Convoy Case Study: The Catch 22 of Building Disruptive Technology

The Disruptors need the Cooperation of the Disrupted

You need two critical elements to build disruptive tech: the actual technology and a practical application or test case to refine and iterate upon. Only having the technology can lead you to create something based on a very niche set of experiences, and only having test cases means that you have a problem.?

Ironically, attempting to pursue both simultaneously under the same brand can lead to perceived conflicts of interest and potentially alienating valuable partners.

As an example, today despite their private label business making up a tiny portion of their overall revenue and volume, many brands are hesitant to sell their products on Amazon's platform due to concerns about Amazon's simultaneous role as a retailer selling competing private label products. This distrust permeates to some degree to every vertical that Amazon is in, like AWS, Supply Chain by Amazon , etc. That thought is that if they (allegedly) stole data before to create a competitor they’re likely to do it again. These perceived conflicts of interest wouldn’t exist had Amazon never had a private label business.

Boeing has a market Cap of $116B vs Delta Airlines at $20B. Imagine if Boeing operated its airline alongside its core business of selling planes to carriers worldwide. In doing so, Boeing could leverage the scale of its aircraft production to offer itself lower operational costs compared to other airlines. In reality, customers like Delta would order more from Airbus. It’s a surefire way to take a great business and shrink it down.?

The reality is that Convoy’s valuation was a multiple of revenue and the fastest way for Convoy to earn revenue was as a freight broker.? Making the transition from a market competitor to a market supplier would have been politically difficult since the only real way to alleviate fears would have been to jettison the broker business and just focus on tech.?

Nobody is going to allow disruption to happen to them laying down. They are going to fight back if they feel threatened.?

What they should have done instead

Ryan Petersen (Flexport) actually created a template for how to have your cake and eat it too.? Flexport was founded in 2013 with the ambition to disrupt the freight forwarding industry and faced the same challenges that Convoy did. They needed time to develop the tech and they needed customers who would actually use it.?

In 2017, Petersen co-founded ROOM , a company that builds those ubiquitous telephone booths and office pod conference rooms seen in co-working spaces like WeWork. These sizable, custom-built booths were manufactured in Asia, guaranteeing a steady flow of shipping containers from various parts of the world. According to a 2022 LinkedIn post by ROOM's CEO Brian Chen, the company has done over $100 million in cumulative sales.?

By confounding ROOM, Flexport not only got regular volume from a captive paying customer, but they got a high profile and vocal company to put in front of potential clients and who could create editorial-style pieces for Flexport. ?

Flexport’s revenue grew from $75M in 2016 to $225 million in 2017, $441 million in 2018, and? $670 million before the COVID-19 pandemic started skewing results. Was this all thanks to ROOM? No. Did it help? Absolutely.?

Convoy could have adopted a similar strategy by bifurcating their business into two distinct brands: one specializing in technology and the other focused on brokerage services built around the technology. This segmentation would have allowed Convoy to maintain a strategic arms length distance between the two businesses. They could have positioned themselves as technology providers to brokers instead of competitors. Convoy could have simultaneously developed their technology and cultivated robust relationships with other brokers. The technology division could have been nurtured and capitalized as a dedicated tech startup, while the brokerage arm could have been run as a separate entity, operating independently. In theory, such a strategy might have culminated in the emergence of two thriving businesses instead of one dead one.?

Flexport bought Convoy’s tech- now what?

Given the strength of Flexport's brand in ocean and air shipping, one might assume that Flexport either isn’t good at shipping (needs to borrow brand equity) or they are overpriced. To be fair, their shipping solution could be really good (I’ve never used it), but with the acquisition of Convoy’s tech, it’s about to be a lot better. The way I see it, Flexport has several options (from least interesting to most interesting):

1. Continue to keep the freight business relatively hidden and marginally better with Convoy’s tech.?
2. Ingest the tech to make their core offering (forwarding) better. I’m sure that there is some interesting work that could be done from a drayage perspective to drive out their own costs.?
3. Spin out the brokerage business as its own entity (still powered by Flexport) and run the Convoy playbook: use the tech to become a bigger broker and work to retain as many of Convoy’s clients as quickly as possible
4. Spin out the technology into a separate entity and provide Convoy’s tech to brokers of all sizes. They would be the first paying client and could probably raise money to make back whatever they paid for it. Bonus points for also spinning out the brokerage as mentioned in #3

In the end, investors and founders need to do a better job of picking a lane and sticking to it from a valuation perspective. We should value companies like Convoy with two revenue multiples- that of a tech company (10-15x of the revenue from selling technology only) and the tech-enabled services (prevailing public company valuation metrics).

Assuming Convoy’s peak revenue of $600M was 90% from brokerage services, their peak valuation should have been closer to 1.1B- $900M for the tech & $200M for the brokerage instead of $3.8B.