics and policy) of global logistics and trade, which is the foundation of economic and human development.

Logistics costs in the least developed countries account for around 25 percent of GDP, 3x the most developed countries at around 8percent.Taking China as an example, in 1980 logistics accounted for >20 percent of GDP, which stood at $300 billion. Fast forward 40 years to 2020 and logistics accounted for <15 percent of GDP, which had exploded to $14 trillion. During that same period, 800 million Chinese were lifted out of poverty – a transformative change never before seen in human history. If LogTech innovation could help us repeat this for the rest of the developing world, another 800 million people could be lifted out of poverty. This is one of the world’s biggest investment opportunities - ever.

But this transformation will take a lot longer than necessary because LogTech innovation is significantly under-invested. eCommerce accounts for only 5 percent of GWP, or $4 trillion, but attracts almost 8 percent of venture capital (VC), or $25 billion. Compare this to less than 4 percent of VC for logistics, or just $11 billion. eCommerce attracts 5x more VC investment. Speaking from experience, many startups and scaleups (outside digital freight forwarders, last mile delivery and visibility) struggle to raise capital because LogTech is still uncharted territory for many VCs.

“You can always identify a necessary evil by how it hits the headlines. Logistics almost only hits the headlines when something goes wrong!”

So in VC terms, the Total Addressable Market (TAM) is huge, the improvement potential is staggering, and investors aren’t tripping over each other, so valuations are reasonable. So what gives?

In logistics, it’s all about timing!

Logistics customers and employees are increasingly becoming digital natives, and they simply can’t live with broken user experiences. COVID-19 volume spikes and service disruptions have made these user experiences totally unbearable (and costly). The cost of fixing these broken user experiences with technology have dropped like a stone. And when one major player digitalises one core process, it triggers a cascade of digitalisation among customers and competitors.

Long story short, logistics is undergoing a technological (and cultural) paradigm shift, from digital applications and data silos to digitalised, integrated and networked operating systems.

The high capital, energy and labour intensity provides massive opportunities to improve productivity and efficiency through tech. Huge fragmented markets with a long tail of SMEs (that cannot build their own tech) provide an endless stream of customers –LogTech startups that build tech for thousands of customers can scale quickly. And since logistics is a globally networked sector where data flows across industries, startups can relatively easily increase the scope of their business models, organically developing new use cases and markets.

Logistics has plenty of important problems to be solved, and many of the solutions are already provided by startups (see box).

Big customers should look to startups for these solutions rather than developing (wasting money on) their own. Small customers should be early adopters of these solutions, allowing them to get an edge over their slower competitors. And VCs should recognise the incredible opportunities that LogTech presents, so that even more innovative forces can be unleashed!

The digital transformation of the entire sector has just begun, and there has never been a better time to invest in, and benefit from, LogTech.