Convoy's Shutdown Exposes The Desperate State Of Trucking

Tyler Durden's Photo
by Tyler Durden
Friday, Oct 27, 2023 - 10:30 AM

By Rachel Premark of FreightWaves,

In my earliest days on the trucking beat, it seemed to me that there was a massive showdown brewing. On one side, I saw stodgy freight brokerages headquartered in places like Northwest Arkansas and Cincinnati. Their opponents: Sleek startups, based in Seattle and San Francisco, who pledged to change trucking. They would transform the freight brokerage process from phone calls and fax machines to automated pairing of drivers and loads, thanks to big bucks from genius venture capitalists and tech gods. 

As it turns out, though, the business case for swapping out humans for computers in the freight brokerage world is shaky. It’s also not as easy to fix trucking as a slide deck might make it seem. The recent shutdown of Convoy, a digital freight brokerage established in 2015, shows that. 

Convoy enjoyed all the trappings of a runaway tech success. Its two co-founders, Dan Lewis and Grant Goodale, had Amazon and Ivy League credentials. Convoy counted Jeff Bezos, Bill Gates and (bizarrely) Bono among its investors. Convoy had more than 1,000 employees at its peak. Just 18 months ago, the Seattle-based startup was valued at $3.8 billion. But maybe more importantly than cash and caché, Convoy seemed keen on making trucking better – more efficient and more just. 

Everyone suspected that there would eventually be a washout of FreightTech startups, but it seemed like the moral, well-capitalized and buzzy Convoy would be immune to that. Instead, the Seattle-based company is the first major startup closure of our ongoing trucking bloodbath. (As of publishing time, an unknown buyer has acquired Convoy’s tech stack. Convoy declined to comment on this story.)

There are many serious inefficiencies in trucking, and it seemed like the freight startups like Convoy were the only ones that cared to fix them  

In the halcyon days of, let’s say, 2015 to 2019, it seemed like everyone and their mothers (as long as they were venture capitalists) wanted to invest in a trucking startup. The industry seemed ripe for disruption and ripe for making a ton of money. It’s huge ($875 billion, to be exact) and bizarrely antiquated. While the technology situation has mostly improved today, massive public truckers were often run on fax machines and Excel spreadsheets less than a decade ago. 

Sprucing up a few processes with a little automation and a little mobile technology seemed like an easy way to make this crucial industry work a lot better. One issue that digital freight brokers like Convoy were particularly keen on addressing were empty miles. By better matching drivers and loads, Convoy pledged to slash deadhead. That would in turn reduce carbon output, boost driver pay, and make the physical economy more efficient.  

Trucking has a lot of issues. For a while, it seemed like only the flashy, coastal startups cared to address them. (Photo: Jim Allen/FreightWaves)

With the power of technology, it seemed like the coastal trucking startups were going to fix everything wrong with trucking – double brokering, sexism, truck stops with no restrooms, detention pay, delayed deliveries, lack of capacity, lack of drivers, and so on. From my perspective, the rest of trucking had given up on making the industry better. It would require a beginner’s mindset to see that trucking was deeply flawed, but still fixable. 

Over the years, my perspective changed. I think the perspective of the startup guys changed too. It became clear that the issues in trucking have been around for so long not because the longtimers were ignorant or uncaring. It’s because those problems are complex.

The digital freight brokerage industry has a lot of issues

These companies all had high ideals in terms of what their roles in trucking would be. Unfortunately, many of them seemed to forget that the main point of a company is to, um, make a profit. 

The funding environment for these companies, which almost all came about in the late 2010s, essentially made it so they would never be forced to figure out their own financials. Convoy was particularly overfunded, as my boss Craig Fuller wrote about on Monday. Many of the issues in digital freight brokerage – and especially at Convoy – come down to the practice of “blitzscaling.” That term was coined by Reid Hoffman, co-founder of LinkedIn and, yes, Convoy board member. 

“When you have not had the benefit of raising a lot of money … you have to figure out how to get [financially] sustainable and you need to do that rather quickly,” Santosh Sankar, co-founder and managing partner of Chattanooga, Tennessee-based venture capital fund Dynamo said. “I’ve had a lot of founders actually tell me, ‘By not taking that additional million, it forced us to be more creative and address problems in a more thoughtful, efficient way.’”

With less cash, Sankar said, teams are forced to delve into trying to make the fundamentals work. For a freight broker, that might mean carefully deciding on lanes to develop, learning how to mature those lanes, and figuring out how much margin each lane can provide.

That’s not the idea behind blitzscaling, which calls for dumping a ton of money into a problem and growing as fast as possible. 

This practice is a particularly bad fit for the freight brokerage industry, said Leonard Sherman, who is an adjunct professor of marketing and management at the Columbia Business School. To successfully pull off blitzscaling, one needs factors like network effects, economies of scale, high customer switching costs and high barriers to entry. Sherman said freight brokerage is decidedly lacking in all of those areas.

Low barriers to entry and no switching costs are core to the trucking industry as a whole. Compare that to, say, a social media app. You probably don’t need two companies to serve the same role that Facebook does, but a carrier representative might consult a dozen brokers a day. 

That pretty much cancels out the most core practices in blitzscaling, like undercutting the market. Digital freight brokers were infamous for trying to shore up market share with low rates. Convoy appeared to do that as well, as my FreightWaves colleague Mark Solomon reported on Monday. In part because of these low rates, Convoy was only able to achieve breakeven or slightly positive margins during hot times in trucking, a source told Solomon.

The Ubers of the world might be able to undercut rates to get people on their platform, only to jack up the cost later to make the financials work. However, players in the trucking industry are able to take advantage of low rates when they’re offered and then jump ship to any other provider when the situation changes. 

These trucking startups also came on the scene when every random company was branded as a tech company – whether you were selling mattresses, office space, or used designer clothing. As The Information reported, Convoy employees were baffled as to whether the company was a trucking company or a technology company. That’s a common critique leveled against many freight brokerage startups. 

Jonathan Geurkirk, a senior analyst at Pitchbook Data, said the way Convoy shut down was more indicative of an asset-heavy company with fixed costs galore than a technology player. That’s in spite of the $3.8 billion valuation, which is more fitting of a tech firm.

Despite it all, Convoy did manage to bring massive efficiencies into freight brokerage. It said in 2022 that the startup has automated more than 90% of the brokerage journey, such as pricing, shipment tracking, carrier payment and so on. Sankar, the Chattanooga venture capitalist, said Convoy’s engineering efforts around load matching, reducing empty miles, and identifying backhaul opportunities were commendable. 

These feats didn’t, unfortunately, translate to profits.

It turns out the major industry players weren’t ignoring these issues — they’re just kind of hard to fix

The digital freight brokerages seemed to promise that they would revolutionize trucking like other West Coast techy creations. Amazon changed retail, Facebook changed human connection, Google changed information gathering and so on. So too could Convoy, Uber Freight, Transfix, Loadsmart and the like overhaul America’s $875 billion trucking industry. 

And frankly, the industry – especially its truck drivers – needed someone to pledge to save the day. Maybe it seemed unrealistic, but it was a nice idea.

What it looks like to use the Convoy app as a driver. An undisclosed buyer has acquired Convoy’s full tech stack, including its driver-facing app. (Courtesy of Convoy)

Ultimately, the superhero plot didn’t work out. As of now, the tech bros haven’t fixed trucking and neither have the fuddy-duddy incumbents. This year, a record number of trucking companies will shutter. The costs of running a trucking fleet keep spiraling upward while rates slump. And we still have deadhead miles, unpaid detention time and every other trucking issue. 

But throwing our collective hands up is not the solution either. Perhaps some combination of newbies and old-timers will fix trucking’s many, many issues yet — and Convoy’s foray into this arena shan’t be forgotten. 

“They shone a light on the opportunity the industry has when you apply technology to it,” Sankar said. “Along with that, they drew attention from strong engineering talent, sales and operations talent and investment that this is an important segment of the economy. It deserves enduring attention similar to what you might find in fintech.”