Under the heading of things that just can’t last, today’s topic is venture capital firms continuing to invest in technology companies that consistently lose an incredible amount of money. You would think that WeWork’s issues and the fact that Uber continues to lose a lot of money might make investors start to worry that the lack of profitability might eventually be a problem. Some caution may be entering the market on the margin but that does not mean companies who compete with this group of money losers are having an ease time.

Case in point is a company named C.H. Robinson (CHRW). C.H. is the largest freight broker in the US and has for years generated great returns on invested capital. In recent years, a number of technology-focused startups have entered the market with the goal of taking share from C.H. and the other freight brokers. Accordingly, investors have become concerned that companies such as Uber Freight and Convoy are going to disrupt C.H.’s beautiful business model. As such, at a recent sell-side conference, the company’s CEO was asked a question about the difference between the latest group of “tech-first” competitors and those that C.H. has successfully fended off in the past. His answer was priceless:

And so today, we get into this environment of tech-first entrance as they’ve been called and the — literally, billions of dollars of private market dollars that have flowed into freight tech over the past few years. And it’s not just convoy Uber transfix. Those are the 3 that get talked about. But think about companies like project44 that have brought new ways to think about connectivity. You think about some of the ELD companies. You think about the companies like FourKites and Descartes MacroPoint, that have brought new ways to think about visibility. The convergence of all of these things have caused us to continue to react, to continue to stay nimble and to continue to stay committed to staying on the forefront of leading our industry.

And so what has anyone brought different this cycle, if anything, I’d say, a willingness to lose money, would probably be the thing that I’ve seen that’s truly different in this cycle. I mean we’ve seen competitors come in that have been attempted to take market share by being more aggressive, but that was really about maybe working at a slightly lower margin for some period of time. We haven’t seen the willingness of companies to just large-scale come in and may promise that someday they’ll be profitable and then just throw money, sell dollars for $0.50.

Amazingly, there doesn’t seem to be a slowdown in the amount of VC money pouring into this space:
https://techcrunch.com/2019/11/13/convoy-raises-400-million-to-expand-its-on-demand-trucking-platform/

Our sense is that this will not go on forever. Some companies will establish themselves and be able to compete. Others will inevitably fail. But the challenge for anyone considering investing in the incumbent—in this case CHRW—is that in the meantime the money losing companies can destroy pricing discipline in the market. We believe that if you have a long enough time horizon and invest with a large enough margin of safety, you can take advantage of other people’s fears that a bunch of VC-funded companies that lack scale will be able to successfully dethrone the incumbent. It just might be painful in the short-run.

– Ben Claremon, Principal & Portfolio Manager

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