From The Front Lines: Drew McElroy (Transfix)
The Bowery Capital team is embarking on a ten week journey to cover B2B Marketplaces. We are doing deep dives on various companies, interviewing founders and investors, and learning what it takes to build success in the B2B Marketplace arena. Below is a part of our content series focused on insights from founders in the space. This week, Drew McElroy, Co-Founder & Chairman of Transfix, answers some of our questions. You can read all of the posts by going here.
Drew McElroy is the Co-Founder and Chairman of Transfix, a leading freight B2B marketplace providing trucking brokerage services in the United States for the retail, food, beverage, and manufacturing industries. Transfix completely automates the freight brokerage process by standardizing service offerings, optimizing truck and load matching, and providing real-time visibility in transit for both carriers and shippers.
A lot of B2B marketplaces involve solving for a really discrete problem set and going narrow with the product to create the flywheel – order visibility, process optimization, labor shortages, etc. How did you think about the initial product in this context and what you needed to get right?
Fundamentally, the market that existed was a big commodity marketplace, similar to more mature commodity marketplaces like oil. So, we started with the mechanism of executing the transaction, which was comprised of 2 components:
(1) Automation of process: Processing was costing 10-12% of a transaction, equaling $100-$120 of variable cost per transaction. Automating has enabled us to significantly reduce this cost and add value.
(2) Matching supply with demand: Historically, this has been done manually, one transaction at a time, and without optimized planning. So, we looked at that on a large scale, with chunks of supply and chunks of demand to more effectively match trucks and loads. The resulting cost savings have created a lot of value both for our users and for Transfix.
Bill Gurley famously says that marketplaces “shouldn’t be afraid to do unscalable things” in the beginning. Can you talk about the origins and some of the unscalable stuff you did to get the business off the ground?
Everything we did at the beginning was unscalable. You have to overcome that initial inertia and find a way to create leverage. It’s a classic B2B enterprise sale. I had a background in the industry and put myself at the mercy of the people to sell our product. Our marketplace was initially cranked by demand, with the thinking ‘if you build the product, they will come.’ We had to start with demand but we also had to get really scrappy to get that demand.
If you don’t have demand, truck drivers won’t want to talk to you. To get any traction with supply, we had to have freight. It’s about putting density in the right places. The faster you scale aggregate density, the quicker you can mold it into what you want it to be. One thing we had to determine was who to say yes or no to. In our commodity-like marketplace, our secret sauce is that we can source our supply at a below-market price because we’re eliminating waste. However, this has been counterbalanced by a few competitors with greater scale. So, sometimes when we try to enter a new lane, we can’t buy at a below-market price. We have wrestled with when to say yes vs. when to say no in these types of situations.
For supply, we had to win over the owner-operators. At first, I wasn’t focused on scaling, I was more focused on getting the platform out there and getting people to use it. In our earliest days, this involved buying beer and pork chops for anyone at The Great American Trucking Show who would give us 10 minutes of their time and download our app. We even had a dunk booth at one point where people could throw baseballs and dunk me if they downloaded the app. Anything we could do to introduce ourselves, show personality, and get our message out there.
You come out of this space having a long family history and track record in the industry – would you encourage founders who don’t have your level of domain expertise to start a B2B marketplace? It seems tough and we are curious to get your thoughts.
I believe that the founders I’ve come across have the ability to accomplish anything. I wouldn’t discourage anyone from entering a market if they recognize that there is value to be created. However, the complexity of the business is still something that you have to consider. My co-founder and I have very different domain expertise, and I believe it takes a badass operator/product person to really tie things together. Early on, startups should consider bringing someone on who has this nuanced experience. It’s important for your team to be comprised of granular, scrappy, and tactical folks and smart engineering/business talent. Industries like logistics need this type of engineering/business talent, but it’s harder to find. Talented folks also need to enter this space with authenticity, as opposed to engineers and MBAs who are going to come in and tell us how to run our business.
There have been a lot of consortium-led marketplaces and acquisitions by private firms. Your marketplace creates a lot of independence, which can be lost if acquired by a large strategic. How do you think about this and your exit strategy, given you have raised venture capital and are considerate of the outcome?
There are 3.5m truck drivers and 500k trucking companies in the US, which comes out to 7 trucks per company. There’s incredible fragmentation. The US domestic truckload market is a giant black hole because of fragmentation and lack of visibility. Transfix is getting ahold of that. We are not a marketplace, we are a virtual trucking company. Transfix has 250k truckers on its platform and great sourcing capacity. If Walmart, for example, wanted to do the same, they would have to connect with thousands of different small trucking companies. So, there is a unique consolidation of market opportunity.
The biggest supply chain providers in the world are global forwarding companies like FedEx that take on a multi-modal supply chain. Right now, we think Transfix is at a great launching-off point to also become multi-modal. Our companies are made up of the biggest shippers in the world, all of which have ocean freight. So, we think we’re in a good place to really grow the business and be the acquirer rather than the acquired.
How have you seen shipping/freight marketplaces evolve since launching Transfix seven years ago? How do you think they will continue to evolve, and what actions is Transfix taking to adapt to these changes?
When we first pitched the business, it was at the height of cleantech. What better timing to be doing this, since the heart of our business is waste elimination. Since then, the world has changed pretty dramatically. There has been more momentum in logistics tech than virtually any other industry over the last three to four years. We feel like we were in the right place at the right time, and we were there first. This is great for the logistics industry because nearly every industry needs shipping and there were a lot of improvements to be made.
If you liked “From the Front Lines: Drew McElroy (Transfix)” and want to read more content from the Bowery Capital Team, check out other relevant posts from the Bowery Capital Blog. Look out for more content on B2B Marketplaces from us in the coming weeks.