Too much automation

1. Waystar liquidity.

• Waystar Holding, a hospital revenue cycle management platform backed by EQT, Canada Pension Plan Investment Board, Bain Capital, and Francisco Partners, has filed for a $100 million IPO.

• Expectations center around an $8 billion valuation, meaningfully higher than rivals R1, trading at a $5.5 billion market cap, and Ensemble Health Partners, bought last year by Berkshire Partners and Warburg Pincus for $5 billion.

• In 2019, EQT and CPPIB acquired a majority stake in Waystar from Bain Capital at a $2.7 billion valuation, with Bain opting to maintain a minority position. The group has completed a number of add-ons and grown the business to $296 million of 2022 EBITDA on $705 million of revenue (growing at 20% year-over-year).

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On Wednesday, Seattle-based freight brokerage startup Convoy canceled its backlog and told employees to halt new bookings. The announcement brings an abrupt end to a company that led a wave of logistics-focused venture activity and, at one point, looked like it had a straightforward path to IPO.

Convoy was founded in 2015 by a pair of former Amazon managers, Dan Lewis and Grant Goodale. Neither founder had prior logistics experience, but they saw an opportunity to disrupt the trucking industry with an Uber-like platform to pair independent operators with shippers looking for capacity.

By 2016, solid traction in the Pacific Northwest region led to a four-year freight deal with Unilever, on the back of which the business was able to raise from big-name early backers — investors in a 2017 round included Jeff Bezos, Bill Gates, Marc Benioff, and Greylock.

Market Making is Difficult

Lewis circulated an internal memo this week that blamed Convoy’s demise on market conditions, both for freight and capital:

The collapse in freight rates has hit the entire industry (you may remember our note on Yellow last month), though it is somewhat surprising that the latest casualty was a tech-forward brokerage and not another asset-based carrier.

In Convoy’s case, they may have become too tech-forward.

Early post-mortems have partially pinned the blame on algorithmic replacement of roles traditionally held by relationship-based account managers.

When rates plummeted, legacy brokers hopped on the phone with their long-term (and largest) clients to negotiate pricing increases that allowed them to stay afloat. Convoy lacked similar relationships and couldn’t easily react to choppy market conditions.

Former Convoy research scientist Evan Welch believes the business exposed itself to a similar set of pitfalls as Zillow’s ill-fated homebuying experiment, where he previously worked.

The issue both faced was a lopsided market — the buy-side (shippers and Zillow home purchasers) is both relationship-based and considerably smaller than the sell-side (trucking operators and home sellers).

The result is that tech-focused disrupters (Convoy and Zillow) had a relative abundance of data on the sell-side but limited insight on the buy-side. Better data meant easier automation solutions — as these platforms built out capabilities, their natural tendency was to focus more of that development work on the less challenging sell-side.

As the sell-side became increasingly automated, human-dependent pricing and risk controls on the buy-side were gradually wrested away. That became a big issue when market disruptions revealed the true extent to which smooth execution relies on experienced industry operators.

Welch highlights the impact that this dynamic can have for a business like Convoy:

Roadblocked Fundraising

As Lewis noted, a lack of viable funding sources ensured Convoy didn’t get an opportunity to work out the kinks in its model.

In April 2022, Convoy raised $160 million in Series E funding, along with $100 million of venture debt. At the time, the business appeared to be headed toward a near-term IPO and saw participation from investors like T. Rowe Price, Fidelity, and Baillie Gifford.

The freight market fell flat shortly after. By 2023, the IPO was off the table, and investors had sharply curtailed their appetite for risky, cash-burning investments. After total funding of more than $1 billion, including debt, Convoy was unable to secure additional financing.

Part of that failure may have been the result of an over-the-top valuation as the market peaked, even compared to other early-stage deals.

The Series E valued Convoy at $3.8 billion, or around 3.8x its forward revenue of $1 billion. But, in highlighting that $1 billion figure, both VCs and Convoy skated over a very important gross-to-net distinction.

Traditional trucking brokerages focus almost exclusively on net revenue, or topline earnings after accounting for payouts to drivers that transport the booked freight. Convoy opted to instead report a gross revenue figure, ignoring those payouts and posting results many times higher than what its industry peers would have reported for the same size business.

FreightWaves’ Craig Fuller cited internal Convoy data reporting a 17% gross-to-net, or $170 million of “actual” revenue on Convoy’s initial 2022 target. That implies a “true” valuation of 22.4x forward revenue from Convoy’s Series E.

By the end of 2022, actual results had meaningfully missed the $1 billion forecast — final gross revenue of $630 million returns a net revenue valuation of more than 35.4x for the April 2022 round.

Earlier this month, Convoy’s year-to-date revenue was reported at just $320 million. Considered in the same gross-to-net context, even the most disastrous down-round scenario would have penciled out to a very rich multiple. Not quite so palatable in today’s environment and much more apparent when so little actual contribution is flowing through the financials.

It’s unlikely that sophisticated venture backers missed this nuance on the way up. Instead, it was probably more a story of something that was easier “to get comfortable with” when revenue was growing 30% per year and an IPO looked imminent.

So, while Lewis’ assessment of the situation is relatively accurate on the surface, there was, perhaps, a bit more at play behind the scenes.

No Off-Ramp Available

Per The Information, Convoy brought on Goldman Sachs to lead a sale process in June of this year. The company received initial interest from Uber Freight, Walmart, C.H. Robinson, and UPS-backed Coyote Logistics.

By late summer, C.H. Robinson was thought to be in advanced discussions with Convoy, though the deal ultimately fell apart. A last-ditch proposal from J.B. Hunt also failed to materialize.

In an industry-wide pricing shock, potential strategic acquirers had limited appetite for a relatively risky bet as their own businesses struggled.

Hercules Capital, the lender behind April 2022’s $100 million debt financing, has now taken effective control of the business and is marketing Convoy’s technology assets and intellectual property to potential buyers — primarily its driver app and back-end automation engines.

As it winds down, it’s worth noting Convoy did deliver real change to the freight industry, even if it didn’t have the staying power. Automated brokerage opened up new capacity, improved safety, reduced cargo claims, lessened empty leg waste, and may have positioned ‘freight tech’ as a viable career path for talented engineers and developers.

 DEALS, DEALS, DEALS

• Chesapeake Energy is in discussions with Southwestern Energy over a potential $12 billion acquisition.

• Wyndham Hotels rejected a $7.8 billion offer from Choice Hotels.

• Apax Partners agreed to buy Kin + Carta, a UK-based consultancy, for £203 million.

• CVC Capital Partners is considering a bid for payments processor Nexi.

• J.F. Lehman acquired environmental services business Heritage-Crystal Clean for $1.2 billion.

• Mirvac Group and Pacific Equity Partners agreed to acquire Serenitas, an Australian land lease operator, for around A$1 billion.

• Providence Equity Partners invested in Populous, a Kansas City-based architectural design firm.

• CenterGate Capital bought Cartridge Technologies, a Maryland-based federal printing service provider, from Broadtree Partners.

• I Squared Capital will acquire Arriva, a London red double-decker bus operator, from Deutsche Bahn.

• Henry Schein purchased Shield Healthcare, a Valencia-based homecare medical supply provider.

• EQT engaged Evercore to lead its exit of Rimes Technology, a New York-based data management firm valued at up to €2 billion.

• Berkshire Partners invested in PDQ, an IT asset management software firm based in Salt Lake City.

• Blue Wolf Capital Partners and Stonepeak are set to acquire Logistec, a Montreal-based firm specializing in marine cargo and environmental services, for around C$1.2 billion.

• CDPQ, CPP Investments, GIC, and Mubadala are exploring the acquisition of Hg's 25% stake in Argus Media, a London-based oil pricing data firm potentially worth over £4 billion.

• Elliott Investment Management is contemplating a takeover of E2open, a supply chain SaaS provider based in Austin, Texas.

• Summit Partners invested in Hallmark Health Care Solutions, a New York-based healthcare staffing management business.

• Catalyst Capital Group is prepping an exit for Gateway Casinos & Entertainment, expected to fetch around $2 billion.

• Spin Master agreed to acquire wooden toy business Melissa & Doug from AEA Investors for $950 million.

• Discount Tire acquired Dunn Tire’s retail and maintenance business.

• Kohler is preparing to divest its generators unit, which could be worth more than $3 billion.

• MRC Global, a pipe, valve, and fittings distributor trading at a $900 million market value, could be in play following an activist campaign from Engine Capital.

• Prothena, a developer of Alzheimer's therapeutics, is expected to launch a sale process that could value the business at more than $3 billion.

• Thermo Fisher Scientific agreed to buy protein biomarker platform Olink for around $3.1 billion.

• Apax Partners and Bain Capital have each submitted bids for enterprise cloud business SoftwareOne, which had previously rejected an earlier proposal from Bain.

• Arcline agreed to buy Hartzell Aviation, a Tailwind Technologies-owned aviation parts manufacturer.

• Wendel SE is considering a potential approach for middle market buyout firm IK Partners.

• A&M Capital Partners and Highview Capital are preparing to exit portfolio company GS Foods Group, with Harris Williams leading a process that could bring in more than $1.5 billion.

• Global Infrastructure Partners is marketing its 51% stake in renewables provider Vena Energy, which could be done at a $15 billion valuation.

• Czechoslovak Group has agreed to acquire Vista Outdoor’s sporting products unit for $1.91 billion.

• Saudi Aramco is considering an approach for Shell’s Pakistan energy assets.

• Prima, a Paine Schwartz-owned stone fruit farm operator, filed for Chapter 11.

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