Logtech investment slump signals pivot from disruption to enablement

The cratering of venture capital investment into logistics technology last year signals not only a freight market cooling from the overheated frenzy of the COVID-19 pandemic but an admission that venture capitalists (VCs) are pivoting their focus from disruption to enablement.

Investment in logistics startups plummeted to $2.9 billion in 2023, down almost 90% from a peak of $25.6 billion in 2021 and the lowest total since 2015, according to a report from research from consulting firm McKinsey released Aug. 1.

It seems like a lifetime ago, but the roots of the logistics technology investment boom took hold in 2012 — eight years before the pandemic-fueled funding surge — back when now-name brand companies such as Flexport, Freightos and Convoy were just being founded.

At that time, VCs largely unfamiliar with how international and domestic supply chains operate were swayed to invest modest sums of money into startups that spun tales of an inefficient, prehistoric industry still overly reliant on fax machines and phone calls.

But those narratives ignored how much the industry had progressed since the dotcom boom of the late 1990s. By 2012, software vendors had largely convinced skeptical buyers that things like cloud computing and monthly subscription payment models were safe and suitable for large and complex enterprises.

Incumbent staying power

Those early investors in logistics startups also underestimated the staying power of incumbent software providers, forwarders and brokers and misunderstood the length of sales cycles for logistics technology providers. Once the sugar high of the pandemic wore off, VCs realized that long sales cycles are an ingrained feature of the logistics industry, not a bug, and not a result of antiquated technology and sales models.

In other words, the industry had — and still has — major inefficiencies, but the opportunities to disrupt the market with new technology were — and still are — a bit overblown.

Indeed, despite the nearly $140 billion invested in logistics startups globally from 2012 through 2023, according to McKinsey, most of those inefficiencies remain, and the underlying structure of the industry has hardly changed.

No major third-party logistics providers (3PLs) went out of business in the past decade, although there was some natural consolidation through mergers and acquisitions; the same can be said of large, enterprise-focused supply chain software incumbents.

These investments have made an impact. There has been a more tangible focus on improving user experiences and digitizing and, more recently, automating repetitive processes to allow human employees to focus more on exception and relationship management.

Market structure intact

But these incremental improvements have not disrupted the market. In that sense, the pullback in venture capital investment should have been expected. VCs now realize that startups need to plan for long sales cycles rather than attempting to reinvent them. Perhaps more importantly, they recognize that incumbents are potential customers for technology that enables, rather than roadblocks that technology must disintermediate.

The fact that investors have turned to enablement over disintermediation is a sign of how much their attitude toward technology adoption has changed. It's been two years since investors poured nearly $1 billion into Flexport, the second such funding round for the so-called digital forwarder and the last such investment into any company aiming to change the game. Most of the comparatively large investments have gone to firms looking to empower, not replace, shippers' logistics teams and 3PLs' sales and operations personnel.

There will always be those who believe venture capital investors are ill-suited to the low margins and hyper fragmentation of global logistics. But just a few days after McKinsey released its findings, supply chain software vendor Altana announced a $200 million funding round, the largest in the industry since 2022.

Whether venture capital investment in logistics technology will rebound from 2023 levels — let alone return to the heights seen during the pandemic — remains to be seen. But at least in the short term, investors will be far more reluctant to place large bets on startups claiming they will succeed in disrupting an industry so many others have failed to disrupt.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.