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April 27 2020

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4 The Journal of Commerce | April 27 2020 Eric Johnson THE LAST DECADE in logistics was defined, in large part, by the hun- dreds of millions of dollars of venture capital that flowed into technology startups, and by the way that money compelled the rest of the industry to invest to keep up. Given the global state of eco- nomic uncertainty, it's likely the coronavirus disease 2019 (COVID-19) pandemic will sharply focus the lens through which venture capital (VC) investors appraise the potential of such new endeavors in logistics. To be sure, COVID-19 will drive down the average amount of money logistics technology startups can raise and the average valuation they will get after raising those funds, various VCs have told The Journal of Commerce. More importantly, it also will reset the revenue expectations on companies looking to raise venture capital. In other words, a company that had $500,000 in annual recur - ring revenue (ARR) will be able to raise a smaller amount of venture capital today than it would have even three months ago. To put a finer point on this, data from Silicon Valley Bank, a bellwether financial institution in the startup ecosystem, showed that the average company raising a Series A round of funding in 2019 had $1.7 million in ARR and raised a $6 million round with a $31 million valuation, according to a startup that provided the data to The Journal of Commerce. Those numbers highlight a trend that endured through the end of 2019: higher valuations on smaller ARRs. It's reasonable to surmise that valuation and ARR figures will contract toward each other in 2020 — and beyond — due to the broader economic impact of COVID-19. As one VC put it to The Journal of Com - merce, "We are coming off the most founder-friendly period of investing in history, where VCs were compet- ing for companies and promising value-add even while paying super- high prices." But a global pandemic changes that balance in a heartbeat. The coronavirus is likely to accelerate the impact of another dynamic logistics technology start- ups are likely to face: that VCs in the space already have made their large investments in logistics while simultaneously gaining a greater understanding of the various business models in the industry. "The tier-one [VC] firms all placed their bets between 2014 and 2016; only the followers are left," a founder of a late-stage logistics technology startup, who asked not to be identi - fied, told The Journal of Commerce. Complicating matters further, "there hasn't been a clear winner out of any of the tier-one bets," the source said. VC groups undoubtedly will be more selective in their investments. It's too much of a generalization to say they will make smaller invest- ments with lower valuations. Instead, they likely will require startups to demonstrate more market traction to get to the same level of funding. "In the early stage, fundamen- tals are not the driver of valuation," another VC told The Journal of Com- merce. "They are not as meaningful. Valuations tend to be a function of money raised and ownership the mar- ket demands for taking the risk," as opposed to revenue growth. Perhaps investment in logistics technology was due to cool off, COVID-19 or not. Consider the Series A rounds that some logistics startups received over the past five years. Visibility provider FourKites raised $13 million in October 2016, a month after rival project44 received $10.5 million in its Series A round. The forwarder Flexport had a $22.1 million Series A round in 2015. Seattle-based freight broker Convoy, the domestic leader in fundraising, had a $16 million Series A round in March 2016. Series A is typically the thresh- old at which a company goes from "plucky startup" to an established industry name with something to prove. The onus is on Series A compa- nies to rapidly scale their business to please investors. On one hand, that those four companies' Series A rounds in 2015 and 2016 were two to four times the average Series A in 2019 supports the theory that logistics as a "hot" indus- try has passed. On the other hand, logistics orchestration software pro- vider and cross-border freight marketplace Forager both nabbed $10 million-plus Series As in March. And valuations for logistics start- ups were still growing. For a company with more than $1 million in revenue, assuming the same growth rate, team, and subscription business model, its valuation would have increased from 15 times revenue in 2015 to more than 18 times revenue by the end of 2019, according to Zenequity. But that will also change because of COVID-19. The revenue-valuation equation is also geographically dependent. A company with $5 million in ARR based in San Francisco or New York will get a different valuation than one in other cities. The flipside is that startups in smaller cities might get a larger investment on smaller ARR, COVID-19 notwithstanding. "Logistics is still hot by the way; SaaS [software-as-a-service] is red hot, in fact," the late-stage logistics technology startup founder said. "But everyone is savvy to the business models now." email: twitter: @LogTechEric Editor's note: JOC Executive Editor Mark Szakonyi will return to his regular column next issue. The new VC calculus The Journal of Commerce (USPS 279 – 060), ISSN 1530-7557, April 27, 2020, Volume 21, Issue No. 9. The Journal of Commerce is published bi-weekly except the last week in December (printed 25 times per year) by JOC Group Inc., 450 West 33rd St., 5th Floor, New York, N.Y. 10001. Subscription price: $595 a year. Periodicals postage paid at New York, N.Y., and additional mailing offices. © All rights reserved. No portion of this publication may be copied or reprinted without written permission from the publisher. POSTMASTER: Please send address changes to The Journal of Commerce, Subscription Services Department, 450 West 33rd St., 5th Floor, New York, N.Y. 10001. Letter from the Editor "We're coming off the most founder-friendly period of investing in history."

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