April 18, 2022 – On today’s podcast we welcome special guests, Transfix CEO Lily Shen and CFO Christian Lee . Transfix is a leading digital freight platform where they use technology, machine learning, and AI to dynamically match thousands of freight transactions between shippers and carriers.
On the show, Lily and Christian discuss:
- The opportunity in freight logistics due to extreme inefficiencies
- Issues affecting supply chains right now
- Why the company is going public
- Their thoughts on current market conditions
- And more
Welcome investors to The Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies, your hosts, Julian Klymochko, and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by Accelerate Financial Technologies. Accelerate because performance matters. Find out more at accelerateshares.com.
Julian Klymochko: Welcome Lily and Christian of Transfix to the podcast today. How are you guys doing?
Lily Shen: Doing great. Thank you, yourself?
Julian Klymochko: Doing fabulous. Thanks. I wanted to kick things off by just getting into a quick background. Lily, prior to joining Transfix, you had a career in financial services, Goldman Sachs, but also eBay, Wealthfront. Can you walk us through your career, key insights you picked up that ultimately prepared you for the CEO role?
Lily Shen: Yeah, absolutely. You know, I’ve truly have had the privilege of being a part of some amazing companies over the course of my career. I did start my career at Goldman on the buy side, but I’ve spent the last two plus decade building marketplaces across sectors and globally. And you know, over the course of that period of time you know, what I’ve really come to learn is the power of marketplace. How marketplace models are really able to bring a lot of efficiency to broken models and you know, and really bring two sides, whether it’s buyers or sellers, or obviously an RK Shippers and carriers together and drive far more efficiency in the system through the use of data technology and far superior user experiences as well. I think so for me, some key learnings has been certainly relentless focus on the customer that is very top of the list in terms of how we operate here at Transfix.
Particularly with evolving and increasing expectations and especially in such a complex space you know, really building high performing teams. I’m a firm believer, no matter where you are as a company, as a business, whether your early-stage, high growth, you know, large scale company you have to be able to continue to attract great talent, build high perform teams and an incredibly strong culture that truly makes you a resilient team in business. You know, and really continue to drive innovation. You know, this is something that is truly core to how we operate here at Transfix. You know, this is obviously a huge, huge, complex space, and you have to really rethink and reimagine the ways in which freight can be moved and the ways in which people work. And I think we have a tremendous opportunity here ahead of us.
Julian Klymochko: Now, speaking of attracting talent, I was wondering what brought you guys to join Transfix? Christian, do you want to start then we could go to Lily? Like, what was the opportunity set that made you want to join the company?
Christian: Yeah. There was a few things. So, my background, just to kind of dive in there for a second, I did mostly large companies. Citigroup, Time Warner Cable, and was lucky enough to be part of the team that spun time Warner Cable off from time Warner Inc. So had that experience of taking a company public essentially you know, had a variety of roles there. Ultimately, we ended up, I was leading [Inaudible 00:3:19] development and we were sort of in the merger with attempted merger with Comcast and then ultimately with Charter and wanted to do something that was you know, higher growth, more disruptive. And so, I joined very early on WeWork and was part of, sort of the growth that happened there. Originally a CFO and then went over to Asia to help launch and run the businesses there.
And did that for five years and where, as I was sort of looking at the next journey was really you know, focused on being in an industry that you know, was in need of disruption, you know, huge growth potential, massive market but was very focused on how do you do that in an operationally disciplined way, right. A team that sort of understood the vision and where we wanted to go, but also was very focused on how do you do that, you know, day in and day out, month over month, quarter, over quarter, year over year. And so, it was really blown away when I met, you know, sort of the combination of, you know, Drew and Jonathan kind of on the vision and the technology side. And then, you know, Lilly who sort of brings that together, kind of this vision, you know, but combined with the real, okay, how do we actually make that happen?
And so, it was like, okay, this is actually everything I was looking for in terms of massive opportunity, huge potential, real ability to bring in technology and people together to drive innovation. But with the clear plan, how to do that. And I then looked at it and said, well, my background of, you know, how do we think about, you know, capital allocation? How do we think about M&A? We think there’s a huge you know, acquisition opportunity in this space going forward, partnership growth, those sorts of things. So, for me, it was sort of the perfect combination of big opportunity with a clear plan of how to get there and then my particular skillset of sort of M&A, Capital Allocation, New Businesses. And it just all sort of made sense coming together.
Julian Klymochko: And Lily, how about yourself?
Lily Shen: Yeah.
Julian Klymochko: Appealed to you about joining Transfix?
Lily Shen: Yeah, I mean, I met the founders back in 2015 and quite frankly, fell in love with the massive market opportunity, the vision and the opportunity to truly transform a massive market. You know, my background, especially in technology and operations was really bring that to life and the opportunity to have impact and do that to really, you know, drive and help build a better platform, a better experience and help eliminate waste and inefficiencies that exist. You know, and also for me a big part of it was the team. You know, I think the combination, and this is how we have grown the company over the years as well, you know, really strong, I would say industry leaders and insights, right. Into a lot of the ways in which things are done and maybe the ways things should be done better.
But also, incredibly strong technical acumen and bring those things together. So, you know, one of the things I loved about Transfix early on was that, you know, it’s not a, you know, it’s not just a technology company trying to figure out the industry or, you know, kind of a, you know, I would say a more traditional model trying to figure out the tech from day one. It was really building it the right way and myself, Christian, the rest of the team, having that opportunity to really, you know, scale that business was incredibly exciting.
Julian Klymochko: Now, I did want to get into this big growth opportunity and Transfix business model, specifically, the company uses proprietary tech machine learning and AI to dynamically match thousands of freight transactions between shippers and carriers. You have built this big marketplace. Can you describe how the company’s business model works? How do you guys generate revenue?
Lily Shen: Yeah. Christian, do you want to take the revenue and we talk about more the business model?
Christian: Yeah, absolutely. So, the core, right, the majority of what we do today is, as you said, the sort of matching right. Sort of, you know, people will think of it as sort of digital freight brokerage. We work with shippers; we price that out for them. We match with carriers. You know, we sort of try to find the most efficient routes, the most efficient way to bring that together, to really drive matches at scale. So, 90% of our revenues today comes from very large enterprise companies. And it is on a transactional basis, right? So, we get paid, move load and match with a carrier. And then we have costs of making that transaction happen. Where we’re differentiated is coming at this as we have from sort of a data first approach and being able to make matches very efficiently at scale. So, very large shippers need to move. As you said, thousands, tens of thousands of loads, and being able to match that with the hundreds of thousands of carriers around the platform, as opposed to the traditional model of, you know, a broker who’s on the phone, trying to kind of, you know, email back and forth, we’re having the machine do it you know, and then giving a human being the opportunity to review it. And so, it’s effectively turned a transactional model into almost a high growth kind of recurring revenue model, because we’re able to continually get better as we match. And we’ve automated so much of the inefficiencies out that we can really scale this quickly as you’ve seen from our numbers, you know, and sort of the revenue and margin growth over time. And then from there, add on that, we also have the software businesses that are continuing to grow, which I’m sure Lily will talk about.
Lily Shen: Yeah. Just to add onto that, you know, I think the magic and the ways in which we’ve been able to make that all come to life has been, you know, multifaceted, we meet our customers and carries exactly where they’re at. So, whether it’s through APIs, through integrations, providing the software ourselves, you know, we make it incredibly easy for every customer, every carrier to work with us onboard quickly, and then to be able to dynamically access whether it’s a capacity or they’re freight that they’re looking at. And, you know, that’s very much because of the matching platform that we’ve built. I think to take that one step further, the matching capabilities have been enabled because of multiple things. One is because of the automation platform that we’ve built. So, you know, we have literally over the year has been able to drive automation at every point necessary to process a load.
And so, whether it’s through pricing, auto bidding, auto tendering, auto matching, right. It actually takes the aggregate of all those things to come together to really drive the automation, the platform, and have built that. The other aspect of the business that I’ll talk about is you know, our network level approach. So, you know, Christians absolutely right. We have taken a data first and platform approach. And what that means is that, you know, we look at everything at a true network level. So, you know, if you think about it, a shipper is like, they are primarily optimizing their own needs and their own supply chain. We work with multiple shippers and we’re able to look at, I would say synergies amongst shippers and between shippers and carriers and also amongst carriers. So, we’re able to really bring that together to drive value through the ecosystem.
Julian Klymochko: Now there’s a couple key themes that I’ve latched onto here. Number one, it’s a huge potential, this massive market of digital freight brokerage. And also, the fact that there are these inefficiencies that you can capitalize on. Now, a couple questions, how big is the freight logistics market and why do these big inefficiencies exist?
Lily Shen: Yeah, I mean, the market is huge. It’s estimated to be over $1 trillion and that includes trucking spend plus freight software and services. And you know, the reasons why the inefficiencies have existed for so long is because one, as it is, the industries incredibly fragmented. There’s an incredibly long tail. It’s very fragmented, many, many players. And at the same time, everyone works in incredibly siloed ways. And that is, you know, I would say, siloed ways, not only in terms of how they’re working with, you know, their customers and other constituents and partners, but also because there’s no connectivity in terms of a lot of the systems that exist. Now because of that, as you can imagine, right? This is where the power of the data comes in because we’ve built a unified data platform and because we’ve built the modern interfaces and connectivity with the shippers and carries we’ve worked with, and the automation, you know, we’ve been able to actually identify capture, structure, leverage, and then really build our machine learning AI capabilities on top of that, that’s helped driving the efficiency through the system. Chris, anything else you’d like to add to that?
Christian: No, I think that’s all right. And I mean, the only pieces, when you, then look at that structural, you know, so historically right. The alternative has been very, very manual processes for all this right. People had to pick up the phone.
Julian Klymochko: Yeah.
Christian: Try to make, you know, use their personal relationships to connect, you know, a few loads to a few carriers. And so not only were there sort of structural efficiencies and silos but there just hasn’t been the ability to sort of take a more network level approach. And that I think is the big development that we brought to the industry was, again, getting out of just like, how do I have an individual broker who matches things, but taking a whole network level approach, applying automation, all of that. So, you’re sort of fundamentally changing the nature of how the services delivered which has led to huge, you know, benefits for shipper’s carriers and ultimately for Transfix.
Michael Kesslering: It seems to me like it’s basically like a very sophisticated market making function that we would be used to in the equities market. And just so I’m understanding the business model correctly, is it simply that where you’re generating revenue, is it through taking a fee for connecting to counter parties? Or is it taking the risk on one side of those transactions? How does it work exactly?
Michael Kesslering: Yeah. So today we do take the risk, right? So, we contract with the shipper and again, take the risk as a, you know, somewhat term of, I think accounting here because we have a huge amount of data on the other side to know what carrier preferences are, what lanes they’re good at, what the cost likely to be. I mean, that is sort of the nature of what we’re doing is, is knowing where the market is likely to be on the shipper side and you know, both what the cost is likely to be on the carrier side, but more importantly, the service levels you know, who can deliver on what lanes, you know, who’s done this well historically. And so, it’s not just a, you know, our head of data. We’ll talk a lot about, these are not substitutable goods, right?
It is a massive market, you know, like a treasuries or something like that, but one carrier is not necessarily transferable to another carrier, right? So, you need to both be able to make the market, but also understand the unique nature of that carrier, you know, where they’re strong, where they’re good you know, where they have repeat ability where it’s just a one off. And so, it is that market making, but it’s one level advance because you have a service and you know, a reliability and all these other components that come into, that we take into account,
Michael Kesslering: That makes a ton of sense. And so, what, something that you were talking about, the inefficiencies of the industry, one of those inefficiencies would be the environmental cost of this? And what’s the environmental impact of some of these empty miles I saw was something that came up in your investor presentation.
Lily Shen: Yeah. So, you know, one of the inefficient is in fact, the waste that exists in the industry and 30% of miles are driven, empty every single year. You know, and, you know, I think that in combination, obviously, like many people are also talking about driver shortage, right? So that has, you know, the combination of things have actually led to, you know, an incredibly high demand and need for reliable capacity. Our platform because of the tens and thousands of carriers that we’ve been able to aggregate over the years, because of the experience that we’re providing, the carriers and the reliability of consistent freight. And therefore, that means consistent freight, consistent revenue, right. And ability to really keep the truck moving. That is one of the things that our platform is incredibly good at. So, you know, I think that there’s, you know, there’s a lot more quite frankly, and I think that speaks the opportunity ahead in terms of inefficiencies, in terms of empty miles that can be driven out of the system, you know, but as we continue to actually scale the marketplace, drive more volume, bring more carriers, right. And recognize, and identify those synergies across lanes, across carriers, across shippers. Over time, you can actually continue to drive some of those empty miles out of the system.
Julian Klymochko: Now, I wanted to touch on the competitive dynamics in this industry, specifically, who are you guys competing against? Are there anyone else in the digital freight brokerage side, are you competing against a group of guys on the phone? You know, do you have a competitive advantage in this market?
Christian: Look, in this market, as we’ve talked about is, massive, right? I mean, just even digital brokerage is 120 billion market. The broader trucking industry, 500, you know, Lilly said, when you add in all the service and pieces, you are talking about trillion-dollar industry. So, as you can imagine, there are many, many, many players in that market, even within brokers, depending on who you talk to and how you count some between 10 to 17,000 people who are just brokering freight today. And so, there are many, many folks who are doing this. But generally speaking, everyone is doing one of two things, right? Sort of the traditional analog, phone, broker led individuals who are making calls, who have their own personal PNL within a larger organization, who sort of are incentivized to not share information on the ship or not share information on the carrier, kind of keep that to themselves for their own personal PNL, so that’s one-piece.
Others who have taken, I would say a more you know, technological first approach, but it tends to be app based. It tends to be kind of one driver to one load. And we think the difference of what we’ve done is of course the data piece we’ve talked about, but you know, that network matching at scale. And the way we really think about it is, monetizing the inefficiencies. I mean, going back to the question before, like, when you think about 30% of miles, that tens of billions of miles that are driven empty, right. And we talked about the environmental impact, the impact on infrastructure, you know, roads, bridges but carriers don’t get paid, right. So, if you’re driving empty, you’re not getting paid nearly what you should be. And that’s one of the reasons there’s a driver shortage is, people, you know, sign up for X, but they’re driving empty, they’re waiting, they’re not being treated well.
And so, when you can bring this together at a network, or even a multi-network level way, and start to really truly drive out the inefficiency, it’s better for shippers. It’s better for carriers. It’s better for the environment. And so, what we’ve done is sort of rethink kind of how these things come together through, again, the matching algorithms and through the automation. And so, there’s a lot of people are in this industry to be clear. But we think we’re sort of approaching it differently and we’re helping solve sort of inefficiency in a way that hasn’t been done.
Michael Kesslering: So, right now, like, I mean, you’re solving a highly complex issue with a, with a very sophisticated product, when you talk about your algorithms and the matching algorithms. But right now, pretty much every industry and consumer in the world has been affected by supply chain issues. And so, for our listeners that may or may not be sophisticated in this industry, what are some of the more important things for just everyday people to know about the current logistics shortage? You talked about truck drive shortage and overall supply chain issues. What do you think is most important for consumers to know?
Lily Shen: You know, I would say a few things you know, there’s one thing that we know which that the market is constantly evolving and it’s changing and therefore, right. The ability to build the technology platform that can actually manage that and be able to dynamically match and provide shippers with the capacity they need, carriers with the freight they need to drive a more efficient system is critical. And obviously we know the supply chain is really the backbone of the economy. I mean, especially over the course of the last couple years you know, everyone has felt it, consumers have felt it, shippers have felt it, carriers have felt it and one way shape or form. But I think that speaks to the secular trend in terms of digitalization overall, right? The need to drive better data and analytics to help make better decisions easier and more modern interfaces you know, and more connectivity across various platforms and far more efficiency from an automation standpoint. You know, and that that’s exciting to us, right. It’s actually quite crazy. I mean, this is obviously such a huge market, and I know, you know, there’s been technology pursued in the past, but it’s still incredible antiquated. But that speaks to the opportunity for us moving forward.
Julian Klymochko: Can you guys announce some big news recently, a going public transaction at an enterprise value of 1.1 billion. I was wondering what are some advantages in being a public company versus staying private?
Christian: So, we think there’s a number of, and you can imagine. We spent, you know, a long time discussing, you know, internally with our board, with our key, you know, shareholders and partners of the best option and where we landed or why we landed on the public option was a few [Inaudible 00:23:20]. Coming out of 2020 we saw this incredible demand that there was a real mindset shift of both shippers and carriers saying, I need a different solution. I need transparency. I need to liability. I need to know who my partners are. I need to understand where freight is, you know, again, all the things we’ve been talking about. And so, we started to see this incredible demand sort of, you know, back off of 2020 going into 2021, you can see it in our financial results. And we said, okay, what we need to do is continue to invest in all of the products, the sales and marketing, the new products we’re rolling out, the software products we have because we see this incredible demand. And so, we just need to invest in that. So, hence the need for capital. Secondly that it was a big sort of branding and marketing opportunity for the company that we have been very focused right, prior to recently, we have been very heads down and just building the right solution, not out there as much publicly talking about what we were doing. And this was a given all of the demand we saw on the success we were having, that this was the right time to sort of announce, Hey, here’s what we’re seeing. Here’s the growth, we’re comfortable being out there being very transparent.
As Lily said, this is traditionally a very opaque industry. And so being public allows us to give, you know, full transparency. This is what we’re doing. This is how we’re doing it. We want to be out there. And then finally, I would say it, it is a massively fragmented industry on this service side. And historically M&A has been very difficult because when you have an analog brokerage or you’re using people to broker transactions, you don’t get a lot of efficiencies out of scale. You have to add more people, more offices, all of the things because of the way we’ve architected this, that we have the sort of matching algorithms, you know, with a person to watch them. But you can really scale there and automation that allows us to be able to grow without adding a lot more people.
The idea of consolidation becomes much more attractive. And so, both through capital, as well as through the currency, you can you know, pursue an M&A path, which is quite interesting here. So, when we looked down the list of all of the things, it was pretty heavily in favor of both being the right time overall. I mean, any market has its ups and downs, as we’ve seen in, you know, recent history. But as a general philosophical matter to be public, to use it, to grow, you know, to enhance the brand, to give opportunities for both organic and inorganic growth.
Julian Klymochko: Now Transfix is going public via a SPAC merger. And that merger partner is G Squared Ascend. Now there’s hundreds of SPACs out there. I’m sure you spoke to quite a few of them. What made G Squared Ascend stand out as your merger partner?
Christian: Yeah, maybe I’ll start and Lilly, you can speak, you know, sort of on the partnership side. I mean, look, they’ve been investors since 2019, so they really knew our business. They were less than 1%, so it was small, but they had seen the company through the volatility of the past few years and how it had performed. And I think they were excited about that. So, when they approached us, they were very clear, hey, we’ve seen how you performed. We’ve seen what’s going on. We’re excited about putting more capital in. The structure of the transaction itself was very thoughtful in terms of they were willing to put in a hundred million forward purchase agreement to support the transaction. They were willing to put capital in if we had decided not to go down the path, they were willing to make 50% of their founder shares subject, you know, basically at risk. So, they only vest to the extent that the share price performs over time. So, they’re highly, highly aligned with our existing and new shareholders. And so overall it was just, you know, a compelling proposal, a compelling structure with someone who’s known us for a long time and understands this market very deeply. And so, it was just, you know, a great partnership and someone to kind of together, take the company public and go to the next step.
Lily Shen: Yeah, I think that Christian, you hit the nail on the head there. The one thing I would add is, you know, given that G Squared, has practically been partners with this since 2019. They have always believed in our long-term vision for the company. They’ve always understood very deeply, especially given all their investments in this space, how big the opportunity is and our strategy and approach, right. To really changing the game here. And, you know, I think that, you know, over the course of the last few years, and certainly through this transaction, they have been incredible partners for us. And, you know, I believe that, you know, with the SPAC and the amount of certainty you know, around it, I think that GS squared has been a great partner,
Julian Klymochko: And those are two key differentiating factors is the forward purchase agreement and the performance based promote shares. You don’t see both of those too often, so I can see the appeal of those. Now, prior to letting you guys go, I was wondering, are there any key insights regarding the investment case for Transfix that we haven’t touched on yet? Anything that investors should know?
Lily Shen: Anything else?
Christian: Yeah, I mean, I would say, you know, for me a couple things, it is the dependability of growth that you’ve seen from Transfix, right? Discipline, focus on investment. And whether that’s, you know, capital investment in terms of sales and marketing dollars, R&D dollars, et cetera, new product development, or even in how we launch products in partnership with our shippers, get it right, and then roll it out. There is one strategy, which is the blitz scaling to spend all of the money that you can to get scale. And our view is, again, that may or may not be appropriate in other industries, but in this industry, it is about building a repeatable growth structure that, you know, really gets better, the bigger you get. But to do that, you have to do a lot of hard work, a lot of disciplined investments in the getting the core right. And building that disciplined approach to kind of continual growth has been a foundation, I would say from the very early days. And I think that’s one thing that investors should understand from us is that approach that you’ve seen the sort of consistent growth of revenue and margin. Obviously, no one can guarantee the future, all the caveats about projections in the S-4 that people should go read, but that mentality of discipline investment, discipline growth, continuing to sort of scale over time is, really important for us as a management and what investors should expect to see from us going forward.
Lily Shen: Yeah. The two other points I would add is in fact, the momentum of the business, as I mentioned earlier on the secular trend and really, you know, acceleration and move towards digitalization for all players here in the industry. And also, you know, the team that we have in place. So obviously you’re meeting myself and Christian, but we have put together an incredible bunch of executives, incredibly seasoned, having worked at high growth companies, as well as public companies you know, with deep experience and very broad experience building teams and growing businesses.
Julian Klymochko: That’s great to hear. So, if investors want to learn more, the ticker symbol for G Squared Ascend, the SPAC merger partners, GSQD, and once that merger closes your new ticker symbol will be TF. So, Lilly, Christian, thanks so much for coming on the podcast today, we’ll be watching your progress and wish you all the best luck with respect to the pursuit of these growth initiatives that you’re pursuing and the going public transaction.
Christian: Thank you.
Lily Shen: Thank you so much.
Julian Klymochko: All right. Thanks. Bye everybody.
Lily Shen: Bye.
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