Transition in platforms step 6
The surge of a new generation of venture capitalist (VC) backed digital freight platforms began with Industry 4.0 i.e. 2011 onwards, peaked at 2021, and around mid 2022 a period of consolidation could be observed in the market.
Are these phases of expansion and contraction of the business cycle (also called boom and bust cycle) a new phenomenon or are they unexpected?
I have been studying the evolution of digital platform business models in freight transport since 2014, while paying special attention to the independent third party models operating in the EU and their role in decarbonization.
A brief review of market data on consolidation of selected platforms and related literature reveals that such business cycles have taken place earlier as well.
In this post, the discussions include reasons and consequences of consolidation, followed by insights and thoughts regarding the actions mature platforms take in face of uncertainties. Importantly, the majority of platforms mentioned are those discussed in my earlier posts. It is worth noting that the market conditions in recent years have impacted several firms, including tech-giants such as Amazon and Meta (1), i.e. the phenomenon is not limited only to the platforms mentioned in this post alone.
The consolidation
The data collected on the VC backed platforms founded between 2012 and 2017 indicates their rise has been exponential (2). Secondly, the life cycle of these tech-startups, unlike traditional firms in earlier years, is “compressed” (3). Thirdly, it is not just one but a variety of business models have been affected. The recent developments in the platforms with regards to consolidations are as below. The year the platform was founded and the funds raised are mentioned in brackets.
The Seattle based freight brokerage platform Convoy (2015, over $1Billion), after it’s shut down in October 2023 recently was taken over and relaunched by the digital freight forwarder Flexport, a partner since 2021 (4).
The Berlin based digital freight forwarder Instafreight (2016, $75.2 Million), despite winning large customers recently, filed for insolvency in December 2023 and “buyers are being sought” (5). The Amsterdam based Quicargo (2016, $8Million) filed for bankruptcy in January 2024, and was taken over shortly after (6).
In the multimodal sector, Flexport (2013, $2.5Billion, latest $260M in January 2024) cut 15% of its staff in another round (7). Even Freightos (2012, over $95Million), a leading marketplace in air and ocean transport, that was publicly listed in January 2023 and is showing sound growth, laid off 13% of its staff in July 2023 (8). Forto (2016, ca. $600Million) a digital freight forwarder that also offers rail freight transport, laid off 10% of its staff in Europe and closed offices in Spain e.g. Madrid. (9). Cargo.one (2017, ca. $64Million), a platform for booking and marketing air capacity, also laid off employees some employees despite its accelerated growth (10).
The real-time transportation visibility multimodal platforms e.g. Fourkites ( 2014, ca. $242Million) laid off 15% of its staff, while Project 44 (2014, over $900Million) that also showed activities in rail freight, laid off 116 people in 2023 (11).
Research literature shows that a similar cycle took place between late 1990’s and 2000 (dot-com boom). Data collected was based on 236 independent marketplace platforms
that were founded upto the year 2001;
by 2005, 104 (ca. 44%) of the platforms continued to operate,
121 (ca 51%) ceased to operate and
11 were acquired in the period of consolidation (12).
So what were the key reasons that so many VC backed platforms are being affected in the recent consolidation?
Key reasons
From the data collected it could be observed, that there were a mix of common reasons as also reasons specific to platforms.
For Convoy the reason for its shutting down was attributed to the “freight recession and tighter capital markets” (4). For Instafreight, it was the “potential investor’s withdrawal during the current financing round” (5).
The layoffs at multimodal platform Flexport came amongst others due to “macroeconomic downturn”. For Freightos and Forto these were due to “persistent weak/poor market conditions”, as both platforms reduced costs to achieve profitability (8, 9). Project44 attributed it to “lower shipping rates, inflated labour costs and higher interest rates” (11). The lower shipping rates can result e.g. when supply of transport capacity exceeds the demand.
Unexpected market situations like Corona, Blockage in Suez Canal, and Red Sea crisis can contribute to shorter boom and bust cycles. The market behaviour e.g. speed in adopting digitalization, new (policy)directives, technological innovation (e.g. artificial intelligence, electrical vehicles, alternative fuels) and dependence on a demand side/investor can reinforce positive but also negative feedback loops for platforms.
The short-term decisions of some VC backed platforms in line with the VC’s “focus on achieving rapid growth” at all costs may have affected the growth of some platforms negatively (10).
Whereas some of these issues are not fully in control of the platforms, social media and employer feedback platforms reveal management issues e.g. in making strategic choices, in creating the right environment for growth, in communications (e.g. on making decisions like layoffs public).
The consequences
Who, in a platform’s ecosystem, is affected and how? Such consolidations appear to result in losses but also gains.
Losses: The recent comments on platform related posts reflect the demand and supply side views on losses. These reflect how carriers can lose trust. E.g. In case of Convoy, the abrupt shutdown (did not file for bankruptcy) left small time carriers, who were already struggling in the freight slump, uncertain about the payments for the services they had delivered. Such events can aggravate the ongoing shortage of truck drivers (also in Europe), as many drivers leave the profession, and others do not want to join it. Shippers leave or switch to other platforms to ensure continuity in their business. Convoy’s technology and a small team did get taken over by Flexport, however without the liabilities and assets (4). Lay-offs mean losing talent in a market where subject matter expertise is scarce, thus requiring more resources to rebuild the know-how later.
Maturity improvement: evidently platforms can respond by adaptively reconfiguring their business model and adjusting trade-offs to recover from losses. E.g. prioritizing projects (withdrawing from markets, services) for retaining a clear business focus, revising financial outlooks and developing new capabilities. Ensuring business continuity builds trust in customers and VC’s alike, leading to future successful fund raising and business growth. It is estimated, that as a learning, the funding for platforms may continue but become more focused (e.g. on sustainability projects) (10, 13). More data needs to be collected in this regard.
Higher Multimodality: Takeovers can reduce fragmentation in freight platform market and possibly contribute to improving multimodal transport which in turn could reduce CO2 emmissions better.
These above reasons are best summarized in the view of an expert, that the maturity level of freight platforms can fluctuate, i.e. can go down and go up based on the platform’s ability to adapt to changing market conditions while transitioning towards their vision.
Insights and thoughts
It appears that in such cycles, as third party independent platforms mature, they bring the freight transport world a lunge forward with regards to technological innovation. In addition to the existing competition from competitors, service providers, traditional actors, and the market internalize such innovation and develop their digital services further. So in return the competition rises. In such situations, the news of any challenges faced by the platforms (e.g. through shutdowns) can reinforce the stakeholder’s reluctance to adopt them.
This confirms the necessity for handlings of risks and expectations of stakeholders by the platforms on a continuous basis. For the established platforms discussed in this post, this could imply e.g. prioritizing profitability and sustainability (in line with the platform goals) over achieving exponential growth at all costs (e.g. spending more on promotions and advertisements, offering discounts that may lead to an overall operational loss). Gaining and maintaining market trust both, in normal and in uncertain times implies continuous focus on customer (and employee) satisfaction and communication. e.g. by defining, monitoring and controlling implementation of related policies. Answers to questions such as, will my bills be paid, how will my freight be shipped now or what are the alternatives, what will happen to my data during a takeover; and employees concern such as will they be paid their salary, receive support in job search become critical to handle.
Building knowledge in a freight market e.g. rail freight where transport demands are not uniform, requires years to develop a domain specific knowledge. The danger is that layoffs could hurt the platform’s service organization that interacts with existing customers, thus affecting the trust in the platform's ability. Retaining qualified staff or referrals to partners/customers can create good will for the future. Experts laid-off could be a value addition for freight incumbents and other platforms.
To conclude, the goal of most of the discussed platforms is to offer some form of economic and (increasingly) environmental benefit. There is need for more visibility with regards to how the latter gets affected in the ups and downs of the business cycles.
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**These are author's personal views. The data collection is based on the public sources available on the internet and literature, mentioned below. The author takes no guarantees for this information.
Sources
(2) Azhar, A. (2021). Exponential: Order and Chaos in an Age of Accelerating Technology. Random House.
(3) Aswath Damodaran: The life cycle approach to company valuation - Nordic Business Report. 19. Nov 2018, https://www.nbforum.com/nbreport/aswath-damodaran-the-life-cycle-approach-to-company-valuation/.
(4) https://www.freightwaves.com/news/flexport-relaunches-digital-freight-network-convoy.
(5) https://theloadstar.com/instafreight-files-for-insolvency-but-founder-ortwein-hopes-for-restructure/
(6) https://siliconcanals.com/news/quicargo-offloads-bankruptcy-status/
(7) https://www.supplychaindive.com/news/Flexport-layoffs-15-percent-January-2024/706249/
(8) https://www.freightwaves.com/news/freightos-laying-off-13-of-employees-as-revenue-weakens
(9) https://theloadstar.com/forto-lays-off-more-staff-as-it-closes-offices-in-bremen-and-madrid/.
(10) https://theloadstar.com/booking-platforms-bicker-over-funding-as-cargo-one-lays-off-staff/.
(11) https://theloadstar.com/some-job-cuts-but-our-presence-in-europe-is-essential-says-fourkites/
(12) Marasco, A. (2004). Business Models of Transportation Electronic Marketplaces: an Empirical Survey . Annals of Maritime Studies. Journal of Maritime & Transportation Sciences, Vol. 42(1), 77-92. https://hrcak.srce.hr/file/79771