Did hubris help kill the unicorn? Hide the bottom line, add hot air at the top

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The youthful death of a freight ‘unicorn’ has as ever divided the market: those who believe VC cash simply disguises unsustainable businesses; and those who believe that tech disruption in supply chain management will ultimately succeed at the expense of ‘traditional’ – AKA profitable – operators.

It is, of course, more nuanced than that. But let’s take Convoy, the tech-enabled freight brokerage that shuttered its doors last week.

It had received more than $1bn in funding, from investors including Jeff Bezos and Bill Gates, since it opened in 2015. Last year it was valued at $3.8bn. But, as everyone knows, VCs fling both cash and hubris around, in the ill-thought-out hope that something will stick. One investor, Mosaic, had reasons for investing in Convoy – such as global opportunities – that some have argued belied its understanding about the domestic US truck brokerage market.

But according to co-founder and CEO Dan Lewis, Convoy created “real benefits”.

“It also created the conditions for a truly scalable technology platform and business model that would have yielded real financial gains when market conditions improved. But in the end, market forces were too strong for us to withstand on our own…. the dramatic monetary tightening we’ve seen over the last 18 months has dramatically dampened investment appetite and shrunk flows into unprofitable late-stage private companies.”

Two points spring to mind. Businesses that can only yield financial gains in good market conditions are unsustainable, and so are businesses that need capital injections to survive.

If Convoy had been truly disruptive, and thus provided unique efficiencies, surely it should have been able to weather the current storms?

Mr Lewis’s third excuse may hold more weight: “M&A activity has shrunk substantially and most of logical strategic acquirers of Convoy are also suffering from the freight market collapse, making deal-doing that much harder.”

Tech disruption certainly needs angel or initial investment. From that point, a start-up either needs to become profitable, or let its investors benefit from a sale of the company, once sufficiently scaled, to perhaps a large customer. Walmart, Amazon and CH Robinson were touted as potential buyers of Convoy.

But it’s hard to see exactly what great benefits Convoy would really have bought to any of those for the cited cost of more than $3.5bn. Many observers don’t believe Convoy was a true disrupter. Uber, with which it was often compared, not only matched passengers to drivers, but also digitised payment and performance monitoring. But digital brokers have just digitised existing processes, not added more benefits.

Procter & Gamble was one of Convoy’s key clients. “We called on Convoy to solve a difficult supply chain problem. Their technology platform unlocked a new capacity pool for us to work with, and the results have been impressive,” it said.

Convoy claimed to have a network of 400,000 trucks – thus, as P&G noted, opening up new capacity for shippers. But a court case, filed just days before Convoy closed, raised doubts about its ability to manage and monitor the safety of those trucks and drivers.

The case, which centred on a fatal accident caused by a Convoy-brokered driver carrying P&G Bounty tissues, claimed the driver delivery schedule was unrealistic, and added: “Independent truckers and small companies make up a majority of US freight carriers and are Convoy Inc’s target market for potential drivers. Due to cost savings, profitability increased market share and Convoy Inc preferred to engage small, single owner-operators who weren’t as sophisticated and would accept lower pay.”

It also claimed that Convoy had failed to ensure that both drivers and trucks/trailers were safe. The driver in this case had his licence suspended at the time of the accident.

Some might say this was where Convoy failed as a logistics company – but the court case claimed that good technology, correctly used, would have flagged safety concerns when the driver booked the load. But that never happened, suggesting flawed tech.

Safety aside, industry observers in the US agree that the business model – on a balance sheet basis – was problematic.

VCs love revenue growth, and Convoy worked hard to increase customer numbers to boost this, offering low rates.

As forwarder Sara Dandan noted: “All of it means nothing if you haven’t, and aren’t, building a viable business that can survive and thrive. Remember, it’s all smoke and mirrors if the numbers aren’t actually there.”

Co-founder of Double Diamond Transport Travis Ahern noted: “The issue wasn’t that the digital model didn’t work. It worked beautifully. The issue is they underbid the market.”

Another commentator said: “Saturating the industry with below-market rates can only last so long, no point in moving freight if it loses you money, so that’s a bad business model. Looks great on a revenue growth chart, not so much on the P&L statement.”

Precisely.

But there is another element that seems to elevate risk – or, at least, disguise problems – and it can be seen in founders across the VC-backed freight-tech market. And that’s hubris.

VC cash brings with it rock star status for founders. And rock star status brings rock star vanity. Would Ryan Petersen really have fired people via Twitter in his early days at Flexport – or was he just alienated from reality after hanging out with the likes of Peter Thiel?

Would Slync founder Chris Kirchner have fraudulently taken $25m from investors if his head hadn’t been turned by a valuation of $240m?

Ditto (allegedly) Sam Bankman-Fried.

The vast amounts of cash, which often appear to be offered without – or with very few – strings attached, not only serve to hide the bottom line, but seem to add hot air at the top. Founders begin to believe the hype themselves, so natural is it for them to sweet-talk investors.

Repeating a thing doesn’t make it so; and that’s one of the lessons VC-backed ‘start-ups’ need to hold onto from this. You are not as special as you think you are.

And in the real world, balance sheets really do matter.