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Jason and Will are joined by Bharath Krishnamoorthy Founder/CEO of Axle to talk about the perfectly boring world of freight intermediaries and invoice factoring. Jason has some background in the business, and has worked with “B” before, which lends to a conversation with more credence and depth. The industry is a multi-trillion dollar industry that, for all intent and purposes, essentially exists in pen, and on paper. Bharath and his company are changing that, and bringing this literally rusty industry into the digital space.
Bharath discusses his background as a lawyer and what led to the beginnings of partnership with his co-founder. They saw in something as simple as a commute via bus that there was an entire world that needed to change. They started providing a bus company a custom built revenue optimization solution, and once they had identified the niche they could fill, they pivoted into the intersection of transportation and finance. Now Axle has solidified their business within that space. Check out the conversation for more!
Welcome to the Perfectly Boring Podcast, a show where we talk to the people transforming the world's most boring industries. On each podcast, we will be sitting down with executives, investors, and entrepreneurs to talk about the boring industries they operate in and the exciting businesses they’ve built.
Strap in for the most marvelously mundane ride of your life.
Will: Welcome to Perfectly Boring. I am Will Coffield from Riot Ventures.
Jason: And I’m Jason Black from RRE Ventures.
Will: And today on the podcast, we’ve got Bharath Krishnamoorthy, who is the founder and CEO of Axle Payments. And Bharath is joining us today to talk about the unbelievably boring and strange world of freight intermediaries and invoice factoring. Jason, this is a business you know pretty well—have known Bharath for a couple of years—but this was a really interesting discussion. You know, like, what were some of the key takeaways that you had from our discussion with [B 00:00:37]?
Jason: Yeah, I think this is another classic case of an under-digitized industry that runs the world, right? It’s a multi-trillion dollar industry that’s run on paper, fax, Excel, phone calls, and human relationships. And you’ve got these freight intermediaries that actually benefit from all those relationships, those things are actually fantastic. That’s what they want to be focusing their time on that allows them to offer great services to their customers, but we’ve got a new kind of class of tech companies coming in that are offering new financial services that allow for, kind of, QuickPay and faster payments in the industry. And that’s a benefit to everybody involved, but the incumbents have a difficult time actually meeting those new demands of the market.
And I think what B has built with Axle Payments is a way for that industry to focus on what they’re best at, which I think is what we want to see technology and financial services do. So, I thought it was a fantastic discussion. And before we get too deep into the weeds, let’s kick off the interview with B.
Will: All right everybody, we are joined today by Bharath Krishnamoorthy, who is the founder and CEO of Axle Payments. Bharath, thanks for joining us today.
Bharath: Yeah, thank you for having me, Will.
Will: So, that I don’t botch this going forward, Bharath actually goes by B. So, B, appreciate you being with us today. And I think maybe as kind of a way of kicking off the podcast, what we’ve been kind of doing throughout the first couple of episodes is having the founder give a little bit of a background just on, sort of, themselves personally, kind of your personal and professional background that ultimately led you to founding Axle Pay, and then we’ll kind of dive into the business from there.
Bharath: Sure. Sounds good. So, my personal background, I grew up in New Jersey, moved to Virginia in high school with my family, studied economics at JMU in Virginia, and then moved to New York for law school. So, graduated from Columbia Law School, practiced as an attorney here in New York, doing M&A and private equity work, which is about as fun as it sounds.
And sort of parallel with this, my co-founder, Shawn, who’s my high school best friend, had taken a slightly different path. So, you know, he went to UVA for school and then started working in the FinTech space, a couple of different FinTech startups of varying sizes. And throughout this, we’d started a bunch of small businesses together. Those have been the projects where I’d felt the most energized and the most excited to actually do work. It seems sort of obvious to me, and I think to him as well, that down the road, that’s what we ultimately wanted to do, right, was to build something really dope together, something big enough that it could be our full time jobs, right, where we could quit our jobs and just work on something awesome together.
And the obvious difficult question was, you know, what are we going to build? So, in 2017 when I was working as a lawyer and Shawn was working at this tech startup in DC, we were taking these buses back and forth to visit each other all the time. Probably you know Greyhound, Megabus, you may or may not know that there’s, like, a dozen other smaller regional operators that all kind of operate similarly in the same areas. And we realized that these companies are just, they’re kind of like airlines in terms of their business model, but just way lower tech. And so we came up with this idea to build a revenue optimization solution for them that would basically help them with their pricing and scheduling in order to maximize the money they earned.
Started working on that; we have to quit our jobs, incorporated the company. We got a few customers within, I think, about six months, we were doing about 100 grand in annualized revenue. So, it was, you know, it was working a little bit. And what we realized is it wasn’t going to work much more than that because the market in the US was just very small, right, that if we totally knocked it out of the park and did everything right, maybe we get to a million dollars a year, which sounds like a lot of money, but really isn’t that much if you’re banking on everything going perfectly.
So, that started this process of us really taking a step back and trying to find a better opportunity. And we basically just, like, pivoted over and over again over the course of two years to various opportunities in the transportation space. Eventually we came up with this framework, right, that whatever we decided to do had to meet three criteria: it should be something that we thought we had a relative advantage at given our backgrounds, it should be something that we cared about solving, right, so a problem that we would feel good about working on today, tomorrow, and in ten years; and it should be a really attractive business opportunity. And it’s pretty difficult to find something that satisfies all three of those.
Where we eventually found some traction was in the world of freight finance. And we found this problem which, at a high level, was solving cashflow problems for small logistics businesses. And it struck all three chords, right? It was at the intersection of transportation and finance. By this point, we had a lot of exposure and a lot of relationships in the transportation industry, and both of our professional backgrounds very closely tied to the financial world.
Second, it was a pain point we cared about, right? It’s not that we were coming from a long line of truckers or had some extensive background in the logistics industry, but we were small business owners, and we know that for small business owners, cashflow problems are often the most salient problems they face. And so the idea of solving that problem for thousands of companies was just very compelling for us. The first client we closed literally had his COO recording him signing the contract because it was such a life-changing experience for him. And I was like, “Man, if we can just do that again, I’m going to feel really, really happy.”
And then the third is that it was, it’s kind of a no-brainer business opportunity, right? Huge market, highly fragmented, the incumbents are notoriously low tech, so there’s a really clear opportunity to come in, build a better tech-enabled solution and really consolidate the space. You know, that was mid-2019, and it’s sort of an off to the races since then.
Jason: What drew you to transportation as an industry to begin with?
Bharath: Pretty random. It was, we’re literally riding on those buses thinking of business ideas, and we’re like, well, here’s a busine—here’s an industry that needs help, right? The bus industry clearly needs better technology. And it started there, and then through that, we just ended up meeting a bunch of other founders and investors who work in transportation technology. I think over the course of those two years, we really started expanding our lens.
I think initially, we were very focused on the passenger transportation side, just given that’s an industry that we had direct exposure with. Buses aren’t sexy, but passenger transportation is sexy because of Uber and Lyft, and freight was just sort of this other part of the ecosystem we didn’t really think about. But over time, we realize, like, hey, from a business perspective, freight transportation is actually much more interesting. A) there’s just way more money flowing through that ecosystem, there’s just there’s a lot going on, and it’s a lot more complex, right? So, there’s a lot of different types of opportunities. And B) the bar is so low right now, in terms of where the state of the art is, so there’s a lot of room to come in and deliver a ton of value to the companies that are operating in it by building them better technological solutions.
Jason: As you’re starting to look at transportation, what drew you away from the passenger side into freight? And what does a typical freight operation in the US look like today?
Bharath: So, a typical freight operation in the US today, there’s basically three key players in the space to understand: you’ve got carriers on one end, which are the actual trucking companies who are getting paid to haul freight; you have shippers on the other end, which are the end customers, right, so these are companies like Target or WalMart who paying to have their freight moved; and in between, you have 100,000 freight intermediaries, which is an umbrella term that captures freight brokers, freight forwarders, 3PLs. And what these companies have in common is that they’re essentially acting as outsourced logistics arms for the shippers. And they’ll find carriers who have excess capacity and connect them with the shippers who have too much demand. So, they’ll essentially broker those transactions.
What’s interesting about this ecosystem is that it’s under a lot of stress right now and it’s changing very rapidly, right? So, these freight brokers have essentially operated in the same way for decades, but over the past five or six years, there’s been this rapid influx of venture-backed, tech-enabled freight intermediaries. These are companies like Convoy, Uber Freight, Flexport that basically raised a bunch of venture capital and used it to build software that’s enabling them to disintermediate this customer segment. And in part, they’re doing that by expanding their product offering to include payments and financial services.
And that’s what’s putting so much pressure on these incumbents to try and modernize, right? They’re not just going to lie down and give up. They’re going to try to figure out how can we get those same capabilities, ideally without having to raise a billion dollars in venture capital ourselves? And that’s where we come in, right? We’re essentially building the software and the tools to give that long tail of the market the equivalent capabilities of the Convoys and Ubers of the world.
Jason: And can you give us a sense of scale for that market? Like, what is the topology of the industry? My sense is very fragmented, lots of small mom-and-pop kind of business operations. Could you put some numbers on that?
Bharath: Yeah, that’s a great question for people who are not from the logistics industry, the first time they hear the numbers, it’s kind of like shocking how big it is, right? So, in the US alone, there’s over $700 billion generated in freight movements, right? So, payments to carriers and to freight brokers. And freight broker segment of that market—the freight brokers and freight forwarders—rake in almost $250 billion. So, it's a pretty sizable segment.
In terms of how fragmented that is, there’s about 100,000-plus freight intermediaries in the US. And the top four of them combined are only raking in 10% of the segment’s revenue. So, there’s a lot of fragmentation. So, when we look at the market, we see just a ton of these small mom-and-pop shops that are, you know, small relative to these big billion-dollar companies, but meaningful businesses, you know, raking in millions of dollars a year, often employing 5, 10, 15-plus people. So, it’s a very, very fragmented market.
And each of them does things in their own way, their business model is slightly different from other ones, they maybe add-on other services that other ones don’t provide, or they don’t provide other services that some of their competitors do. So, it’s very interesting, complex space.
Will: And, B, as the venture-backed companies have moved into the space, wha—I mean, aside from having better digital tools, has there been a key mechanism that they’ve used to win over customers and build market share? I mean, is there, like, a key differentiator that the Flexport and Convoys are introducing to the market that created an opportunity for Axle Pay?
Bharath: I think it’s hard to narrow it down to a single one. The industry was just very outdated and these companies—the Convoys, the Flexports—they’re doing a lot of things differently, and that combination of things is making it very compelling to the shippers. One in particular that has really changed expectations in the market is around this payments and financial services, right? And this is particularly true for the digital freight brokers, right, which are the Convoys and Ubers.
So historically, the broker didn’t need to pay the carrier until they received payment from the shipper, right? So, if the shipper pays him 30 days after the load is moved, then after they receive payment, the broker will pay whatever they owe to the carrier then. What’s changed is that Convoy and Uber have normalized the practice of offering their carriers next day payments. In the industry is called QuickPay. So, as carriers have come to expect QuickPay, all of these other freight brokers have been forced to provide it.
But it’s very difficult for them because remember, their shippers are still waiting 30 days to pay them. So, now these other brokers are in a spot where, “Hey, we just moved the load. Now, I need to pay the carrier today, but I’m not going to get the money for that load until 30 days from now.” And that’s, I think, really the genesis of the problem that we went to market solving. What we do is we go in and buy that freight broker’s invoice, let’s say it’s $1,000 that they’re supposed to get paid from the shipper, we will buy it some amount upfront, let’s say $900. We’ll pay some of it to the broker right now will pay out the carrier in entirety, right, so we’re providing that QuickPay to the carrier. And then 30 days from now, when the invoice becomes due, we’ll collect from the shipper the full amount, and we basically pocket that spread.
Will: Factoring isn’t a completely new concept, right? I’ve got to imagine that there are lots of folks that have been doing factoring, even specifically within the trucking freight ecosystem for decades, maybe give folks a little bit of the state of play of how factoring is currently done within this, kind of, specific niche, and how you guys are kind of turning that on its head.
Bharath: Yeah, that’s a great point. So, factoring has been around for literally thousands of years, right? It’s one of the oldest forms of business financing. Huge ecosystem, right? There’s over $3 trillion dollars in invoices factored globally.
To your point, in the US the largest vertical for the factoring industry is actually freight and logistics, right? So, there’s a lot of companies in this space. They are very similar to the freight brokers that we’re serving, in the sense that it’s a very outdated industry, right, very low tech, not a lot of innovation. You know, just one example, a lot of these factors still require clients to fax them documents in order to factor the load, which is outrageous because I don’t even know how to send or receive a fax, and then if think about the fact that their clients are truck drivers who were literally on the road the vast majority of the day, that makes it a lot—even more difficult to understand how that works.
In contrast, right, we’re building a tech-enabled solution. The software that we’ve built our business around, provides us three very distinct competitive advantages. The first is that it allows us to do a lot more than just factoring, right? We’re able to automate a lot of the key back office workflows for our clients and provide them more sophisticated reporting so they can make better decisions. So, when I’m talking about these back office workflows, I’m talking about carrier payments, invoicing, collections, book reconciliation. These are all really important, but normally time consuming, and error-prone business functions that our clients just no longer have to worry about.
And it’s more than just, like, the hour saved or the reduction in hours, right? If you look at it from the perspective of these, like, small freight brokers, right, they got into this business, they started a freight brokerage because they love logistics, they love sales, they love client service, but I guarantee you, none of them got into freight brokering because they love accounting, or accounts payable or accounts receivable, right? So, it’s the parts of the business they see as the most mundane, but are still absolutely critical for growth that we’re able to take over for them. The second piece, the second really—
Jason: Sounds really Perfectly Boring, I will say.
Bharath: [laugh]. Yeah.
Jason: It’s the perfect time to have you on the show.
Bharath: For sure. The second big advantage that we get from the software is that it allows us to run a much more efficient and effective operation, right? So, if you look at freight factoring companies generally, it’s very difficult for them to scale, and that’s because they’re normally based on these really manual and paper-based processes that become really difficult to manage as you add too many clients and debtors into the portfolio. In contrast, we’re able to automate a lot of that operational overhead and streamline our onboarding and client-funding cycles so that we can continue to deliver really high quality service, even as we’re rapidly scaling the business.
The last differentiator is—you know, I mentioned that factoring—that freight and logistics is the largest vertical for the factoring industry in the US, but a nuance there is that almost all of those factors exclusively service the carrier, right, the trucking companies. Very few of them will take on freight brokers as clients. And the reason for that is a piece of the Uniform Commercial Code, which is a statute which has been adopted by all 50 states. And this piece of the UCC provides carriers a first position statutory lien on their freight broker’s invoices. So, what that means in practice is if you as a lender, buy an invoice from a freight broker and that freight broker uses that money to pay a sales rep or to cover some other business expense instead of paying the carrier who hauled their load, then you as the lender, are really out of luck because that carrier still has that statutory lien which supersedes your own.
So, when it comes time to pay, the shipper is legally obligated to pay the carrier instead of you, which is a bad position to be in if you’re a lender. What we’ve done to get around this problem is we’ve designed our product to handle multi-party payments. So, in addition to onboarding all the brokers into our system, we separately onboard their carriers. They create their own accounts, we verify their identity, we link to their bank accounts via Plaid, and this enables us to directly pay out the carriers to extinguish their lien at the time that we purchase the invoice. So, now we’re in first position so when that invoice becomes due, we’re able to safely collect on it.
Because most of these other factoring companies are running on an off-the-shelf software that lacks this functionality, they’re really just not able to effectively compete in this space.
Jason: That’s interesting. So basically, you have perfect information on both sides, right, which allows you to see that both the shipper and the carrier are receiving the proper payments, and you’re able to factor, kind of, the time in between confidently because you can actually watch the flow of funds. Is that correct?
Bharath: Yeah. A hundred percent right. Normally, if you don’t have this type of software and you’re trying to buy that invoice from the broker, you don’t really know what’s happening with the money once you send it to them, and because of that you’re taking on a lot of additional exposure. In our case, that’s not a problem, right, because we have visibility on both sides.
And what’s really cool here is that it provides this risk mitigation benefit to us, but it also solves the brokers’ pain point of them wanting to QuickPay their carrier, right, which was sort of the original genesis of this whole problem, which is that they need cash to pay the carrier today. We can make that even faster by paying it out to them directly instead of sending money to the broker and then having them pay the carrier, right? So, it’s sort of a two-birds-with-one-stone solution.
Jason: I think you brought up an interesting point which I’d love to dig into as well is, like, there still is a bit of risk in the system, right, even with a typical loan, right? People can default on their loans. What mechanisms have you guys come up with to make sure that you have, kind of, the proper payments flowing through and that you’re not putting yourself at outsized risk. This looks like, you know, a great part of that solution, but things can still break down. I’m curious how you guys, you know, do kind of quality assurance and make sure that you’re also going to be in a position to get paid properly and payout properly?
Bharath: Yeah, that’s a great question. So, when we look at risk mitigation, we look at it at three levels. On the first level is us underwriting the client themselves, right? So, that’s making sure that they have the proper licenses to operate, that they have no other liens against their assets, there’s no red flags on their [Carrier 411 00:20:25] account, right? So, just making sure that we trust them to be a good actor, essentially.
Once we’ve approved the client, we separately have to approve or reject each of their shippers, right, their customers. And this looks more like a traditional credit underwriting approach. We’ll look at Ansonia, Experian, Dun & Bradstreet. If there’s not great credit data available, or if they don't have great credit, then we will not approve the shipper.
Once we’ve approved both the client and the shipper, we separately approve or reject each individual invoice, right? And so this is looking at, on a transaction basis, do the receivable documents match and do they make sense, right? Is the carrier they’re asking us to pay the same carrier listed on the bill of lading? Is the bill of lading signed? Is the dollar amount they’re requesting the same as what’s included on the rate confirmation? That type of thing.
So, between these three layers, we’re able to catch problems before they end up in our portfolio. There’s other things outside of this we’ve implemented. For example, you know, we buy the invoices full recourse, we only advance a certain portion of it. It’s a full suite of risk mitigates, but the combined effect is that we are very protected in our portfolio. So, we’ve not actually lost a penny in more than the past year. Actually, since we hired our head of operations we haven’t lost a dollar.
Jason: And what percentage of freight intermediaries do you bring out on the platform, of the people who apply to become Axle Payments customers?
Bharath: So, I don’t have the exact number there, but it’s a good portion. It’s around, I would guess, like, 70, 80 percent. We typically see more rejections on the shipper side, right? So, they’re working with debtors that we don’t feel confident will pay us, or there’s issues on, like, the invoice-by-invoice level. But we are generally able to work with most clients, right?
So, we a lot of times will reject them upfront, like, there’s some issue, maybe there’s someone has liens against their assets, their account is inactive, but we’ll usually work with them to get those remediated. It’s not super often that we find someone who we both cannot work with, and can’t get them to a position where we could eventually work with them.
Jason: And once you’re on the platform, then you’ve got that visibility as well, which is great.
Will: I think this is all super interesting, and I’m curious, you’ve been operating for long enough at this point and I’m sure I’ve had a couple of these great intermediary and kind of broker clients for any one client for 12 to 18 months at this point. I’m curious, like, what you notice in the evolution of their business after they start working with Axle Pay, and just what streamlining cashflow does for the freight intermediary from an operational perspective, and then, you know, kind of what the impact of not only streamlining cashflow but also accessing digital tools for running other parts of the business. Like, what’s kind of the emergent behavior you’re seeing, if any, within the customer base?
Bharath: Well, that’s one of my favorite questions because it’s incredible what we see with the clients, once they start working with us. A huge number of them just blow up, just start growing very, very quickly. On average, our clients grow, over a 12 month period, about 75% over the course of the year. So, if the average client is doing $100,000 in revenue, January 2020—or January 2021—12 months later, we’re expecting them to do 175,000. The segment of our clients that actually already have a functioning business when they start working with us grow much faster, even.
So, with that portion, if they’re already doing least 50,000 a month in revenue, we see them growing on average 250% over the course of the year. And there are some crazy outliers there too, right? People who started working with us, and then a year later are doing more than ten times as much revenue as they were a year prior.
Will: That’s insane.
Bharath: Yeah, it’s really cool. And it feels really good, right, to talk to them. And, you know, I’m not going to take credit for their success; they’re all excellent at what they do, but it’s awesome to hear them attribute, you know, even a portion of that growth to working with us and having the capital they need to scale and having a partner who can take over a lot of the business administrative functions.
Will: There’s an interesting dynamic at play here where most of the other venture-backed businesses in the market have decided to be the operators themselves and to build the technology to be the most digitally native, nimble operators in the market. You’ve taken a completely opposite tack of saying you’re actually going to be an arms dealer to the a long tail of operators in the market to enable them to compete in a more digitally powered market. How does this play out? Like, what is the evolution of the way the old guard, now armed with tools that you’re selling them, engages, competes with the new guard and this kind of class of venture-backed companies that have come into the market over the last really, you know, just over the last three to five years?
Bharath: The way I look at what we’re doing is very similar to what Shopify did in retail, right? So, you have Amazon who comes in and builds this incredible business and really consolidates a huge chunk of the retail market, but there’s still this long tail of retail businesses that are not just going to give up and die, but who will demand and pay for services that allow them to compete with Amazon. And Shopify was able to build a massive business by building that tooling for the long tail of the market, right? I think the founder of Shopify uses the analogy that Amazon is the Empire, and Shopify is arming the Rebels.
And what we’re doing is something very similar, right? You have Uber, and Convoy, and Flexport who are building these incredible, valuable businesses by consolidating a large chunk of the logistics space, but there’s still a very long tail of the market, that’s not going to just give up and die, right? They’re looking for services that will allow them to compete. And we’re filling that gap by providing them the tools that allow them to compete with these companies. And you know, I am a huge fan, if it’s not clear, of all three of those businesses, right, Convoy, Uber, Flexport, and even some of the smaller ones like Loadsmart.
We, you know, we’ve met with some of the founders, some of them are invested in the company. They’re building great businesses and I think they’re going to build huge multi-billion dollar businesses that will be profitable, independent public companies, but there’s still going to be a lot of other very large logistics players in the business, right? So, if I zoom out ten years what do I think the market looks like? I think it will continue to be highly fragmented, but I think every player in this space is going to be tech-enabled because if you’re not tech-enabled, you’re not going to be able to keep up and the business is going to die. Now, if you look at those technical players, a handful of them are going to be tech-enabled because in the early 2020s, they raised billions of dollars in venture capital and built out their own internal proprietary software, but the vast majority of the market will be tech-enabled because they used the profits they were generating to pay for software services that gave them the equivalent capabilities.
Jason: You know, this is, kind of, maybe an inversion, a little bit, of enabling the kind of incumbents here. The incumbents are incumbents for a reason, right? They have a lot of great relationships, et cetera. Now, that you’re providing them with a modern set of tools, what advantages do they have in order to compete? I mean, as you mentioned, it’s a multi-trillion dollar industry, so there’s plenty of space for great companies of different kinds of origins to be grown, but what are the advantages of being an incumbent here now that you’ve enabled them with, kind of, technology and financial services to compete?
Bharath: Yeah, I mean, I think you hit the nail on the head, right? They have been huge rolodexes, right? It’s the relationships, both the people they work with, and with customers, employees, and they have a lot of in-house expertise and knowledge that allows them to deliver a really great service. I don’t think those benefits are going to go away or become less important just because someone has built software that helps them operate more efficiently.
Jason: Yeah, one amazing thing here is, you’re kind of getting paid to build trust with an amazing, huge incumbent base, initially with factoring and some back office workflow. I can imagine that you have a pretty robust roadmap for things that you’d like to build going forward. Maybe you can talk about some of those features that go beyond just the factoring part of the business.
Bharath: You know, we see this as, sort of, three phases, and this first phase is just building out this carrier payments platform, right, and taking two freight brokers and just making it as great of a product as we can and being the market leader for that. And I think we can build a massive business on just that. But like you said, I really think what’s exciting here is that’s, sort of, a platform to build out a lot of other cool products and services.
So, phase two, I see as building this all-in-one financial services platform. And what’s exciting there is there’s adjacent financial services we can introduce, like credit cards or [shipper 00:29:25] finance. There’s better workflow automation tools, right, to help them run a more efficient business.
And where it goes from there is to this phase three, right, which is—you know, my co-founder and I joke, it’s world domination, right, because there’s logistics is just one of the biggest markets in the world, globally, and there’s this opportunity to take this suite of solutions that we’re building for freight brokers to distribute it to shippers, to carriers, to take it international, right, to Canada, Mexico, overseas to Europe, and build a payments network that allows all of these different players in the supply chain to efficiently transact with one another. And that’s where I think the really exciting opportunity is, right? There’s a lot to be done; there’s a lot of value to create there.
Jason: Yeah, no, I can imagine that the international freight landscape looks quite a bit different than the US. What are some of those, you know, interesting idiosyncrasies that you guys have uncovered? I know that’s a couple phases down the line, but it is a global ecosystem, we have a global economy now, so I’m curious what opportunities you see in other countries.
Bharath: Like you said, there’s a lot of nuance between different countries. I think one of the biggest things that separates the US market from most other domestic freight markets, is that, besides just the dollar amount of transactions happening in the US, is that in most countries, if you go to Germany and you look at the freight that’s coming in, it involves a lot of different modes of transportation more frequently than just trucks. In the US, so much of the freight movement is via trucks. Like obviously, things are shipped in, and obviously things are flown in, but trucks just make up a vast majority of it. And that becomes less true as you go to other countries. And they’re reliant more on international shipments to get products in.
Jason: I would assume they still also have the factoring issue. Are there other, kind of, unique issues that pertain to maritime or air freight that are kind of unique to that market versus trucks?
Bharath: Of course, the factoring issue is still there. I think one of the interesting ones is around this shipper finance problem, right? So, when you look at the shippers themselves—so, like, again, these are the companies that have freight that needs to be moved—there’s this issue of them getting financing both to buy the goods themselves, to pay for the very expensive shipment overseas, to pay customs and duty fees. And right now, they go to a bunch of—you know, it’s a super fragmented space of independent lenders who provide this trade finance to the shippers. I think there’s a really cool opportunity for us to piggyback off the business we’re already building to provide a better financing solution to those shippers, right, for a couple of reasons.
One is that because we’re going through these freight intermediaries, we have access to all of their shippers, right? If we partner with our client and say, “Hey, we’re going to distribute to your shippers. We’ll do a revenue share.” Which really reduces the cost of us acquiring new clients, right, because we can just piggyback off their distribution channels. The second is that our current clients, the freight intermediaries, have all of this data on the relationship with their shipper, right?
For example, if they say, like, the shipper we’re working with has been doing 5 million a year in revenue every year, like clockwork, but then two years ago they did 4 million, last year they did 2 million, this year they’re doing 1 million, well, that’s a sign that, like, maybe we don’t want to be lending a bunch of money to that business, right? So, there’s interesting underwriting applications of the data they’re collecting. And then finally, with these international shipments, the freight forwarders often take possession of the goods themselves, which means we can use that to secure the loans, right? Which is like, “Hey, it’s a long-term relationship. If you don’t pay back the first one we made, then we will take possession of these goods.” So, there’s an incentive for them to make sure that we’re currently—you know, we’re always being paid out on time.
Will: And B, one of the things we actually haven’t touched on much yet is, you know, you’re a lender, and would be great to spend a little bit of time talking about, like, kind of, the capital side of the business, some of the unit economics there. And you’re creating a monster amount of value for your clients. How does Axle Pay make money?
Bharath: Right now we have two sources of capital. So, like many tech startups, we raised money from VC funds, and that comes in as equity and funds the business operations, right? So, that’s paying our salaries, our marketing spend, our software costs. Separately, we also raised debt from other sets of financial institutions, and that’s where we get the money to actually lend out to the clients, right, because VCs aren’t going to give you a million dollars if you’re using 800,000 of that to lend to another business, right? And so this allows us to get a lot of leverage off of our equity dollars.
So, when we first started, right, because we had no real operating history, we had to go out to hedge funds or high net worth individuals to get that debt that we could then lend out. I think as the business scales, there’s opportunities to go to larger banks, who will, [write 00:34:29] larger credit facilities and have a lower cost of capital. And farther down the road, there’s an opportunity to set up securitization programs where we’re basically able to sell off that debt at an even lower cost of capital and get that off of our books, as you had alluded to.
Will: Yeah, I mean, I think that there’s a super interesting opportunity to do that, particularly as you accrue more data to support at least what appears to be ridiculously compelling numbers as it relates to default and repayment stats. So far it looks like unbelievably reliable borrower with a very predictable payback period.
Bharath: You know, like, right now, there’s a lot of people with a lot of money, looking to deploy that in the market, and getting a lot of interest from lenders of all different sizes and backgrounds who are looking for somebody to get a piece of that. So yeah, I think to your point, there’s a lot of cool stuff that can be done in the long run.
Jason: Well, yeah, and we’ve also—you know, now that we’re kind of getting to a little bit into the, like, the shocks. We’ve had a COVID impact, you know, massive global supply chain shortages. We also at the same time have kind of a generational shift in a lot of these, you know, under-digitized industries that are now rapidly digitizing. I’m curious what you see as kind of like, the macro impacts on the freight space right now, and how that’s been evolving and maybe accelerating in the past year or two.
Bharath: The obvious one is, like, the current supply chain crisis. I think people naturally look for a single cause and effect, which is tough to do here because there’s a lot of problems, right? There’s raw material shortages, there’s exceptionally high demand, there’s driver shortages, factory closures, right? And I think a lot of these are, you know, indirectly caused by COVID, people not being able to work, so the factory shuts down; people not being able to spend money on anything except physical goods, so they’re just buying a ton of physical goods. And I think there’s this narrative that, like, oh COVID caused this supply chain crisis, which is not entirely true, right?
I think, yes, those are all causes of the current crisis, and COVID did sort of supercharge the problem, but there were underlying trends which I think made this crisis somewhat inevitable and which are continuing to accelerate. One of these is, this is just the growth in e-commerce. Obviously, the growth in e-commerce is increasing demand, but what’s more interesting is that it’s not just increasing demand; it’s a new type of demand, that’s putting a ton of stress on supply chains, right? Before, you would go to Walmart and you would buy whatever Walmart had in stock, and there’s sort of a handful of brands they carry in stock for each good, and you go get it there. And that’s a fairly simple supply chain problem.
But today, you go to Amazon, which is, you know, quote-unquote, “The everything store,” and there’s a million different brands for every product you want to get. And then there’s actually a ton of things you can’t get on Amazon that all these direct-to-consumer brands are selling to you that, you know, creating more competition. And each one of these companies needs to have their own supply chain set up to be able to deliver a product in two days to you, wherever you are in the country, right, which is a much more interesting and complex problem than what we’ve been dealing with in the past. Then if you combine this with globalization and the diversification of supply chains—so people are getting those products from different parts in the world—you get even more complexity. And then you look at this in the context of an industry where technology and processes just really haven’t evolved much in a decade, and you get a recipe for disaster, right?
They’re solving today’s highly complex problem with tools that were designed for a much, much simpler supply chain. So, you know, this is going to sound really self-serving, but to me, the obvious solution is in technology, right? We need better visibility into the movements of goods and the status of payments up and down the supply chain. We need to make it easier for brokers and for forwarders to run really efficient business operations. We need to supply them with the analytics that allow them to see problems in the supply chain before they become an all-out crisis.
And you know, I don’t think—I’d be lying if I said Axle is going to single-handedly deliver all of these solutions to the market, but I do think will be a key piece of that solution, and I think there are a number of other really cool, interesting companies in the supply chain tech space that are delivering the rest of this solution.
Will: B, what does the market look like in ten years when, you know, you’re a public company, you have sufficiently armed the long tail of these great intermediaries with the digital tools to succeed and grow in kind of a, you know, modern supply chain, what has changed forever? Are there any, you know, kind of, predictions you have about the way the Axle Pay is going to dramatically alter the topology of this industry?
Bharath: Yeah. I mean, I think from, like, a payments side, it’s just going to be clean and efficient, right? It’s not going to have multiple companies auditing the same physical piece of paper to find out if a load was delivered on time, right? That data is going to be digital and it’s going to be easily accessible by everyone up and down the supply chain. Payments will flow seamlessly between parties, access to capital to scale will be a lot more efficient so you’re not going to have these behemoths existing just because they happen to have access to capita;. It’s going to be the businesses that actually run the most efficient operation to deliver the best service will get access to capital they need in order to scale it, and those are the businesses that dominate the market.
Will: And so, I mean, that sounds a little bit like we’re almost predicting that what is today an unbelievably fragmented market, once armed with these digital tools, is potentially going to see some consolidation, right? I mean, and a lot of your customers have operated in almost an exclusively regional kind of mindset for, you know, basically their entire existence. With these new tools, do you think that they start to—we start to see more national expansion from some of the leaders of the pack here, and therefore some consolidation?
Bharath: Yeah. So, I think the market will still be fragmented, but I think it will be relatively a little bit less fragmented. So, I think to your point, there will be some consolidation. I don’t think it’s going to have—you know, I don’t think the market has, like, winner-take-all dynamics where there’s going to be, you know, two or three freight brokers that dominate the US market. I think it’s going to be a lot of smaller freight brokers who are able to deliver really good, tailored service to their clients, but maybe it won’t be 100,000 freight intermediaries in the country.
Jason: I think there is, like, a generational shift that’s happening, and the people who grew up on, like, iPhones and smartphones, [audio break 00:41:16] and they also don’t know how to fax anything [laugh]. Like, I have no idea how to fax things. I could watch a YouTube video to figure it out. There are also—as you kind of mentioned a little bit in the consolidation piece, like, is it going to go truly national?—there are benefits to the existing players, and I’m curious, like, what resistance there is in the market to change.
Because, like, e-commerce isn’t new, factoring isn’t new, tech in workflows isn’t new but, you know, for some reason, it feels like they’re all coming to a head. You tend to have people who were, kind of like, on the forefront but, you know, maybe there are pockets that have resisted for one reason or another.
Bharath: You know, we’ve definitely spoken to brokers who are basically like, “Brokers shouldn’t need factoring because they shouldn’t need to QuickPay carriers, right, so I don’t want to work with you.” Which is very much this mindset of like, “Hey, when I built this business, this was not a problem, so I don’t need this solution because that’s the way things are.” Which is just, you know, it’s the resistance to change. And I think that’s the same approach which is like, “Hey, I don’t need to provide visibility to my customers in real time because I built a great business and never did that, so why do I need to do it now?”
And I think what’s inevitable is that those companies are not going to be… around in ten years, right? Because at the same time, there’s a bunch of other people we’ve worked with who are 28-year-olds, 32-year-olds, starting freight brokerages who are asking—you know, emailing us, asking us if we have an API, right? Like, “Hey, can you integrate with our stuff because we’d rather pipe all this data in so we don’t have to do manual data entry.” That attitude is going to get them so much farther than someone who’s just like, very resistant to change, right? And I think what’s going to be great is that some of these companies have, like, the best of both worlds; some of our clients are just, like, super, super smart people who have a ton of logistics experience, who are great at running a business, and who realized, like, technology is not going to solve all of your problems, but it’s going to solve your technology problems, right? It’s going to solve a lot of things that you would have had to do manually otherwise.
And so they’re building businesses that are growing incredibly fast. I think it’s easy to sort of paint the whole industry with a brush and say, “Oh, like, freight brokers are outdated.” And on average, I think that’s true, but like you said, there’s pockets here and there which are very tech-forward, who are reading about ways to implement technology to make their business better, and who are probably going to be the market leaders in five, six years.
Jason: I always think it is fascinating in these markets that are meaningfully digitizing for the first time—like, they’re using some software, but not modern software—the kind of tension between pushing, you know, all the way to the forefront with, you know, the demands of the customer base that might only be able to meet you halfway. Like what you have to do? Like, do you guys still enable people to manage, like, faxes coming in? Like, what did you kind of have to build in the product that made it attractive enough for the freight company that’s been operating for 100 years and it’s been passed down, you know, from generation to generation to the 28-year-old, who’s just starting their own?
Bharath: Yeah, that’s a good question. So, we don’t take faxes, but we have run into issues that, like, you know, I wouldn’t have expected we ran into, and so we’ve had to build around it. So, for example, we’ve had clients who forgot their email address, right, which for me, is like forgetting your own name because it’s so core to, like, you know, that’s—it’s like, I’d forget my phone number before I got my email. But that’s, you know, they just come from a different world where it’s just not as important. We had to build up the functionality for us to send payments by check—even though we offer free electronic payments—because a huge chunk of carriers would prefer to receive a check in the mail instead of getting the money direct-deposited into their account for whatever reason. And so, like, you know, we had to go integrate with another company and figure out how to manage that process.
So, there’s definitely been, you know, a number of these things which are like, if you asked me to write a list of the problems we might face, this would not have come up on that list, but by virtue of, like, the industry being a little bit older and used to different types of practices, we’ve run into those issues and we’ve been able to solve them. And I think that’s part of it; like you said, it’s meeting them halfway because everyone’s sort of at a different point on this curve.
Jason: Yeah. Because you’re there to serve the customer, right? And so you got to kind of meet them where they are. Which I think makes a lot of sense and makes this a particularly interesting challenge to solve because you’re solving for a fairly broad. Swath of customers that are—you know, might as a whole look homogeneous, but are heterogeneous, particularly because they’re regional and smaller, older generation, you know, newer generation, et cetera. That’s really interesting.
Will: Bharath, thank you for joining us today, man. This is awesome.
Will: Thank you for listening to Perfectly Boring. You can keep up the latest on the podcast at perfectlyboring.com, and follow us on Apple, Spotify, or wherever you listen to podcasts. We’ll see you next time.