Convoy's Fall From Grace
As seen in the Freightwaves article this week:
“In a downfall unprecedented in transportation and logistics history, the one-time FreightTech darling went from a valuation of approximately $3.8 billion in the first quarter of 2022 to out of business in a little more than 18 months. Most of its remaining employees were laid off last Thursday. None received severance………… Convoy’s collapse took with it funds from some of the smarter guys in the room, namely Microsoft Corp. founder Bill Gates, Amazon.com Inc. founder Jeff Bezos, mutual fund titan T. Rowe Price and investment firm Baillie Gifford. Convoy had secured $250 million in lines of credit from Hercules Capital and JPMorgan Chase & Co. It also raised money from musical legend Bono, the frontman of the group U2. In all, Convoy raised about $920 million.”
The management claimed that it wasn’t their fault; they had been squeezed by lower demand across the industry and a tighter capital market because of rising interest rates. (Make no mistake, the VCs had a part to play in this as well, but in this article, we will focus on the management aspect.)
We have seen it many times before from tulip mania to the dot.com boom and bust and the bitcoin frenzy (still playing out). The common theme is hubris, a state associated initially with man asserting his superiority to the gods.
We have seen it many times before. Investors disregard norms in valuing the potential of a business and compete to get a piece of the action. This has two effects; first, the company receives much more money than it currently needs or can deploy efficiently and second, it creates a giddy feeling amongst the promoters (management) that they are ‘special’ and that the money tree will provide endless fruit.
In one company, for example, we saw this in action. They had raised tens of millions of dollars in 5 rounds and had ‘bought’ $19m of revenue but lost $19 million in the previous 12 months. There were strategic issues, but the cost of hubris could be seen right down to the minutiae – e.g. fancy business cards across the company that cost five times what is obtainable with a simple internet search and staffing levels beyond what could be justified.
Hubris ( / ˈhjuːbrɪs /; from Ancient Greek ὕβρις (húbris) ‘pride, insolence, outrage’), or less frequently hybris ( / ˈhaɪbrɪs / ), [1] describes a personality quality of extreme or excessive pride [2] or dangerous overconfidence.
Convoy’s collapse is simply a failure of management: Operating management and Treasury and Control management. It can be seen in their dash for growth without paying attention to their fixed cost base – the first thing a software company must manage. Two thousand employees and a fleet of trucks. What were they thinking, some may ask?
There were, however, some valuable things for us mere mortals to note. We have learned that they built the business to $800 million in Gross revenues (which fell to a $500 million run rate in 2023 as they stopped ‘buying’ business and had to manage a tighter market). This revenue was gained with an 18% Gross to Net revenue margin (Shipper invoice less carrier payment), producing a net revenue run rate of $90m. Any reasonably well-managed software business should survive and prosper at this level, particularly given the high percentage of transactions managed without human assistance (98% of loads handled automatically).
We also learned that the Digital Freight Network technology worked!
And worked very well, doing with what it started out to achieve:
A marketplace to bring shippers and carriers together with automated bidding/acceptance and transaction processing.
The company’s platform achieved 98% automated load matching of all loads (true pricing, negotiation and matching in the open marketplace) via its mobile or web apps and 99% for local/city loads. Drivers used the Convoy app for every step of the job 96% of the time with an on-time performance of 94% (within 30 minutes of appointment). That’s exceptionally good performance.
The article goes on to say, “Convoy’s technology was geared as much toward owner-operators as it was to small or micro fleets (nb 90% of carriers own less than ten trucks). This is unlike brokerages that focus on micro fleets. Owner-operators are generally not great candidates for backhaul loads because they are lone wolves who drive here, there and everywhere. Small fleets, by contrast, operate inside networks with locations where they return to regularly. The focus on owner-operators left Convoy out of a potentially large chunk of load generation.
Another factor was the profile of Convoy’s shipper base. Huge brands with big spending were frequent users of the platform. However, they often had payment terms stretching out 90 to as long as 120 days, which put a hit on Convoy’s cash flow.”
The conclusion we draw is that Digital Freight technology’s time has come. It works and improves shipper, carrier and broker efficiency. Like all successful businesses, you need a unique selling proposition targeted at a receptive user group. Convoy got part of it right, but hubris blew them off the rails. We are sure that we will see this again in the future, as we humans have a hard time learning from our history.
Hope your tulips are growing well in your garden.