The FreightTech scene is almost unrecognizable from when venture capitalists discovered it as a marketplace in 2015. Since then, investment in the space has grown exponentially, but what venture capitalists are looking for has also changed. Here we give FreightTech founders five tips for successfully raising venture capital (VC) money today.
1. Understand where you are in the VC cycle.
Understanding where you are in the VC cycle is one of the most important yet overlooked things you can do to increase your chances of successfully raising capital. Venture capitalists raise money for their funds from limited partners who also invest in other asset classes and think about risk on a portfolio basis. At some points in the economic cycle, when sentiment is bullish and VCs can easily raise money, they will have more capital to deploy and may seek risk more aggressively. In other periods, venture capitalists will become relatively risk averse and flee unproven or capital-intensive business models for the tried and true.
What does that mean for your startup? It means that certain kinds of business models are more attractive to venture capitalists for reasons external to the startup itself, due to the risk appetite of investors. As an example, in FreightTech, marketplace-based businesses found funding more easily in 2018 and the next year, but WeWork’s canceled IPO had a chilling effect on investment at the end of 2019. VC fled marketplaces to software-as-a-service (SaaS) companies with annual recurring revenue and higher margins that are perceived to be higher quality.
In addition to business models, there are also successive themes that develop like waves across the landscape: digital freight-matching, then autonomous vehicle technology, then urban mobility, etc. Is your company on the front end of a wave, in which case you want to be first-mover? If you’re on the back end of the wave, you want to present a nuanced, differentiated approach to the problem that speaks to any issues that might have become apparent at the older companies.
Depending on where the VC cycle is and how your company fits into it, you may get to be more or less choosy about the investors you let into the round. Picking an investor is about tradeoffs. The actual terms of the deal may have the most important trade-offs, but consider too the pros and cons of picking a sector-focused fund versus a corporate venture versus, say, a large fund that’s a “tourist” in your neck of the woods. What kind of support is the investor likely to provide you? What signal does their participation send to funds that may want to invest in later rounds? Do they have capital to follow on their investment? Are they approaching the end of their fund’s typical holding period, based on vintage year, and need a faster return, or would this deal be early in the fund’s cycle?
2. A FreightTech founding team needs industry expertise.
In 2015 and 2016, FreightTech founders without deep industry experience but a compelling idea — often generated by an analogy to another industry like “Uber for freight” — could secure generous funding and get to work.
That’s no longer really the case, at least according to 8VC founding partner Jake Medwell, who was named the most active FreightTech investor by Pitchbook.
“We back very well-versed founders who really know the ins and outs of the space versus two computer programmers from XYZ university who see a big, total addressable market,” Medwell said in a recent interview with FreightWaves.
A founding team with tenure in the transportation and logistics industry will be able to secure data partners, proofs-of-concept trials, customers and integrations with incumbent companies, allowing your startup to get a minimum viable product to market more quickly. Ideally, members of your startup’s founding team will already have relationships with potential acquirers whose needs can help guide product development.
It’s likely that even with an experienced founding team, there will be gaps. Maybe you have a surface transportation or non-asset logistics background but you’re building solutions for a shipper’s upstream supply chain, for instance. In that case, backfill gaps in your knowledge and relationships by taking on advisers who can complement your strengths.
3. Calculate the opportunity carefully but not too conservatively.
The global transportation and logistics industry is truly massive, worth several trillion dollars annually. Articulating the scope of the industry may be important for getting VCs that don’t understand freight interested in the opportunity, but it won’t be enough to secure an investment. You should have a good idea how the customer segment you’re attacking is structured — how many large-, mid- and small-cap companies there are — and what size their contracts should be.
It’s important to think about your total addressable market (TAM) then, from both a top-down and bottom-up perspective — thinking it through from both the size of the segment and its overall growth rate and by estimating the number of your potential customers and how much you can charge them for your product.
Be realistic but don’t be too conservative. An early investor in Uber, for example, might have assumed that Uber’s total revenue would eventually be some fraction of the developed world’s taxi industry, worth, say, $50 billion. But within two years of launching, Uber had more cars in San Francisco than the city had taxis when Uber entered the market. Within 10 years, Uber’s revenues were larger than the global taxi industry in the year it was founded. The lesson here is that superior products can create additional demand: Don’t be too conservative when estimating your company’s opportunity.
Another reason not to be too conservative is that your company may find additional classes of customers. It’s worth thinking about all of the potential uses of your company’s product, not just its core users and early adopters. An aggregator of freight-market data might build a product for 3PLs, for example, but then realize that financial institutions and government agencies are highly interested in the same product.
4. Set the right growth expectations.
FreightTech startups — especially those building enterprise SaaS, which is valued at the highest revenue multiple in the space — don’t grow as fast as peer-to-peer mobile apps or social networks. They don’t go viral. Instead, complex trials, lengthy sales cycles and land-and-expand strategies focus on building a smaller number of larger, more lucrative relationships over time.
“We’ve seen that viral, blitz-scale growth based on solid unit economics doesn’t really happen in the industrial environment as more investment has come into the space since 2016,” said Ty Findley, managing partner at Austin-based Ironspring Ventures, in an interview with FreightWaves. “Pure revenue ramp can be a lagging indicator to more industry-specific leading indicators like data access, for example, which legacy companies don’t just hand out. Even getting a master service agreement signed can be a big feat — it doesn’t come with immediate revenue recognition, but now you quietly have a 12-month jump on anyone else trying to go down that path.”
Not only is it vital to have an informed, achievable growth plan when you’re trying to raise money, but modeling growth appropriately will be crucial to allocating the capital you raise once you’ve begun scaling your startup.
5. Focus on the metrics appropriate to the series you’re raising.
Venture capitalists look for different signs of success at different stages of a startup’s life, and you have to know how to speak the language of the investors you’re pitching. At the seed stage, what matters is the idea, the market and the founder’s story. You probably don’t have a product or revenue yet, but what you can pitch is TAM and founder-market fit. Why is that important?
There are two mistakes that early VC investors beat themselves up for making. The first is investing in the wrong market. The “wrong” market here means a market that is incapable of supporting your startup’s growth into a company that can eventually be valued at $1 billion or more. Even just three years ago, it was far more difficult to sell venture capitalists on the idea that transportation and logistics or supply chain could support multiple unicorns. That’s no longer the case today, but do not underestimate how important the size of the opportunity — the potential upside — is to VCs: They’re trying to hit a home run with every at bat.
The second mistake VCs hate making is identifying the right market, but selecting the wrong founder/team. Why are you the best person to found this company at this time? That’s what VCs want to know, and your story—your experience, knowledge, relationships, and record as an entrepreneur—is vital here.
In Series A, you have a minimum viable product: Now you need to show that people are willing to pay you money for it. The oft-quoted benchmark for a startup’s readiness to raise Series A has been hitting $1 million in annual-recurring revenue, but that’s by no means a hard and fast rule. What matters is that you’re adding new revenue fast, month-on-month and quarter-on-quarter.
In Series B, sales efficiency starts to matter more. How much does it cost you to acquire a new customer? How does your customer acquisition cost (CAC) relate to your average annual contract value? In other words, what’s the payback period for a given customer? You still need to grow fast, but you need to demonstrate that your company’s business model makes sense and can grow sustainably in order to attract new capital.
