After reaching an unprecedented $25.6 billion in 2021, venture funding for logistics start-ups fell to just $2.9 billion in 2023 — a two-year plunge of nearly 90 percent, and the lowest level of funding since 2015.
“A number of factors are driving this sharp pullback by investors, including high interest rates (which curb venture investment in general), a global slowdown in the shipping industry (as consumers shift spending away from physical goods toward services), and a market in which excess capacity among cargo carriers is driving down freight rates,” says Ludwig Hausmann, Ann-Kathrin Baum, Olivia Cardenal,Tobias Wölfel and Pete Gornall of McKinsey in their latest report.
The report is based on a review of approximately 650 logistics start-ups, accounting for more than $98 billion in venture capital funding raised in the last decade. The authors analysed the funding by industry and region, “focussing on the changing dynamics of the market.”
Globally, venture capital (VC) funding across all industries fell some 35 percent from 2022 to 2023, the analysis found. “Logistics start-ups were hit especially hard, with the sector accounting for 0.8 percent of total venture investments in 2023 — down from roughly three percent in the five preceding years as the industry grapples with a drop in e-commerce growth, falling trade volumes, and volatile freight rates.”
Before the Covid-19 pandemic, e-commerce spending had been growing at an annual rate of 10–15 percent, accelerating to 29 percent growth in 2020, the report said. “While the e-commerce market continues to grow today, it has been doing so at a slower pace with an annual growth rate of approximately five percent.
“The decline in demand for physical goods has led to a decrease in global freight volumes: between 2022 and 2023, sea freight volumes stagnated, with 0 percent growth, while air freight volumes decreased by four percent. Declining demand is also reflected in global freight rates: air freight rates declined 22 percent while sea freight rates — which had surged because of factors such as rising fuel prices, port congestion and supply chain disruptions — fell some 70 to 90 percent, as capacity returned to the market.”
VCs and logistics entrepreneurs are dealing with the reversal of many of the trends that fueled the Covid-19 era boom, the report added.
Some segments still getting fundsMuch of the venture capital flowing into the industry is “being funnelled into the last-mile sector — the companies that specialise in the final stage of the delivery process. Last-mile start-ups increased their share of total funding in logistics by five percentage points between 2022 and 2023. “The last-mile start-ups garnering the most funding include Zipline, a U.S. on-demand drone delivery service, which received $330 million; XpressBees, an Indian express logistics provider, which raised $120 million; and logistics provider Delhivery, also from India, which raised $114 million.”
Software and systems start-ups also saw their share of VC funding increase over the past two years, despite this segment’s small market size, due in large part to the logistics industry’s growing demand for digitalisation and AI solutions. Start-ups with software-based business models, particularly those with a transparent revenue stream from subscriptions, also are proving attractive to investors, the report added.
Indian start-ups saw their share of total funding nearly double between 2022 and 2023, rising to equal Europe’s share. “India has benefited from companies diversifying their manufacturing and supply chains. The trend has aided India’s efforts to attract foreign investment and become a preferred manufacturing destination.”
Outlook uncertainOverall, confidence remains that logistics sector funding will return in the long run, given that it accounts for 10 percent of GDP, says the report. For start-ups, focusing on a realistic path to profitability will be critical. Growth will always be a key consideration, but in an industry marked by significant cost pressures and fragmentation, entrepreneurs should expect that investors will demand financial viability sooner rather than later.”
As confidence returns and entrepreneurs and investors find a new valuation middle ground, start-ups will likely attract more than one percent of total VC funding, as they have in years past, the report said.
