Capital amnesia

Money has a short memory. Seventeen years after billions followed the Pied Piper of dot-com over the cliff, the cycle appears poised to repeat, only this time it's tied to the dubious quest to disrupt freight brokerage.

Nary a week goes by that we don't run one or more stories of logistics IT startups landing significant capital with the mission to bring brokerage to heel using the latest digital tools. No one has a firm fix on numbers, but Jett McCandless, founder of startup project44, estimates that in 2016, there were 315 deals involving logistics tech companies valued at more than $5 billion, both record highs. The trend is likely to continue through the rest of 2017, he said.

The most recent money grab centered on a company called Transfix, an online marketplace that pulled in $42 million in its third round of funding, bringing its total to $79 million. Not bad for a company that appears to have an app but no profits.

Transfix hit all the proper talking points: The U.S. truckload market and the brokerage industry that supports it are inefficient and fragmented. Yes, there's competition, but our visibility and transparency solution is more robust and comprehensive. We have scale, scope, analytics, big data, etc.

Then there was a comment attributed to a KPMG consultant in a recent news story we did on Transfix that a "profitable model today is not as important as the size of the total addressable market." That took us back a few years and made us instinctively grab for our wallets.

Needless to say, we have a few problems with the evolution. The truckload and brokerage markets are fragmented, have been fragmented, and will likely always be fragmented. Getting motor carrier authority today requires paying a filing fee, completing a two-page form, and getting insurance. Brokers confront similarly low barriers to entry. Fragmentation is as natural as breathing, and consolidating the sector is about as easy as getting a bill through the U.S. Senate.

The new players, and the venture capital/private equity money backing them, think they are entering a world full of Luddites. Yet the brokers we've talked to—and we know it's not everybody—are quite IT-oriented. In a world where visibility is paramount, they are keenly aware of technology's role in keeping them competitive. They are investing in IT and will continue to do so as prices drop. Meanwhile, many bring vast experience in mastering the physical part of the solution that the startups can't touch.

To that end, the newbies will compete against incumbents that have spent decades assembling formidable physical and IT networks. As David G. Ross, the perpetually candid transport analyst at investment firm Stifel, said at an industry conference in late June, "J.B. Hunt has an app. C.H. Robinson has an app. So why wouldn't you want to do business with a proven service provider with thousands of carrier relationships?"

The biggest newbie on the block, Uber, plans to grab share by narrowing the gap between brokers' buying and selling prices. Yet Uber has virtually no installed customer base, and with the parent embroiled in big-time turmoil, whoever replaces founder Travis Kalanick may start asking questions about whether brokerage needs to be on the plate of a company that's already dealing with more than a few distractions.

McCandless of project44 takes a dim view of how this will end. "Most of these deals have nothing more behind them than marketing," he told us. "Only a few of these companies have market-ready technology. Even fewer have robust solutions that can make an immediate and widespread impact on how the industry functions." Project44 has been the recipient of private funding, but it can be argued that its model, aimed at replacing a legacy technology (EDI) with a newer and faster mousetrap called an application programming interface (API), has proven viability. It should also be noted that McCandless and Tommy Barnes, project44's president, have a combined 40-plus years of experience in physical distribution along with IT.

There is room for IT innovation in brokerage, and we don't doubt that a handful of startups will endure and flourish. But we're old enough to have lived through the past, and we see it pretty much as prologue to what lies ahead.