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FreightWaves is covering the Transportation Intermediaries Association’s 2019 Capital Ideas conference in Orlando, Florida. On the afternoon of April 11, Drew McElroy, chief executive officer of New York City-based digital freight brokerage Transfix, sat down for an interview.
Transfix’s business is going well. McElroy said the company is posting positive gross margins on 98 percent of its transactions, and that every customer is profitable every month. Transfix’s revenue run rate is well above $100 million. Even more importantly, as McElroy explained, the growth rate of enterprise accounts has accelerated dramatically.
“We win an extraordinary number of the customers we speak to,” McElroy said. “I’m not saying we’re taking 100 percent of their freight. We say ‘hear us out, if what we’re saying is true, it would add value to your network. Take a small bite because it’s the logical thing to do; the downside of it going badly is limited, but the upside is quite large. It’s not like we win a customer, check the box and move along – each customer is its own journey.”
McElroy said that Transfix’s first enterprise customer took three years to build into a $10 million account, beginning with providing spot capacity and gradually shifting to contracted and critical freight. Now Transfix is helping the shipper re-imagine how to tender all of its loads.
“The velocity of those journeys is increasing dramatically,” McElroy said. “We have a [consumer packaged goods] customer going live next week; the initial award is $12 million plus spot. Two years ago we would have choked on that, but now we didn’t even have to hire anyone. The flywheel is turning faster and faster.”
One of McElroy’s central insights is that asset-based carriers care far more about asset utilization than rates per mile, and Transfix is leveraging that to deliver positive returns-on-investment to both sides of the market.
“I believe in my core that you can’t create a business in a two-sided marketplace of any type without adding value on both sides,” McElroy said.
Transfix’s load-matching algorithms are optimized to minimize carriers’ deadhead (empty) miles. The bet is that by giving carriers more revenue-generating miles, Transfix can get carriers to accept lower rates per mile. McElroy said that Transfix’s carriers generate more revenue on a weekly basis at lower rates per mile because they aren’t driving empty nearly as much.
“If we can say to carriers that by working with us, we can create better utilization through matching and finding the right load for your individual truck, it’s acceptable to pay less per mile,” McElroy explained. “You get more money from us weekly, and we are also procuring your asset at a lower rate, and our internal cost to process a load is vastly lower, allowing us to go to market with lower rates.”
“No one wants to be in a purely price-competitive business, but it’s a great way to start a conversation with a customer,” McElroy added.
FreightWaves asked why Transfix chose to locate its headquarters in New York City – in Times Square, of all places. McElroy said that New York City had the right quantity and quality of tech talent, and that his co-founder and chief technology officer Jonathan Salama had already built a tech company there.
“The New York City decision was very intentional,” McLeroy said. “When we started, and still to this day, the biggest challenge is hiring the right level of talent in the right quantity in quantitative jobs – data, software developers. As far as I can tell, the only two places where that is easy to do is the [San Francisco] Bay and New York.”
McElroy said that the secret sauce in Transfix’s vision and culture comes from its creative melding of the worlds of technology and freight. McElroy grew up in a family-owned freight brokerage, while his co-founder is a software engineer.
“We have a 50-50 orientation, while most people are on one side or the other,” McElroy said, “either logistics veterans who are trying to hire technology people or tech people desperate for freight expertise.”
McElroy continued, “We’re taking the best of the old school and best of the new school and smashing them into each other. You haven’t lived until you’ve seen an engineer from MIT and an ex-J.B. Hunt dispatcher from Fayetteville in the same room, red in the face, arguing with each other about the best way to do something,” McElroy laughed.
As far as consolidation goes in the third-party logistics (3PL) space, McElroy believes “we haven’t seen anything yet.” In his mind, the end state for logistics is three to five massively scaled businesses, all much larger than even C.H. Robinson is now. McElroy thinks that the elimination of waste and cost savings could double brokerages’ total addressable market to $200 billion annually, which would in turn be dominated by a few largely automated leviathans.
“Every incremental piece of scale that we get drives extra value, and we’re not by any means complete – we’re still building the truck as it’s driving down the road,” McElroy said.