Logistics businesses have been hot since 2014, when the industry caught the attention of the venture capital world. In fact, VC funding in logistics companies has grown at a 76 percent compound annual growth rate over the 5 years to 2019, according to a recent McKinsey study.
While the global pandemic has sent parcel delivery volumes skyrocketing in 2020, are logistics companies still worth starting? Let’s take a look at the real opportunities for logistics startups, and the current challenges.
VC Investment into logistics businesses
Of the different types of logistics businesses, last-mile startups have been the most successful in terms of attracting venture capital funds. Last-mile providers attracted around 40% of the $28 billion invested by VCs into logistics companies since 2015.
‘Last mile’ refers to the last stage of delivery of a product. For example, when a customer orders something online the last mile refers to the leg of the journey when a courier drives the parcel from the distribution hub to the customer’s front door. The last mile is typically the most time-consuming and expensive part of a delivery.
While last-mile startups have received the most attention in recent years, money is still flowing into traditional parcel businesses involved in pickup, sorting, and delivery. In 2017 $1.2 billion of VC funds flowed into new parcel businesses.
In fact, Apex Insight reports that private sector carriers hold a 39% market share by revenue globally (with global integrators holding a 37% market share and postal operators a 24% share). Private delivery companies are still relevant and small startups can benefit from the large pool of experienced drivers who would rather be employed by a business and avoid difficulties such as finding courier insurance for themselves.
But while there is still investment into private parcel businesses, it’s not where the real money is flowing.
Where the biggest bets are being made
Last-mile delivery services that rely specifically on unconventional delivery methods have attracted the most attention in the sphere. According to McKinsey, out of $11.1 billion of VC funding raised by logistics startups supplying last-mile delivery services, $9.9 billion went to companies focused on using unconventional delivery methods such as crowdsourced delivery, drones, autonomous vehicles and parcel lockers.
For example Shenzhen-based Hive Box, which operates more than 150,000 parcel lockers located across China, raised $323 million in a Series B round in January 2018 and currently has more than $700 million in funding in total.
In the past few years, capital has more often than not backed startups with a proven business model through larger funding rounds, rather than new startups. But whether a business is a new startup seeking funds or a maturing startup, what are the biggest challenges these businesses are facing?
In the B2C segment, customer retention has proven to be difficult. Large retail customers are keen negotiators and are willing to switch to another provider for a better deal, so logistics companies reliant on just one or two big clients face significant business risk.
Logistics companies working with large marketplaces like Alibaba and Amazon risk losing volume to in-house delivery services and vertical integration. But there are opportunities for entrepreneurs looking to run a small business. For instance, Amazon’s Delivery Service Partners supports owners as they build and grow successful parcel delivery businesses.
Companies with large fleets of delivery vehicles have the added difficulty of managing these fleets while abiding by increasing environmental regulation. For example, a review of the current Euro 6/VI emission standards framework for cars, vans, lorries and buses just closed 09 November 2020. This consultation will result in new Euro 7 vehicle emission standards that will impact fleet owners, in particular.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision.