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January 6 2020

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2020 ANNUAL REVIEW & OUTLOOK 114 The Journal of Commerce | Januar y 6 2020 www.joc.com Logistics | In Perspective By Mark Szakonyi It takes more than being digital to disrupt By Satish Jindel THE PAST YEAR has been an uncomfortable roller-coaster ride for investors in so-called disruptors Uber, Lyft, Grubhub, Blue Apron, and WeWork. Few will dispute that these compa- nies have woken up the established companies in their respective industries, forcing them to improve via digital technology. However, the reversal in the financial fortunes of these companies shows that it takes much more than just use of smartphones to disrupt and, perhaps more importantly, to generate sufficient value to create a profitable enterprise. Even so, venture capitalist investors con- tinue to plow millions of dollars into digital freight brokers such as Flexport and Convoy. WeWork, for example, saw its valuation plum- met from $47 billion to $7 billion in a a few weeks, and it is far from certain that the com- pany will survive given that even this dramati- cally reduced valuation now seems too high. Within the freight segment, Convoy recently received $400 million in Series D round at a valuation of $2.75 billion. By contrast, established freight broker Echo Global Logistics is valued at $564 million despite generating gross revenue that is many times more than that of Convoy. Based on Convoy's gross and net revenue, publicly traded broker C.H. Robinson would have a valuation of $86 billion, more than twice that of FedEx. That's insanity. Softbank's recent record of losing billions of dollars invested at outrageous valuations in com- panies like Uber and WeWork should be seen as an indication of its inability to assign proper valuation at other companies. Could it be that its investment in Flexport, which raised a record-setting $1 billion in its last funding round, will turn out to be like that of Uber and WeWork? In the ride-sharing business, Uber and Lyft introduced digital technology that had more attributes than just matching a driver with a rider. Their tech involved digitization of payment systems, providing directions to unknown destinations, and monitoring per- formance of the drivers and the behavior of passengers to weed out the bad ones. They also converted riders from taxi companies that were ill-equipped to compete after years of protec- tion from public utility commissions. Most importantly, they converted thousands of men and women into commercial drivers willing to give rides to strangers in their personal vehicles, thereby offering cab service to areas that previously lacked adequate coverage. Freight brokers, on the other hand, have a long history of operating in a competitive market, and they generate billions of dollars in annual revenue. They also have longstanding relationships with shippers, who often require lots of attention, want payment terms of 30 to 60 days, and don't pay for each transaction via credit card. Furthermore, the freight brokers still have to comply with many state and federal regulations, most truck drivers do not own and operate their own tractor trailers, and existing brokers already provide coverage to all parts of the country. For established brokers, labor productivity Based on Convoy's recent valuation and revenue, C.H. Robinson would be valued at $86 billion. That's insanity.

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