Future Proof

Future Proof hosts industry leaders racing to future proof their businesses, and seize opportunities created by AI and automation.

Featured Episode

The history of American agriculture is a story of technology improving the efficiency of production. But the volatile global economy of the last decade is showing the industry that efficiency is not everything. Changing consumer taste coupled with increasing pressures of commoditization are forcing farmers to embrace technology as a lever for much needed differentiation.

In this conversation between Matt Nicoletti, the Head of Business Development and Venture Investing at Penny Newman, one of the largest grain distributors in the western United States, and BSV investor John Mannes, we discuss how the agriculture sector is being affected by Covid-19 and the important role technology will play in keeping farms afloat as industry consolidation accelerates amidst a growing economic recession.

Matt Nicoletti:

... If you're a dairy owner, not only are you seeing a massive hit on your income statement due to the decline in milk prices from the shortfall of demand in food service, but your balance sheet is also taking a hit because you can't process your animals.

John Mannes:

I'm John Mannes, an investor at Basis Set Ventures, an early stage venture capital fund investing in founders, transforming the way people work across all parts of the economy, from factories to offices. This is episode five of Future Proof, today we're talking with Matt Nicoletti, the Head of Business Development and Venture Investing at Penny Newman, one of the largest distributors of grain in the Western United States

John Mannes:

To understand the impact that COVID has had on agriculture. You have to understand the context of what was happening in the industry at the time Americans began sheltering in place. The ongoing trade war has already put pressure on farmers. The loss of the Chinese market made it really hard, if not impossible for many in the industry to even break even. This, coupled with oil prices smashing ethanol demand has produced immense volatility in an industry grasping for stability. And the longer our current economic recession lasts, the more vulnerable the industry will become as consolidation rips through the rich long tail of the agricultural economy. Despite a growing scarcity in capital, innovation is rapidly becoming a prerequisite to survival.

John Mannes:

Thank you so much for joining us, Matt, why don't we start off with a little bit of background on you and Penny Newman?

Matt Nicoletti:

Penny Newman Grain Company is one of the larger distributors of grain and feed ingredients in the Western United States. Our primary markets in which we're focused are the animal feed and pet food ingredient markets, we do handle some grains for human consumption. And again, our model is leveraging our expertise with logistics and supply chains. And then of course the commodity trading side of things, where we are ultimately leveraging volatility to capture margin. My family is actually the majority stake holders in Penny Newman, and I oversee all of our ad tech venture investing endeavors.

John Mannes:

Very cool. Well, this should be a fantastic conversation because we're definitely in volatile times if nothing else. Tell us a bit about what's happening in the agriculture space post COVID and of course, with a number of other macro shops?

Matt Nicoletti:

Right. And there's definitely a ripple effect across between the energies and the ag sector. They're certainly linked there, but the short answer in terms of what's been happening is volatility. Energies going negative. We saw ethanol demand evaporate for corn. So we saw corn making new contract lows, that oversupply led to folks trying to purchase in corn and get out of other contracts, it created some challenges for us, but inversely, one of the most widely consumed protein sources amongst the animal feed sector are a byproduct from ethanol production, DDGs. So that particular supply chain got very tight.

Matt Nicoletti:

And then of course you saw massive risk in the dairy sector. They weren't the only folks affected by this, on the demand side of things. There was certainly a scare at the retail level where it seemed as though shelves were empty and we were running out of food. But the funny thing about that is that we were not at all and the fallout of demand at the food service level, the restaurant level vastly outweighed the gains that were seen at the retail level for a lot of different folks in the supply chains. It has also shed a bit of a light on the risks that come from centralization, meat processing is a big one of those things. And I think that one of the primary headlines with respect to the disruption in the food and ag supply chain were the shut down of these meat processing plants.

Matt Nicoletti:

If you're a dairy owner, not only are you seeing a massive hit on your income statement due to the decline in milk prices from the shortfall of demand in food service, but your balance sheet is also taking a hit because you can't process your animals. There's an oversupply of animals that can actually make it to the processor. Excuse me. It also makes it difficult for supply side corrections, so that's why there were also headlines about people dumping milk. I mean, these are just a few examples of the volatility that ensued when you have such a massive shift in demand. The funny thing is it was a boon to some folks, some folks, especially the smaller, more regenerative type of model direct to consumer. There is a big argument and a big push being made to decentralization supporting food security. And I think that this pandemic was a great example of some of the risks that a centralized model has.

John Mannes:

We've seen a lot of that, even on the technology side. There were a number of companies that were building marketplaces within wholesale food distribution that decided to pivot and basically focus entirely on helping farmers and/or other folks in the food supply chain sell directly to grocery stores instead of having food wasted through the supply chain that ordinarily would have gone to restaurants just being thrown out.

Matt Nicoletti:

Right.

John Mannes:

I think a good question to your point is given that there was so much more demand lost in the restaurant world than was made up for in the grocery world, how longterm is that trend going to be? And is it going to be something that actually sustains with us and disrupts the way people think about food supply chains or is it just a short term shock that will fade away?

Matt Nicoletti:

We are definitely seeing demand come back at the food service level with the reopening of restaurants or dine-in. I ultimately think that that direct to consumer model is something that it would behoove most growers, especially the smaller folks that have a narrative to tell about what they're doing on farm for better environmental stewardship and human health and animal health than husbandry, the things that fall into the more regenerative category. Those are the folks that are producing premium food products for which there is growing demand. They ultimately need to be able to tell the consumer their story in order to capture that premium. So it makes more sense for that type of user to try and access the consumer directly because if you're selling into the wholesale supply chain, that story gets lost. That's all about efficiency and scale, the wholesale supply chain.

Matt Nicoletti:

And we have a very secure food system because of the efficiency. We now spend a smaller percentage of our disposable income on food than any other time in history. Back in the early 1900s, I think the average was about 50% of weekly income spent on food, now it's about 6%. with each younger generation you're seeing a higher likelihood or desire to spend premiums on food that is perceived to be either better for human health or better for the environment. The generation with the least amount of money is the most willing to spend a premium. That's just going to be a growing trend in agriculture, especially in the highly commoditized space, the broad acreage crops, the corn and soybean growers. They have been lucky to break even for the past 10 years.

Matt Nicoletti:

Where does that differentiation come from? There's a great argument to be made for regenerative practices reducing costs on farm and improving crop resilience. Where they're going to see a lot of support is the consumer demand and the willingness to pay premiums, supply chains are going to have to be built around that And I do think that technology is going to be one of the main avenues through which those producers are going to be empowered to reach the consumer and capture that premium by being able to tell that story.

John Mannes:

That's exactly what we've seen from folks in the vertical farming space. You would think that they would be going to market for mass market fruits and vegetables, but actually it's all a play, at least initially around premium products and services and trying to produce things that otherwise the economics wouldn't make sense for. The main question for you with all of that then is the degree to which that market has been affected by the trends we were just discussing with COVID and oil prices, et cetera. Have you seen demand dry up for some of these premium products?

Matt Nicoletti:

Not necessarily from my perspective. We're not actively involved in the marketing post-harvest of these premium products. Other than organic feed ingredients, that demand has dried up a bit, specifically on the organic dairy side, which is where I have the best frame of reference. Those economics have been questionable for the better part of the last several years, and there has been an oversupply of milk. Organic feed prices have just been declining. We've seen a decline of about 20 to 25% over the last six months in the prices for organic feeds.

Matt Nicoletti:

If you're an organic dairyman or an organic poultry producer, and you locked in the price of your feed six, eight months ago for this contract year, you're kind of kicking yourself in the butt. But I've spoken to a number of folks, I sit on the board of a non-profit that's trying to advocate for soil health policy to incentivize growers to improve the health of their soils. One of whom is a regenerative grazer, and this trend was a boon for him because he worked with a small, independent processor to get his beef slaughtered and has a direct to consumer model that he had already developed. It's only going to accelerate that trend of those folks going more independent. Part of the reason is because there's a perceived resilience in that type of a supply chain more so than the centralized supply chain.

John Mannes:

Yeah. I mean, the theme there to me that sticks out is the flexibility piece. And we've seen that across a number of different industries, but just by nature of having the choice to distribute through a different channel, you create more flexibility at which to your point, resilience to your supply chain.

John Mannes:

I'm curious, given that you've been in this industry for a long time, obviously have a really strong family connections to the agriculture industry. Can you speak a bit to what happened in 2008 during the last recession and how this is either similar or different?

Matt Nicoletti:

With any sort of an economic downturn in the agricultural space, you will see it driving a trend of consolidation. And that is something that's just inevitable with supply chains that exist at scale. It's natural for people to try and grow and get larger in order to improve their unit economics, just simply through economies of scale. And in 2008, again, the best frame of reference I have is the dairy economy, in terms of the industry that we support here at Penny Newman. In 2009, there was a dairy crisis just due to an oversupply of milk. It led to a lot of dairies going out of business. You essentially have these distressed assets that become available for sale and other opportunistic larger operations that were able to survive, can acquire those distressed assets in a manner that just accelerates consolidation.

Matt Nicoletti:

I would say that that was one of the biggest things that we saw happening in 2009. We're actually seeing something similar now, and it's not just COVID related. It's also trade war related. It's also just simple supply and demand related. One of the things that California is known for its ability to produce almonds, I believe it's about 80% of the world's almonds are produced here in California. And that market went from about $2.50 a pound down to $1.55 a pound on the heels of COVID and on the heels of the crop report and the expectations of there being a record production this year.

Matt Nicoletti:

But more and more people have been planting almonds, supply side has been falling in an upward trend for a number of years now. We are just now seeing farm bankruptcies starting to pop up, which we haven't seen in the better part of a decade. I think the trend that we're going to see continue here is consolidations. It's really inevitable. And that does to a certain degree run counter to the trend we're seeing take place in the regenerative space, but still, commercial farms out here are king and these sorts of downturns do accelerate consolidation.

John Mannes:

In that sense, it's more about competitive differentiation and how you build a sustainable business maybe differently than a farm had been run historically. And you're saying that you're seeing a significant portion of smaller farms at least considering or starting to think about and take steps towards greater diversification in ways that enable them to remain competitive against some of these larger players that are consolidating?

Matt Nicoletti:

Certainly, yes.

John Mannes:

I want to spend the last couple of minutes here just talking through some of the advice you have, both for folks in the industry and then also on the technology side. We'll start with the industry itself. You have a network of a lot of folks, farmers, distributors, equipment, sellers, et cetera. Can you just give listeners a little bit of an inside look into the advice that you've been giving these folks as they navigate COVID and the trade war and the oil price situation that we were discussing?

Matt Nicoletti:

There's a cultural apprehension in this space to adopt technology. There's a cultural identity associated. This is how we do things. This is where I'm a multi-generational farmer, I'm a multi-generational business selling equipment, whatever it may be, but it's coming. And it's really an inevitable wave that you cannot fight. There's in a nutshell, a simple thing that I can tell people it's pay attention to technology, leverage your resources and your market reach to support entrepreneurs that you believe in, keep an open mind.

Matt Nicoletti:

And then the second thing, if you're not thinking about environmental stewardship and it's human health in what it is that you're doing, you will be forcibly made irrelevant, whether it's by regulatory burden or change in consumer preferences.

Matt Nicoletti:

As mentioned, the younger generations are more likely to want to pay a premium for something that they perceive to be either better for them or better for the environment. Just simply from an opportunistic perspective, folks should be thinking long and hard about that. What am I doing to make a positive impact on the environment? And ag tech is in itself inherently aligned with improving all of that. I mean, just speaking anecdotally, almost every single one of the entrepreneurs that I interact with, they are socially minded. They are trying to increase transparency. They're trying to reduce the environmental burden of ag. In fact, there is even a thought that agriculture could be used as a carbon sink through these regenerative practices to help cool the planet, which is essentially the opposite of the impact it's had to date through the commercial models. So that trend is growing. I believe it's gaining steam on the heels of this pandemic, in terms of building in food resilience and environmental health to reduce the risks that I think a lot of folks didn't take seriously enough.

John Mannes:

Okay. And just as a closing thought, a little bit of advice for founders, particularly given that institutional expertise that you have from the corporate side. What are some really gritty problems that founders need to spend more time thinking about and hopefully solving for farmers?

Matt Nicoletti:

Well, again, speaking from my own direct frame of reference. In California, a piece of legislation was recently passed that's requiring us to divert 75% of the biomass organic matter that's currently going to landfills and we're going to have to figure out something to do with it. Whether it's composting, upcycling it, unique ways of processing that organic matter into something that can be used either on farm or to produce energy. We see a lot of folks attempting to tackle that problem, but it is a gargantuan challenge and I think California is definitely a thought leader in that space.

Matt Nicoletti:

I think that's going to be a growing trend with the growing awareness around just the immense amount of food waste that we create, upwards of 40% of all food we produce is wasted. In addition to that, as far as the crop input side of the business is concerned, we're steering away from synthetic, cheap, efficient, easy to produce crop nutrients and looking more at the biological intermediary between those nutrients and the crop itself.

Matt Nicoletti:

I certainly think that there's a huge biotech component that is still lacking in the production ag space. There are, again, some folks attempting to tackle that problem, yet we are years and years away from really understanding the nuances of that biology that supports crop production. A lot of problems can be solved on that front.

Matt Nicoletti:

And I would say lastly, as I previously mentioned, there is going to be... At least my personal piece is that there's going to be an acceleration of the decentralized model. The smaller operators that are going to be able to exist are going to be those that are diversified, incorporating livestock and a diverse rotation of crop production. Those folks are going to need technological support for both the processing animals being processed into the various meat products and through a decentralized model. I don't think that there is a great deal of resources supporting those folks or empowering them in getting their products processed and getting them to market. There's certainly some voids to be filled there as well.

John Mannes:

All right. Well, awesome, Matt. Thank you so much. I definitely hope we have a number of founders that step up and start to build some of those things. The ag industry definitely needs them, and we're all very grateful for all of the time that you dedicated for this and your unique insights on this space. So thank you so much for joining us.

Matt Nicoletti:

Of course. Thanks as well John.

John Mannes:

Like it's the case in many other industries, the agricultural supply chain may be one of the first industry wide casualties of COVID-19. Farmers are learning fast that they need to differentiate in order to survive fast approaching consolidation in the agriculture sector. Existing middlemen and wholesalers in the ag supply chain make it hard to differentiate what are in many cases, commodity goods. Farmers are looking for new ways to get to market with fewer middlemen and greater differentiation in order to capture more of the value from production. This means growing more premium products and distributing them direct to consumers with a compelling enough story to drive sales. Technology has a role to play in supporting each step in this new chain, from planning to distribution.

John Mannes:

I hope you enjoyed today's episode of Future Proof. We'll be posting episodes on Spotify, iTunes, and SoundCloud so watch out for our next episode. Check out Basis Sets full research on agriculture at basisset.ventures/research. And if you want to chat about any of the themes from this episode, drop me a note at john@basisset.ventures.

For more information on this topic, check out BSV's research:
Agriculture

Previous Episodes

The 2008 financial crisis catalyzed the most ambitious real estate technology startups ever founded. Airbnb changed the way homeowners conceptualize home value, Opendoor simplified real estate transactions in a way the industry never thought possible and Compass redefined the role technology plays in agent workflows. As we wade deeper into the Covid crisis, we’ll see similar attempts at differentiated businesses models and novel financial products that help homeowners extract greater value, more conveniently, out of their largest assets.

In this conversation between Sheila Vashee, the VP of Growth and Marketing at OpenDoor, a real estate unicorn simplifying the process of buying and selling homes, and BSV investor John Mannes, we discuss how the real estate industry is being affected by Covid-19 and the important role technology will play in keeping transactions happening and keeping people in their homes coming out of the crisis.

Sheila Vashee:

COVID has slowed down real estate transactions. It's affected every type of business, every sector of the market.

John Mannes:

I'm John Mannes, an investor at Basis Set Ventures, an early stage venture capital fund investing in founders, transforming the way people work across all parts of the economy from factories to offices. This is episode four Future Proof. Today we're talking with Sheila Vashee, the VP of growth and marketing at Opendoor, a unicorn in the real estate space, simplifying the process of buying and selling homes.

John Mannes:

With real estate sales down more than 50% in some markets, the industry as a whole is trying to parse the short term symptoms of COVID from the longterm trends. It's consensus that real estate tech will see a boost in adoption as consumers develop new preferences for remote home buying, but what remains unclear is exactly how big this trend will be, and every day that COVID continues to spread, it grows more likely that we'll see even more extreme paradigm shifts in the way Americans conceptualize home ownership.

John Mannes:

Welcome Sheila, for people that haven't been following property technology over the last couple of years, can you just give folks a little bit of background on what the biggest innovations and problem spaces have been?

Sheila Vashee:

Absolutely. So I'll start by saying that real estate is, up until a few years ago, one of the biggest sectors of the economy, I mean literally multi-trillion dollar sector of the economy that was virtually untouched by technology. I mean I'm talking about very large financial transactions, and these are transactions that for consumers, for homeowners is typically the biggest transaction of their lives that were conducted over handshakes and paper documents and just archaic methods, and so all the innovation that you've seen over the past few years, and we'll talk a little bit about what that is, is really revolutionizing this industry and making it more efficient and breaking down some of the information silos that exist, both around the value of homes and then also how business gets done.

John Mannes:

We've seen a lot of companies in one of two buckets. We've seen folks that are effectively building software, most often SAS solutions for agents or brokers or various stakeholders across the real estate industry, and we've also seen companies that have taken more of a full stack approach like Opendoor. There are folks on the buy side, there are folks on the sell side, there are full stack brokerages. Can you give folks a little bit of a sense of the status quo of the market right now and what adoption looks like for folks on both sides of that paradigm?

Sheila Vashee:

You're absolutely right. The companies that have come up in the past few years are basically making bets on both sides of the market. The first side, which is the more vertically integrated players like Opendoor and others are essentially a new way to buy and sell homes. So you can an agent, you can use traditional methods with those companies, but you don't have to. You can sell your home to an eye buyer. They'll buy it, they'll do all the renovation, et cetera, and then resell it on their platform. Zillow has also recently entered this space. That's one bet, is that the entire transaction will be completely different, and then the other bet is what you were talking about, and Compass is probably the biggest player in this space, which is actually powering agents and giving them better technology to be more efficient, to drive more revenue, which is effectively reach more people more quickly, and then also drive more bottom line, which allows them to move forward with the transaction faster. Those are the biggest players on each side. The other trend is actually changing the way people own homes. So that's divi, zero down. That actually opens up home ownership to a whole new segment of people that may not have been able to afford a down payment or may not have qualified for a home loan previously, and so that's also a really interesting trend. There are many companies in the space.

John Mannes:

So you mentioned earlier in the conversation just how big the real estate space is. If I'm thinking from the perspective of a traditional agent in a city in the middle of America, let's say, what do you think the biggest impact has been on me, of all of this new technology in each of the spaces that you mentioned?

Sheila Vashee:

Taking all of this activity into account and all of these new players and eye buyers and Compass, et cetera, the percentage of transactions that are not conducted in the traditional way is still only around 10%. The massive majority of the market is still transacting in the traditional way. Now that doesn't include some of the digitally enabled brokerages, so that's kind of considered a traditional transaction, but the movement around eye buyer and even just for sale by owner is still at a very small percentage of the market. So there's still a huge opportunity to extend beyond what I'd almost called the early adopters.

John Mannes:

So perhaps it's best to parse apart each of those segments, just given how robust the property tech ecosystem is when we start to think about how COVID might affect real estate, and maybe we'll tackle the first one first. How has COVID been impacting the traditional buying and selling model for homes independent of technology?

Sheila Vashee:

COVID has slowed down real estate transactions. It's affected every type of business, every sector of the market, and the reason for that is especially with shelter in place, people can't go visit homes. So the means by which they do that is really they can go visit homes a single person at the time. There are no more open houses. Getting the transaction through is actually difficult because in some states they've actually shut down or put on hold some the regulatory bodies, and so real estate has dramatically slowed down because of COVID. Now that said, looking at other countries, especially China, the industry popped back up pretty quickly, and so there's an expectation that once shelter in place is ... and it's already in some states getting pulled back, once that starts to get reversed, all of the pent up demand will come roaring back, but then the impact of unemployment and the SMB environment will longterm likely have an impact on home buying and the real estate market.

Sheila Vashee:

Some of the other players ... so let's take eye buyers for example, similar thing in that there's just not as many real estate transactions happening right now. What's interesting is that this provides a really interesting opportunity for those companies to think about how to innovate on their model, rather than just offering a simple auction of buying or selling. There's a lot of work happening with frankly all the companies in the space around what else can they offer. Is there some kind of way to track your home, track the value of your home? Is there some other things that can allow them to continue adding value to customers and their patients in the meantime? Longterm, I actually think that the trends will be in the favor of the tech enabled or vertically integrated companies.

Sheila Vashee:

And the reason I say that is even simple things like search demand have dramatically changed over the past couple of months. So, for example, virtual home tours, virtual real estate are seeing anywhere from 50 to 90% increases in search volume. The expectation when the market comes back is that people will be able to transact in a digital way or be able to search and view homes through digital means, and the tech enabled players in the space will just be better set up to do that. I actually think that COVID will catalyze some of those trends in a way that would have actually taken decades, but will happen much more quickly now.

John Mannes:

So as you think about, and I'm sure many of your counterparts in growth at other real estate technology companies think about where to make product investments, how do you think about what is going to be a longterm trend here versus what might be short term? And I'm particularly thinking about what you mentioned around virtual home tours. I could imagine something like this being a really short term symptom of COVID. I could also see a reality where this sets in as a longer term trend, but ultimately from a product and from a growth perspective, it's important to think about which items fall in each of those buckets.

Sheila Vashee:

It's hard to predict, obviously perfectly. My expectation is that similar to a lot of the other spaces, like food delivery or even remote work, my expectation is that for a period of time everyone will be forced to do that, and then when everything comes back, some percentage of the population will decide that they like that better. They prefer the grocery delivery at home, they prefer working out of their house, and the same thing will happen with real estate. There'll be the segment of people who still want to transact the traditional way, and there are some trends that are countering that argument around people will need security, they'll need to feel comfortable with the decision given the environment. So that might actually require more handholding or in person discussions, but there'll be a portion of the population who actually prefers a digital transaction and they got used to it through this crisis. It's hard to pinpoint exactly how big that population will be, but it's worth investing in.

John Mannes:

Yeah, and I think one thing that's important for listeners to keep in mind, as you mentioned in the beginning of this discussion, is just the sheer size of the real estate space. Even 1 or 2% of folks deciding to transact virtually would be a massive difference in the industry, and Opendoor obviously has achieved a very high valuation on the back of only controlling a very small number of transactions in the real estate space, but doubling that or tripling that target market is absolutely massive and opens the door for a number of new companies.

Sheila Vashee:

Absolutely.

John Mannes:

Let's spend a little bit more time on the technology side of this. We spent a bit of time talking about eye buyers. I'd like to dive into a couple of the other trends that we've seen that you've touched on and just think a little bit about how their value propositions might need to evolve post COVID. One of the things that we've spent a lot of time looking at at basis set is this idea of security deposit or rental guarantees in the rental space, folks like Jetty. I can imagine that in the time of COVID, there are a lot of folks that are struggling to put down money for security deposits. Most Americans don't have necessarily money for savings for large upfront payments like that. Do you think that that market is going to be fundamentally changed by COVID in a way that requires even more companies thinking about how to guarantee rent or help renters come up with money for security deposits?

Sheila Vashee:

I think there'll be more openness to that on the consumer side. I would put that in the bucket of financial engineering, whether it's security deposit or rental guarantees for owners or renters, or even fractional ownership, which effectively lets you rent back your home, and the challenge I've seen with those businesses, they're innovative and interesting, and as I said earlier, it can open up a new segment of the market. The challenge that I've seen is that people are suspicious. It sounds too good to be true in many cases. In some ways it's reminiscent of the 2008 real estate crisis. That's not to say that they won't gain traction, and I think they will over time, but they're harder for people to understand and I think it'll take some time for them to get traction. The current situation could help encourage people to check them out, but my experience with some of those, and even kind of in customer research with some of those is that it's a bigger hurdle to cross because it sounds like financial engineering.

John Mannes:

And I guess that's interesting. We can be somewhat arbitrary about where we draw the line for financial engineering, but another model, one that might be a little bit more timely in terms of fundraising, is this idea of giving homeowners faster or easier access to their home equity. I know [inaudible 00:11:43] raised a pretty sizable round and there are a couple of other companies in that space. Have you seen similar challenges there around conveying that value proposition in a way that doesn't come as gimmicky or do you think that that is ultimately something that will be bolstered by COVID?

Sheila Vashee:

I think that there will likely be more demand for things like that. Of course people will need the immediate cash. I think there will still be questions about the business. Anytime there's a new business like that, will they be around, will they make it through the crisis, et cetera? And so probably less so than some of the other companies, but I still think the same basic questions remain.

John Mannes:

So the last two I want to touch on are definitely the two gorillas in the room you talked about in the beginning, Compass and Opendoors. Thinking about the eye buyer model more fundamentally and the digital brokerage model, what is your sense for how these folks are going to need to be proactive and respond to COVID in a way that will ensure additional market share a year or two from now as we come out of this crisis?

Sheila Vashee:

All of the companies have taken drastic action to cut costs and I think that's the right thing to do, because the most important thing is sustain through the next several months. There are varying opinions on whether the downturn or the recession can last a few months or it'll last a couple of years, and so the first thing is how do they reduce burn in such a way that they're able to actually last? The second thing is how do they start innovating? And I actually think that that is where the situation presents a really unique opportunity, because the resources from the entire company can be devoted to thinking about new models, new products, and how do they actually innovate beyond their own core products. What you'll see out of both, either the vertically integrated eye buyers or the digital brokerages like Compass is a lot of innovation and thinking around how do they actually move forward to take advantage of the market when it comes back.

Sheila Vashee:

Because when it does come back, as I said, people will be seeking out these digital transactions and virtual experiences in a way that would have taken years to get to before. Whoever makes it through the crisis will be very well set up to take advantage of secular trends once the market returns. On the Opendoor side, it's really around, as I said, what are other ways to serve customers and what are other products that they can offer that for people who are coming to transact on their home, what are all the other options that they could pursue? And there's a lot of stuff there that is being explored that I probably can't get into the details on.

Sheila Vashee:

On the Compass side, what's really interesting is that ... and I've been hearing this actually from a number of folks in the industry, technology adoption by brokers has been a challenge because each broker runs their own business and has their way of transacting and their way of doing business that they've done for years, and so disrupting that business and introducing a new technology or new process is difficult and typically hard to do, and what I've heard anecdotally from folks in the industry is that that whole paradigm has changed. Agents are now much, much more open to things like virtual home tours and even digital notaries and ways to transact online because they have to, and that will actually make them much more competitive when things come back, and so both sides will be pushed more into technology than they would have otherwise. It'll be interesting to see how each develops.

John Mannes:

And it plays into a couple of the narratives that I think have surrounded both of those business models for the last couple of years. I mean on the Compass side, we can think about this idea of business in a box and we've seen a lot of roll-ups on the brokerage side in a number of different industries, not even just real estate, but this notion that it makes sense coming out of a recession for agents to align themselves with someone like Compass that can back them up with additional technology and resources and capital and pieces to be able to run their business, and it sounds like you're in agreement that that actually is a thesis that could end up playing out in their favor. Is that a fair assessment?

Sheila Vashee:

I think that's very reasonable.

John Mannes:

And on the eye buyer side, one narrative that I think has been particularly pervasive is this notion that folks in a downturn will seek liquidity on their properties and that coming out of a recession there will actually be increased demand in the eye buyer segment. Is that a thesis that you think still holds water?

Sheila Vashee:

Absolutely. What will be interesting to see is in a downturn, exactly as you said, people will be seeking liquidity and they'll need it quickly, and no one is better set up, no company is better set up to deliver that than an eye buyer, and Opendoor as an example. I think we'll see that once people are able to transact easily again.

John Mannes:

And by that you mean the bottleneck being just visiting properties, even in person?

Sheila Vashee:

Yeah, exactly, the actual shelter in place that really prevent ... I mean because even on the eye buyer side, there needs to be a home inspection before you can buy the home. There's some limited home interaction that needs to happen.

John Mannes:

So pivoting away from some of these experimental real estate models, I'd like to talk a little bit more about some fundamentals in the real estate space, traditional fundamentals that might inform new businesses being created coming out of the crisis. Obviously one of the most important ingredients in the overall real estate sector is access to capital, and markets right now are in a very interesting place. So maybe for folks who haven't been following, can you just give folks a sense of what is happening right now in mortgage markets and what your expectations are for the next year to the extent that you can actually predict that out?

Sheila Vashee:

If I could predict that I would be able to make a lot of money, but yeah, I think just more generally, the markets have been all over the place. Interest rates are very low, and the reason for that is obviously the fed wants to jumpstart the market. Mortgage rates have actually been bouncing around a little bit, and the reason for that is there's just been a massive increase in demand. 175% increase in interest around mortgage queries. What I've heard from lenders is that there's actually almost for the first time a strain on supply, and that's actually causing rates to bounce up and down a little bit, tons of interest in refi, et cetera. There's a huge opportunity there to continue to automate refi, loan origination, but it's a really interesting time in this market for that because there's just all of a sudden massive demand that could continue or could actually disappear if rates increase.

John Mannes:

Given that it's our job on the venture side to think through which of these trends are going to be long lasting enough to sustain a venture backable business, I want to talk a little bit about the longer lasting trends in real estate. We all know that Airbnb was arguably one of the greatest real estate technology companies founded, and it was founded directly in the wake of the 2008 recession, primarily as a way to get homeowners access to capital that they desperately needed by monetizing an asset that they already owned. Do you think that we're likely to see the continuation of this trend in the real estate space?

Sheila Vashee:

It will be interesting to think about what happens there, because on one hand you can imagine that with unemployment and decline of SMB retail, et cetera, people will actually need to share more assets to generate revenue, or you could imagine actually that people don't want to have the frequency of contact of those interactions and actually shy away from it. We'll probably -

John Mannes:

Or we've just reached peak sharing.

Sheila Vashee:

Yeah, I think that's fair. A couple of trends that were just starting up pre-COVID that could be interesting around the monetization of the homes as an asset is the monetization of your backyard, and there was a rash of company as I would say over the past nine months that have done this. Rent the Backyard is one, Abodu is another. There are several other, really companies that do small prefab homes that you can put somewhere on your property. That could be interesting and then another way to monetize a space that's not actually your home. There is a ton of regulation around this by county, and so that could actually stall some of the adoption of that trend.

John Mannes:

And it also requires capital investment from the homeowner to put that in a backyard, I assume?

Sheila Vashee:

It's low. It's very low, actually.

John Mannes:

Interesting.

Sheila Vashee:

Yeah. The bigger challenge there actually is that county by county, there are a ton of restrictions. I met a company that was able to get permits for San Jose, but not for San Mateo. That's actually the harder piece there.

John Mannes:

I see. A lot of times when we think about enterprise value propositions, we think about revenue generation versus cost cutting. Obviously in the context of recession, cost cutting is a particularly convincing value proposition for most enterprise software. On the consumer side, when we think about something like Airbnb, that's still primarily a revenue generation value proposition. Something more like a refi product is on the cost cutting side. Do you buy us in one direction or the other as to where you think more valuable be created coming out of COVID?

Sheila Vashee:

I'll give my answer for the homeowner perspective and then for real estate at large, because I think they're slightly different. From the homeowner perspective, there's not a ton of places where they can do cost cutting. One area is preventative care and there have been some companies that have done this over the past couple of years, and that's really when you prevent something from happening to your home by staying on top of upkeep and maintenance schedules, et cetera, and dashboarding in a way to actually monitor what's happening in your home. So that's interesting and can effectively be cost cutting. It's hard to imagine other than refinancing, as you said, or getting cash out of your home what cost cutting could look like. More broadly for the industry, cost cutting and efficiency will be huge, because there are still really large portions of the value chain, as I said earlier, that are manual and paper-based, and all of those pieces, especially now, are a huge opportunity.

John Mannes:

One thing that's particularly unique about COVID, at least with respect to the 2008 recession, is that COVID is so different based on your geography. We in San Francisco, we're in a very fortunate place with respect to other cities around the country. How do you think about the impact that that has on both traditional real estate players and also the adoption of real estate technology? I would imagine that that would make someone like Opendoor think very critically about what markets it might want to operate in or what countries make sense from an international expansion perspective in the event that we ended up in a situation where there are some cities that are doing significantly better than others or some countries that are doing significantly better than others?

Sheila Vashee:

Absolutely. That will be taken into account I'm sure, whether it's the real estate brokerage side or the Opendoor vertically integrated player side. As I think about expansion, that will absolutely be taken into account, because the region or the area or the city will just be less attractive because of the economic drivers.

John Mannes:

Do you think that drives international adoption of a lot of this technology that we haven't seen before?

Sheila Vashee:

Yeah, international adoption is interesting. The real estate industry is so different country by country, and regulations are so different, and the way that they do business is so different. In some markets like Mexico, almost nothing is online. There is no MLS. It's just a completely different scene and there's actually not been a lot of international traction for any of these companies. That will be an interesting trend to see, and it's likely several months out, would be my guess, if not years.

John Mannes:

Fair enough. So I want to end on one last question here. This will be our shoot for the stars closing question. If this does end up lasting for longer than a year and we end up in a depression like situation, what do you think the biggest possible paradigm shift is that could ultimately end up happening to the real estate industry as a whole?

Sheila Vashee:

The recession is one piece of it. I actually think the shift to remote work for such a large percentage of the population is another huge driver of what will happen in real estate, because once people have experienced it, not only people, but also companies, either how feasible or not feasible remote work is, people will realize that they don't actually need to live in a certain place to have a job anymore, and so what we'll likely see is more of a migration of people from urban centers to more rural areas, because they can still do their work from really anywhere, and that will obviously also be catalyzed by a desire for cheaper real estate. Regardless of how long the recession lasts, that will likely be a trend that we start to see.

John Mannes:

Well, thank you so much Sheila. I hope we're able to get there in as short of a recession as possible.

Sheila Vashee:

Absolutely. Thank you so much. It was a pleasure.

John Mannes:

The 2008 financial crisis catalyzed the most ambitious real estate technology startups ever founded. Airbnb changed the way homeowners conceptualize home value. Opendoor's simplified real estate transactions in a way the industry never thought possible, and Compass redefined the role technology plays in agent workflows. As we wade deeper into the COVID crisis, we'll see similar attempts at differentiated business models and novel financial products that help homeowners extract greater value more conveniently out of their largest assets, and for agents and brokers, we're likely to see even greater adoption of technology coming out of COVID. New companies will be forged, even if only a small percentage of home sales transition to virtual. That, after all, is what drives so many ambitious founders to take their chances building companies in the massive real estate space in the first place. I hope you enjoyed today's episode of Future Proof. We'll be posting episodes on Spotify, iTunes, and SoundCloud. So watch for our next episode. Check out Basis Set's full research on real estate from our own Reid Callaway at basisset.ventures/research, and if you want to chat about any of the themes from this episode, drop me a note at john@basisset.ventures.

For more information on this topic, check out BSV's research:
Real Estate

Factories that used to make tee shirts are now making PPE. Products we used to be able to ship to ourselves same day are now on back order for weeks. Much of this is the result of supply chains buckling under the weight of Covid-19. As the dust settles, enterprises will have the opportunity to go back to the drawing board for the first time in years to rebuild supply chains from the ground up. The result will be more robust and modular global production and sourcing.

In this conversation with Marc Dragon, Managing Director of Reefknot Investments, and BSV investor John Mannes, we discuss the valuable data enterprises need to vet new suppliers while ensuring products can get to consumers as fast as possible. Reefknot is a venture firm backed by Singaporian sovereign wealth fund, Temasek and global logistics company Kuehne + Nagel.

Marc Dragon:
Trade finance has suddenly risen a lot in terms of visibility, just because of the need for cash at this point in time.


John Mannes:
I'm John Mannes, an investor at Basis Set Ventures, an early stage venture capital fund investing in founders transforming the way people work across all parts of the economy, from factories to offices. This is episode three of Future Proof. Today, we're talking with Marc Dragon, the managing director of Reefknot Investments, a venture firm backed by Singapore sovereign wealth fund, Temasek, and the global logistics company, Kuehne + Nagel.


John Mannes:
When the dust settles from COVID-19, many of the world's largest companies are going to need to rebuild their supply chains. Enterprises are facing a perfect storm of recession-related supplier turnover and vulnerabilities originating from supply chains overexposed to single countries and regions. We're here to understand the ways technology can help enterprises build more robust supply chains as quickly and inexpensively as possible.


John Mannes:
Marc, why don't we start off by talking a little bit about Reefknot? Just give our listeners a little bit of background on the investment firm, where it originated, and what types of companies it's backing.


Marc Dragon:
Thanks, John. And thanks for the invitation for this call. We are a global supply chain and logistics technology venture capital fund based out of Singapore. Our two main backers are Temasek, as well as Kuehne + Nagel. Now we look at Series A, Series B type startups on a global basis, and we are specifically looking at three areas. The first part is really on AI and deep tech, so fast network design, and more complicated problems like pricing optimization on a more dynamic and real time basis. So that's one bucket.


Marc Dragon:
The second bucket is really on logistics digitization, which is the general digitization of the industry. And the third area is in trade finance. Now this is an interesting area, but what we believe is that greater visibility and greater information flow coming out from the supply chain logistics industry, that can feed very well into the trade finance functions, and new models and new technologies will emerge that can help to address this space.


Marc Dragon:
We also have a bunch of ecosystem partners, global companies like Unilever, Starbucks, Mitsubishi, some of the ports, especially the Singapore maritime ecosystem, from port authorities to the ports and the liners themselves, as well.


John Mannes:
So Marc, we've spent a lot of time at Basis Set looking into the maritime shipping industry. As a firm, our thesis has been primarily tied to workflow automation tools. We've looked a lot at marketplaces, and then I would say automated services, of which trade finance is one of those things. I know that you've done a lot of the same work on your side in building up the fund, and you just gave us a great overview of your priorities. At a high level, how are those priorities changing as a result of COVID, if at all?


Marc Dragon:
Bear in mind that COVID happened in Asia way earlier than in Europe and the US. To understand the COVID impact to the industry and to us, we actually did a mini macroeconomics survey of business leaders, supply chain leaders, across Asia Pacific and globally. There was some interesting results that came out of it. The whole AI thesis is still very solid. There might be some enhancements in terms of what industry might deem important in the logistics digitalization space. The AI business continues to double and triple. There is greater demand of certain types of solutions which I'll talk about later. And trade finance has suddenly risen a lot in terms of visibility, just because of the need for cash at this point in time. So I think that's great for the industry and I think that would be a great booster moving ahead.


John Mannes:
One of the things that hits me first when I look at this survey, and I think it's a great survey, by the way, is that a lot of the areas that are lower on the prioritization list are things that we've seen a lot of over the last five years. When I think about the hot companies in supply chain logistics and maritime trade, I think about things like inventory optimization. I think about things like demand management and fleet management. But it seems like a lot of the things that are higher priorities post-COVID, at least as of March, have a lot more to do with flexibility of supply chains, particularly on the supplier sourcing side, and also cash. And I don't think either of those surprise me in any particular way. What have you seen thus far from startups in those spaces? Have you seen compelling companies trying to solve these cashflow problems? Have you seen compelling companies working on vetting suppliers or adding additional flexibility to supply chains?


Marc Dragon:
Absolutely. And macroeconomic implies not only COVID-19 but also the trade war thing, right? From the survey results, it wasn't surprising to see tossing strategies being one of the top few on the list, instead of a more centralized kind of a SAP supply chain to a more decentralized supply chain, more localized supply chains. Now, that is actually top of mind for a lot of execs at this point in time. It will take some time to actually do that structural shift and the reason being, because these are very heavy, very capital intensive kind of exercises. For example, in the electronic supply chain, your raw materials, you just can't get around it that much. A certain country or certain companies have predominant share of that particular material. You'd be hard pressed to actually get an alternative in the short to mid-term.


Marc Dragon:
But that being said, having visibility around just the tier one and maybe extending it to tier two suppliers seem to be something that is good enough and feasible for most companies at this point in time. Anything beyond tier two goes into a bucket of having mitigation strategies around it, but not necessarily having that kind of a dynamic response to changes. So the focus still very much is on tier one, tier two, even though the deep tier parts of supply chain becomes important to at least monitor.


Marc Dragon:
You also mentioned about flexibility versus others, right? How do you actually obtain flexibility? From understanding the true demand, understanding where capacity is and the available capacity, and not only in terms of manufacturing capacity but logistics lane by lane capacity, as well. And, of course, that whole service level kind of a thing, right? This goes back to Supply Chain 101, right? Which is, do you have visibility on your stuff? Do you have arrangements in place? But some core capabilities need to be built. Those are data capabilities, as well as process capabilities on visibility, as well.


Marc Dragon:
There's a huge importance on cash management at this point in time. Cashflow management of the companies themselves are really top of mind, especially now in collections. A big part of it, right? Even forecasting collections starts becoming something that is on top of some executives' minds, right? Previously, we didn't really think too much about it.


Marc Dragon:
The other part that I would like to emphasize as well is the health of the supplier cash flows. Even though this didn't come up a lot, just because most companies that did this survey were just thinking of themselves, but if you just extrapolate it across the supply chain, everybody's thinking of their cash flows, right? And if you go back to the supplier risk management piece, supplier cashflows is a very big component of supplier viability within your chain. Some of this is important. but it just hasn't emerged through this survey.


John Mannes:
I can only imagine if I'm an auto maker and I have thousands of suppliers that I'm working with, and you mentioned tier one and tier two as priorities, but obviously we know that it goes much deeper than that. If I'm a startup founder in this space and I'm interested in building something to help address some of these issues around supply chain vulnerabilities that these large corporations are facing, how do I even begin to tackle that problem, just given how large the scope is and borderline insurmountable it sounds?


Marc Dragon:
I think one of the first things that we did after this survey was done was to look at the supply chain risk management space. And if you look at that space, that has been around for some time. It wasn't dynamic, or didn't have full data visibility, didn't have AI on big data, any of those stuff, right? But the space was there, and they did it more or less manually or in silos, right? For startups addressing this space, the question mark is that, will this continue post-2020, right? So that's not too clear right now. How much of it is structural versus how much of it is cyclical?


John Mannes:
How do you think about discerning those shorter term trends from the longer term ones? I have to believe that there are at least some longer term trends that are going to stick around post US-China trade war and post COVID.


Marc Dragon:
It is not so easy to discern. I think at the end of the day, I go back to the whole backstop for me, which is propensity to spend, right? Would corporates have propensity to spend on some certain types of solutions? So if you look at this survey, corporates had a propensity to spend on inventor optimization previously, just because the working cap kind of a thing, it directly impacts their working cap, so therefore they could spend in those kinds of solutions.


Marc Dragon:
Corporates originally spent a lot on visibility. How corporates think of visibility right now is probably very different from how they thought of it before. And what did they do with that visibility? More importantly, what do they do with that visibility becomes top of mind, as well. So some of these lend itself a little bit more to longer term structural shift. Of course, all of this has to be proven.


Marc Dragon:
I think from a technology perspective it becomes very key, because technology, things like data integration, things like application integration, things like AI to figure out stuff, becomes almost like foundational capabilities that organization needs to build in order for those higher order visibility, or planning, or flexibility capabilities to actually flourish.


John Mannes:
We've seen a lot of companies, I would say, in the last six months, trying to imitate or improve on the old Dun & Bradstreet model of validating suppliers and trying to get KYB, KYC into the hands of folks in the supply chain. What does it take for these kinds of solutions to actually succeed in market and make a large difference in the way that suppliers are vetted overseas? We spent a lot of time talking with folks in the Bay Area that have been trying to import PPE internationally, for example, during this crisis. And it's been really, really challenging to vet suppliers, unless you have people on the ground. And that's always been historically the bottleneck, particularly for SMBs and mid-market folks. So I'm curious to you what that threshold is, where some of these things move from fantastic napkin ideas to actual viable businesses.


Marc Dragon:
So I would approach it from two perspectives here, right? The first is the technology layer, and the second is really where the data comes from and the business model itself. On the technology layer, besides standard AI stuff, there's one technology that I like that I have been looking at, which is a knowledge graph, graphical analytics type areas. So I think technology-wise, there's some proven technologies that can look at relationships between players, across entities, across categories. It can be a buyer-supplier relationship, it can be a political relationship, individual relationships, and you can just put all together. The technology piece is that whole knowledge graph, graphical analytics thing. Then only after that it becomes the whole... where does data there come from, and what's the business model that sort of applies to this.


Marc Dragon:
Again, the whole China stuff, it's not only China that doesn't have visibility. If you had the right sources in China, you can get the right information. But it's the other emerging markets that don't even have the kind of data structures in place to collect information on companies. I think those are the ones that are real question marks. And that's where AI can potentially play a big part, in terms of having proxy relationships. How do you know manufacturing capacity of a certain supplier is what they say it is, right? I heard of proxies being used from an electricity perspective. So if you know the electrical generation through that particular plant, that address, and you sort of proxy it to other known manufacturing capacity folks, then you know yeah, more or less, they are kind of there.


Marc Dragon:
So there are some proxies that you can use, as well. But again, it's how the whole business model pulls this technology component and the data component together, I think that's key. But not a lot of startups have actually successfully navigated this.


John Mannes:
So I think you make a lot of good points, and I would say from our perspective, a lot of it comes down to data, as well. And I think that alluding to something you said earlier about changing emphasis or changing expectations, the human element of how we think about supply chain visibility, you're right in saying that a lot of the data thus far has been third party data. It's trying to figure out proxies to validate suppliers. It's building these large databases and knowledge crafts by scraping information, and buying up third party data, and trying to come to some sort of conclusion from all of that. The big question mark of what's been missing is data that actually comes from these vendors, that actually comes from these suppliers. And also, quite frankly, the buyers being able to open source or share their information in some kind of viable way. Do you think that those norms around sharing data, even something like production data, for example, in order to underwrite financing, do you think that that starts to shift and where might we start to see that first?


Marc Dragon:
Absolutely. I don't think it's starting to shift. I think the importance is starting to come up. There have been some discussions around sharing of data, while at the same time anonymizing that data. So for example, you have a buyer and you've got a third tier supplier, right? Third tier supplier, it would be great to have a sense of what is the demand patterns coming in from the buyer. But on the other hand, the third tier supplier might not want to give visibility to the buyer around what is the price at which they are selling that particular component and how much they're building that component to the second tier supplier, for example. Having that data in there, and yet anonymizing it such that it becomes usable for all parties in the chain, is something that we are looking for. We are looking for startups that do stuff like that, as well. That kind of a will be important going into the future.


John Mannes:
I'd be remiss if we didn't touch on the other piece of this, which is the cashflow management part and invoice financing. I would say this is another area, actually, that I've started seeing heating up, probably the last year or even predating the US-China trade war conversation with a lot of companies going after factoring. One could posit that that's a product of the state of the economy over the last few years, and interest rates and the sort, but I'm curious to hear from you how you see those tools and services evolving, as well, beyond existing work that's been done by folks like Stripe in the last year, and Square, and other larger players in the ecosystem.


Marc Dragon:
The ones that we like are those that are kind of unique in this space. So for example, are startups able to help to ascertain if a particular invoice or PO can be paid immediately, without going through a whole KYC process and without having all those couple of months of onboarding process, right? If just looking at data and using some types of AI, can I actually give to a very high level of certainty whether invoice or POs can be paid immediately? It actually changes the way that, potentially, the industry functions. AI in the trade finance space is something that we are very, very interested in. So not only in terms of that predictive aspects of, can I pay now or not. The other part is really that whole relationship graph, how is one related to the other, and what's the implication of a cashflow of one to the financial inputs of another.


John Mannes:
Do you think there are lessons to pull out of the last recession in 2008, 2009, that would be good guidance to heed here when thinking about the cashflow needs of enterprises and the role that technology can play in satiating some of that demand?


Marc Dragon:
There has been a lot of talk around '08, '09. We are in a different situation this time around. And it's a phased global thing, right? So China got into it first. So demand cut off, supply, everything was cut off. Now China's starting to come out of it. Capacity, what I just read recently, ocean freight capacity volumes have gone up almost to the norm in March, right, for China. Demand is also picking up. So China is starting to recover.


Marc Dragon:
The rest of the world are in a different time phase kind of a thing. How deep the individual economies goes into it, and how it impacts those individual economies' demand, therefore capacity, it would differ. Unfortunately right now, I'm not sure whether there are models being built right now. It's not easy to do it around this whole time phased, switch-on switch-off demand and capacity kind of a thing. Recovery will take a bit longer, maybe into the end of this year.


John Mannes:
If we can't have quantitative, might as well go for anecdotal and qualitative. What are you hearing from CEOs and executives that you're talking to about cashflow needs and and what they can't get that they need?


Marc Dragon:
Collections become very key. Forecasting collections becomes an input into cashflow management within the organization itself. I think for a lot of the CEOs and the executives out there, it's just a case of reacting to the whole situation in 2020. Whatever government grants and funds that are being made available, folks are just looking at understanding how that can... There are some industry sectors that have a greater dependency on these government grants because of their huge capacity that has been locked out or have been grounded, right? Interesting models have started to come out. The return of the air freight-only vessels. Some of those are starting to return, I think. Question mark is that is it going to be temporary or is it going to be structurally and therefore it becomes permanent?


John Mannes:
I want to wrap up with actually just a couple of rapid fire questions around your personal take on whether some things are going to last for a shorter term or longer term. So one thing we touched on earlier was this emphasis on deep globalization and what it means to start insourcing more of supply chains. Do you think that's a short term impact, long term impact?


Marc Dragon:
It's a mid to long term impact.


John Mannes:
What about fuel prices? Obviously in the maritime space, we've seen dramatic decrease in fuel prices. A lot of technology that was focused on helping companies deal with high fuel prices had their value propositions carved out. Is that here to stay, or is that a short term change?


Marc Dragon:
In the short to medium term, I think that whole pricing piece, fuel price and fuel optimization and that whole space, sort of becomes deprioritized. But interesting is that some global MNCs are thinking of tying their supply chain strategies moving of the crisis to de-carbonization, as well.


John Mannes:
I'll throw in one more bonus one. When we look at a graph five years from now of the most commonly shipped goods over sea by different countries around the world, do you think that we're measurably going to be able to see the impact of COVID and the trade war, in terms of what goods are most commonly shipped?


Marc Dragon:
I absolutely think so. I think you just need to look at which are the chains that... not so much strategic in nature, but which are the ones that are easier to move out more. Those are the ones that will have higher propensity for that. Chains are not so easy to be rebuilt, right? Like, for example, automotive, or even some parts of consumer electronics. That whole second and third tier supplier infrastructure, and knowledge, and employment, and capabilities is not so easy to replicate. Three to five years, we will see some structural shifts happening in some industries, not all. Further out, maybe 10 years, we might see further changes in other industries that would be more difficult to switch on-off.


John Mannes:
Thank you so much for taking the time to chat. This was a fantastic conversation. Thank you.
Marc Dragon:
Thanks, John. Thanks for the good questions.


John Mannes:
For years, technologists and logistics wonks have been pouring out phrases like supply chain visibility. But only now, in a time of volatile oil markets, a persistent trade war between superpowers, and a global pandemic, are enterprises realizing the full implications of their vulnerable supply chains. With many supply chains frozen around the world, enterprises are quickly realizing that visibility is a predicate for risk management. Companies not only need to understand the risks to their direct suppliers, but also risks faced by their suppliers' supplier. Insurance and financial services can and will come to the aid of ailing corporates, but they, too, will require data from every step of the production chain in order to underwrite risk. Startups have a huge lift ahead. They'll need to identify and aggregate new sources of supplier data and ultimately combine it with sophisticated forecasting models that will inform next generation supply chains born in the aftermath of COVID-19.


John Mannes:
I hope you enjoyed today's episode of Future Proof. We'll be posting episodes on Spotify, iTunes, and SoundCloud, so watch out for our next episode. Check out Basis Set's full research on maritime trade at BasisSet.ventures/research. And if you want to chat about any of the themes from this episode, drop me a note at John@basisset.ventures.

For more information on this topic, check out BSV's research:
Maritime Transport

Covid-19 is disrupting global flows of goods and people at an unprecedented scale. During the War on Terror, the government invested in technology to keep borders open and trade flowing. Our current pandemic requires a similar investment in a new generation of data infrastructure. If we can stitch together the right data, we can put an end to conversations about closing borders or subjecting large numbers of people and goods to draconian one-size-fits all quarantines and travel bans.

In this conversation between Ari Schuler, the creator and former head of U.S. Customs and Border Protection’s Innovation Team (INVNT) and VP of Emerging Markets at Daon and BSV investor John Mannes, we discuss how customs and trade are are being affected by Covid-19 and the important role new data streams will play in helping CBP respond to future pandemics.

Ari Schuler:

The next threat could be bacterial. And so if you go down too far with specific technologies, you end up with something that's really good for a crisis, and then the crisis passes. Let's be honest, government and industry for that matter does what they do. Three to five years later, they go, "Why are we spending all this money on this old thing?" And then that gets phased out, and then you lose some preparedness.

John Mannes:

I'm John Mannes, an investor at Basis Set Ventures, an early stage venture capital fund, investing in founders, transforming the way people work across all parts of the economy from factories to offices. This is episode two of Future Proof. Today, we're talking with Ari Schuler, the creator and former head of the innovation team inside of US Customs and Border Protection, and the current VP of emerging markets at Daon, about COVID-19, customs, and global trade. COVID-19 threw supply chains into chaos long before news of the pandemic was top of mind for most Americans. Disruptions that started in China are showing signs of easing while factories close down in the US and nonessential commerce and travel winds down. We're here to understand what's been going on behind the scenes as the government pushes to get PPE into the hands of doctors and nurses, and to try to parse apart the ways that US Customs was and was not designed for threats like COVID-19.

John Mannes:

Along the way, we'll touch on ways technology can bolster our response to the next pandemic. Silicon Valley's had to get up to speed on customs and trade really fast in the last few weeks. Talk of the town at board meetings back in January was supply chain disruptions in China. Took about six weeks to get here, but I saw a stat yesterday showing Monday's TSA inspections were down to about 330,000 from 2.4 million in the previous year. From the sidelines, Would you say CBP was ready for something like this?

Ari Schuler:

There've been several past pandemics as you know, most recently Ebola, but also SARS and MERS. The agency has gone through this before. I would say that while there's a playbook that everyone knows how to run through, the challenge with pandemics, as everyone's finding out in the world, is that you just never know how bad it's going to be. Is it going to be a regional issue? Is it going to be a global issue? If it's global, how disruptive is it? And this has clearly been more disruptive than anything in recent history. And so I think no one was going to come and say, "Hey, we did a really great job based on where we thought it would go." But did they start cold? Absolutely not. I know everyone there has been working around the clock, whether it's border patrol, OFO, Air and Marine, trade specialists, to try to keep things as steady and normal as possible.

John Mannes:

Well, Ari, in the past you've told me that CBP balances security, contraband, and trade facilitation priorities. How do you think that COVID-19 might reshuffle resource allocation to those three priorities?

Ari Schuler:

One of the false trade offs ... I think you know this, is that you can't do both security and facilitation at the same time. In fact, the more you can facilitate, the more time you have to focus on security. If I know someone's a trusted trader, I have very, very high confidence in that, I can spend less checking because I know they're trusted. And then that gives me more resources to focus elsewhere. I think this will create some new challenges that will require new programs, new technology, new policies, to help build in health security as part of that. But I think what's really interesting ... And maybe the two of us can dive into a bit, is how CBP has built what I would call a really powerful platform for risk analysis, whether that's for people coming into the country or for cargo coming into the country. That's enabled them to be very dynamic. Now, not perfect by any stretch. You're certainly seeing an adaption period now, but something that I think they'll be able to build upon, coming out of this crisis and even during this crisis.

John Mannes:

Tell us a little bit about that. Is that something that opens up communication with other countries during a time like this or other government agencies?

Ari Schuler:

As you know, trade is about as multifaceted as you get. You have all these different countries, and you've got those bilateral relationships. Then you have all the partner government agencies, which is government jargon for agencies that might have a say in something. For pharmaceuticals, it's the FDA, but it's even things like Fish and Wildlife for certain products. Like I said, there's 50 plus of those. CBP is really good at building those coalitions. But taking a step back, CBP has built what I would call one of the best risk analysis capabilities of any country in the world, coming out of 9/11. They call it a layered approach, which I think is fair because it starts with the moment that someone wants to ship something. There's a lot of regulatory filing that goes in, lots of data that CBP collects on any import or export. This immediately feeds into their risk analysis engines, which are extremely complex in a good way, extremely powerful, staffed by some of the best people, I think, in the government. That's looking at all sorts of different things, trying to flag what might be good, what might be bad. An example might be, very simply, we may have an address that we know a lot of drugs have been shipped from this address.

Ari Schuler:

So, if something comes from there, we're probably going to take a look at that cargo, and we're going to flag it for later inspection. Then, and this depends on exactly where the cargo is coming from ... There's, in some cases, even some screenings that occur before it even leaves the country, coming into America. For example, an air cargo, a lot of that is screened for potential explosives, coming out of some past aviation threats. Again, another layer before those goods have you been left to enter the US. Once it gets to the US, then there's a variety of different tools. One term for it is not intrusive inspection. These are high powered x-ray type machines that can x-ray vehicles. They can x-ray cargo containers, you name it, to look for anomalies, "What could be in there that doesn't look like what it should be?" maybe it doesn't match what was declared. And then if there's an anomaly, of course, a physical inspection can be created.

Ari Schuler:

You build all that together and you have a very, very robust system. And right now, it does everything, like you said, from narcotics to agricultural pests. And so I think coming out of this, it's very, very likely we will see new requirements, whether it's new data forms for the analytics side of things to help understand provenance, and help understand the health implications of a product, to actual technologies that are physically used to screen something and see if that's safe or not.

John Mannes:

Well, how do we even think about that in the context of a disease where at least some research shows that COVID is able to maintain infectivity on surfaces for a number of days? How would CBP think about intercepting something like that, and what data would contribute to discovery in that case?

Ari Schuler:

When something is shipped, you know where it's coming from. Say we have a country that we have some concerns about what's coming in. You could say, "Anything coming from that country ... " Say the data plays out that COVID doesn't stay alive past three days. I'm just using that as an example here, of course. I think we'll get much better science once the imminent crisis over. You could then say, "Hey, for the next two months until we are convinced that country is safe and free, all goods coming through have a three day holding period." Maybe you'll have special containment areas that you offload in the port. Maybe you just keep it on the ship. That's not preferred. The shipping operators don't like that. Maybe you find a way to certify bonded areas in the place where it ships from that, "Hey, it sat there before being loaded onto a plane." I think there's some flexibilities you could build into the system there. Obviously, people aren't going to like that. They like having their goods come just in time. You like it when you order stuff off Amazon, and it immediately comes to you. But I think when you have health crisises, you understand that some of that has to [inaudible 00:07:19].

John Mannes:

Is that happening today or would it take more infrastructure to get there?

Ari Schuler:

To my knowledge, that's not happening today. I think, as I was saying, until there's really good science, I don't think anyone wants to pull the trigger on those sorts of solutions.

John Mannes:

I know that you had been out of CBP for some time now, but the president last week, was going back and forth on clarifying whether to close cargo between the EU and the United States. It doesn't seem like we're on a path to having cargo cut off. Do you think that there's a threshold, or something like that might happen?

Ari Schuler:

I think it's going to really come down to, "Is it safe?" I think that's a really hard call to make. I think you're seeing a very aggressive national debate on where that threshold is. I think with cargo, the advantage is you have less people being involved. You have a couple of pilots as opposed to a plane full of passengers. Those are hard national security, presidential level decisions. If someone was foolish enough to make me in charge, potentially, you have to look at, "Does a country have control over the outbreak? Is there confidence in their testing and their epidemiology?" I think if you lost a lot of confidence in that ... I don't think any country is really at that point yet. I think a lot of countries are struggling. But if you really saw something go off the deep end or you just didn't trust the data coming out of a country, you might have to make that decision. But there's a lot of challenges in shipping, as you know. There's a lot of games you can play. Things can be reshipped, maybe sent to a third country, and then snuck in that way. It's a tricky situation.

John Mannes:

I want to take a step back and think a little bit about CBP priorities on the technology side, leading up to this current COVID crisis. What were the priorities, and how do you think that those priorities have changed, particularly from an innovation perspective?

Ari Schuler:

When I left, we were in the midst of the opioid crisis. It's still ongoing. Fortunately, it's abated a little bit. But that is another one that is just critical to our public health and something that CBP was playing a key role in. As an example, we actually led an opioid detection challenge to help find opioids in the mail environment. We were looking for all new technologies of all sorts, everything from things that could look at letters to full packages to data analytics behind them, to identify those technologies. Broadly and crudely, but I think accurately, CBP is always looking for things that can better segment the bad from the good with that emphasis on, "You don't want false positives." Every single false positive that you go, "Hey, we think that package there potentially has bad stuff." Then a human has to open it. Just to give you context, just looking at mail, there are, I think, around ... I want to say it's almost 2 million packages a day coming into the US when trade was as it is. And then there's about 70,000 cargo containers a day.

Ari Schuler:

It doesn't take a very high false positive rate to just create a crippling amount of workflow. If you can't trust the technology, it won't get used by operators. Always looking for those sorts of technologies, a lot of investment on the data analytic side, and then a lot of investment on the hardware side about things that can actually be deployed in that hands-on sense. Like I was talking about, once you say, "Hey, this container might be suspect." how can you get better data without having to unpack the whole thing because that's very labor intensive.

John Mannes:

How much of that technology is specific to COVID-19? I know that things like antimicrobial surfaces and thermal cameras, for example, have become hot commodities the last few weeks for companies. Do you think that it's things like that, that are specific, that are ultimately going to become priorities for CBO? Or do you think it comes down to better communication, better traceability, better flexibility around interventions?

Ari Schuler:

There's a lot of ways to approach challenges like this. I think you want a combination because anytime you have better data and better traceability, you're creating a system that's very flexible. The challenge, as you know, COVID-19 is a coronavirus. It's got certain aspects. A lot of things are attuned to it. The next threat could be bacterial. And so if you go down to far with specific technologies, you end up with something that's really good for a crisis, and then the crisis passes. Let's be honest, government and industry for that matter does what they do. Three to five years later, they go, "Why are we spending all this money on this old thing?" And then that gets phased out. And then you'll do some preparedness. This is, again me, not CBP. I think 80% want things that are broadly applicable for all hazards that build a lot of robustness across the entire system. A lot of that is data and provenance, and trust. And then you want to spend about 20% on more attuned threats. But even then, you want things that are flexible.

Ari Schuler:

To go back to that opioid challenge, one of the big things we talked about is we wanted technologies that weren't just tied opioids, and could be tied to any synthetic drug or any narcotic because we've seen the drug of choice that gets popular changes. And so if you go all in on opioids, in that case, you've got a thinking adversary. You've got criminal organizations. They'll just switch to something else the second they realize, "Oh, well, opioids can be detected. We'll use something you can't detect." Mother nature doesn't quite do it the same thinking way. But as we see in this whole coronavirus pandemic, mother nature is crafty in her own way. And so you've got to make sure you're ready to adapt to any threat.

John Mannes:

The hot topic of the last few weeks has been speeding up the importing of PPE. I know that this has gotten complicated with a number of different government agencies involved in regulating PPE, including the FDA. How should we be thinking about this kind of inter-agency communication and the role that agencies have to play in designating what gets to come in and out of the United States?

Ari Schuler:

It started rough I think it's getting better. You have a lot of process in place. Sometimes, having done this in the interagency, you've got to figure out which that process is there for a good reason and which of it has accumulated during peacetime. And so the good news is that all these partner government agencies, there's a process for them to talk to each other. Everyone knows how to get everyone on the line. I was talking to some of my friends still in the agency. They were on a multi-stakeholder call recently. They were resolving something. They did it quickly in a way that you expect your government ... But you kind of have to go through those motions. I think you're seeing this at, really, every level of government, of shaking off the cobwebs and making sure that things are functioning as they should be, that meets the current crisis. And you're not defaulting to what you did when there wasn't anything going on that was super urgent.

John Mannes:

You mentioned that the CBP has learned a lot from previous crises. I know 9/11 is probably one of the most prominent and top of mind for most of us. What lessons were learned throughout that crisis that are informing responses to this one?

Ari Schuler:

Data, data, data. Prior to 9/11, a lot of the data that's collected on travelers coming to the US simply didn't exist. And so you could not take a look at that and say, "Are these people that we've encountered before, and we know are bad actors in some way?" When it came to 9/11, folks like that were able to get in. and then it became a race of law enforcement and intelligence agencies against the bad guys doing bad things, and we lost. Coming out of 9/11. We built, as I was talking a bit on the custom side, also on the people side, these regulatory systems to collect data to make sure that all the different government holdings are talking to each other so that if we've ever encountered someone who's done something that other agencies need to know about, that information is available. I think we've done a really good job. There's always room for improvement, but I truly believe it's one of the best things that's come out of post-9/11 in terms of making sure that gap was closed. You're seeing it get better and better with biometrics that CBP is rolling out for entry and exit. That closes another potential gap. It's been a really great focus.

John Mannes:

How do you stay ahead of each crisis? You mentioned the next crisis could be bacterial in nature, for example, or potentially even different than that. Founders already struggle with the amount of information that they need to declare around importing and exporting goods, particularly given the amount of data that each one of these agencies needs in order to be able to make decisions around safety for goods that are being imported. How do we make sure that we're not collecting too much data, that we're actually collecting the right data?

Ari Schuler:

It's a great question. I think that ... And I hope because I'm an eternal optimist, coming out of this, that will be one of many things that everyone looks at. You get that peacetime accumulation, like I was talking about before, where, "Hey, this bad thing happened once, but it only happened once. Let's just add another data collection." It kind of stacks on each other for good reason. But to your point, eventually gets to a point where, particularly a small business, whether they're a startup or just mom and pop, they're looking at this and they're saying, "How the heck do I do this?" I think that there needs to be a good conversation, post COVID, post recovery of, "All right. Let's look at this system. What are we trying to do? What data do we need? And then what technology is out there that can maybe close some of those gaps and make this a more seamless experience?" I think that happens through a really good dialogue between government and industry.

Ari Schuler:

I think this tends to actually go pretty well. It happens through the Commercial Customs Operations Advisory Committee, which is an industry advisory group to CBP called the COAC. They actually are continuing to meet even through this pandemic virtually to keep that communication going. I think CBP has to continue to do what they've done, which is really look hard with those government agencies of what they need.

John Mannes:

What about lessons that can be learned from other countries? Have you seen anything compelling from other countries on an import, export management side?

Ari Schuler:

We're witnessing some of the largest worldwide AB testing of solutions that's ever happened in human history. And because we live in an era of generally free information being transferred in the internet, that information can be shared rapidly. And so we're going to figure out, I think, over the next couple of weeks ... You're already seeing examples of this, like with three D printing of ventilator pieces and just some incredible innovation designed to save people's lives. I think you're going to see that on the custom side, maybe not as fast. You'll start being able to roll it out. I think the devil's in the details, though. You're an expert on this as well, is not conflating policy problems with technology problems. And as we started in this conversation, there are a few things that are as complex as international shipping because you have a bevy of different stakeholders. You have a lot of countries. You have trans-shipment. You have pieces of one thing going to another country to be a subassembly to go to another country for a final assembly. The sophistication of the customs agencies in each of those countries may not be equal.

Ari Schuler:

You might have very critical parts coming from a country that maybe doesn't have as developed a custom system. You can't always roll out a whizzbang technology solution to all the parties involved without a lot of policy wrangling and a lot of diplomacy. I think that's what a lot of founders get appropriately frustrated. But it's part of the customs fabric, unfortunately.

John Mannes:

If you were recommending ideas to a founder today, what would be the top ideas that you would ask them to start working on that would be helpful for CBP and potentially also corporates that are working with CBP on managing imports and exports?

Ari Schuler:

Just to give you an example of how complex things are, one of the really big gaps in international shipping is we talked about how there's that advanced electronic information that comes into cargo coming into the US. Well, it turns out that that doesn't happen in mail. It's gotten a lot better. There is a lot of advanced information in mail now, but it wasn't until ... I think it was 2010 or 2011, that the Universal Postal Union even mandated that countries had to do that. And even today it's not 100% adoption. Digitization of mail and sending that data, that's very, very basic. Any Silicon Valley person would be like, "Are you kidding me?" But that's the sort of environment you're working in. So, founders have to really, I think, lead with understanding the challenges, and then try tackling the solution instead of what can sometimes be the more Silicon Valley approach of, "Hey, here's a great idea. It might step on some regulatory toes, but we're just going to do this anyway. We'll sort out the implications later." That works in a lot of industries.

Ari Schuler:

You see that in some of the vacation rentals and ride sharing ... I think [inaudible 00:19:06] would argue took that approach. It just doesn't work in customs. You will be fined out of existence. You will be unable to import. you'll run out of venture money before ever securing customers. It's just much harder to disrupt the way Silicon Valley likes to disrupt things.

John Mannes:

And what about companies that maybe aren't working in customs specifically, but have hardware supply chains around the globe in countries that are hotspots right now for this crisis? What type of advice would you give them for working with CBP and potentially other agencies in other countries mitigating those supply chain risks?

Ari Schuler:

I think we're going to have a really interesting worldwide societal question after all this, which is ... For years and years and years in pursuit of profit, which is a good thing. That's what business does. We have squeezed a lot of robustness out of the supply chain system across the world. The result has been greater profits, but I think all of that fragility has been exposed with an event that is not a black Swan. This is a white Swan. Pandemics are well known. A lot of groups have been talking about the threat. We've seen them happen multiple times over the past decades. There's no surprises here. Now, they've never been this bad, but this was a predictable event. And so the question is going to be, "Is everyone willing to eat some of that profit to invest in resiliency and robustness." Or a year from now are we going to go, "Well, that was really awful. Let's hope it doesn't happen again." And if we do that, I think we're all courting disaster.

Ari Schuler:

But if we take a step back and go, "You know what? This is a problem. We have to better understand the supply chain. We have to build robustness into it." Then it becomes much more interesting and much more meaningful. It will become a true public private partnership of making, I think, the world better. I'm really hoping that is one of the ways that things get better, coming out of this. But again, I'm an optimist.

John Mannes:

Do you think that's just as accessible for earlier stage companies as it is for larger corporations?

Ari Schuler:

I think it's going to have to be. I think if your goal is to have a robust supply chain, it's going to be kind of like cybersecurity. It's a cost that you're just going to have to bear. I think initially, it'll probably be pretty costly for everyone, but hopefully, as the market does what it does, you'll start building in robustness efficiently. I think, then, it will become something that is more accessible for startups that are seeking to be in this space. But initially, I think you're right, it's going to be tough. It's going to be painful for a lot of folks, and it's going to require some reorienting.

John Mannes:

The last thing I want to touch on is around labor. CDP is a massive employer. How do you think about the labor risk given coronavirus? And what types of technologies can assist CBP in doing their work more efficiently?

Ari Schuler:

Part of me thinks that robotics still isn't there yet. I think it will get there, but maybe this will be something that accelerates it because it helps minimize human exposure. I think it will be interesting to see if there are investments made in decontamination, in hygiene, in PPE. I heard something that I thought was very insightful and I think, perhaps, one of the biggest areas we'll see some investment going forward, and frankly some changes in a ... Kind of like after 9/11, there were a lot of changes to how security was, shoes off, belts off, et cetera. I think, likely, hygiene and cleanliness of travel and hospitality, of a lot of different sectors, may become something that ... Used to just be something like, "Yeah, they vacuum the plane when you're done." You may start seeing real investment in there, and then a lot of investment opportunities, people figure out, "Okay, how do we make this a more technological process? How do we ensure the job got done correctly, and it wasn't just a bunch of cleaning theater?"

Ari Schuler:

I think you'll start seeing some of that. But again, that's going to assume that this sticks in everyone's mind as, "Wow. This was really bad. We need to pay attention to the impact of a global economy and all the things that make diseases spread." And not just a, "Hey ... " One year later, "Gosh, that was awful. Let's hope it never happens again."

John Mannes:

Thank you, Ari. I really appreciate the time. I know we covered a lot of topics, but I think you presented this in a really digestible way for folks. Thank you.

Ari Schuler:

My pleasure.

John Mannes:

Technology's come a long ways since the enactment of the Aviation and Transportation Security Act. Asa society, we've largely grown accustomed to new measures aimed at collecting data to increase security, deciding to charge the powers that be with responsibility of ethical collection and analysis rather than a shooting surveillance altogether. As COVID-19 disrupts global flows of goods and people, we must think critically about new minimally invasive data that we can collect to enable targeted interventions. Today's state-of-the-art temperature scans will not be enough. If we can stitch together the right data, we can put an end to conversations about closing borders or subjecting large numbers of people and goods to draconian one-size-fits-all quarantines and travel bans. Simultaneously, the private sector needs to take a hard look at supply chain vulnerabilities and prioritize redundancies. We can't risk another 11th hour scramble to chase down PPE and other important medical equipment. We need new tools that can help businesses find and vet suppliers at home and abroad, so our supply chains become more robust and flexible.

John Mannes:

I hope you enjoyed today's episode of Future Proof. We'll be posting episodes on Spotify, iTunes, and SoundCloud. Watch out for our next episode. Check out Basis Set's full research on customs at basisset.ventures/research. If you want to chat about any of the themes from this episode, drop me a note at John@basisset.ventures.

For more information on this topic, check out BSV's research:
Global Customs

Trucking is one of the most essential industries in the global economy — food, masks and pharmaceuticals are of little value if we can’t get them to those who need them. As Covid19 continues to spread, millions of aging truck drivers remain on the road — ensuring critical goods can get from point A to point B. Moving forward, new technologies will shift the burden of work away from the field, allowing trucking companies to do more with less.

In this conversation with Jeff McCaig, owner of North America’s third largest dry bulk and tanker company, Trimac Transportation, Trevor Adey VP of Digital at Trimac, and BSV investor John Mannes, we discuss how the trucking industry is responding to the pandemic and the role technology has to play in keeping drivers safe and deliveries on schedule.

Jeff McCaig:

When a truck driver makes a delivery, he often gets out of his cab and goes into a room to talk to the individual responsible for that unloading facility and we're saying, don't do that. Do it through the window, do it through your phone, but avoid the contact, the whole social distancing thing.

John Mannes:

I'm John Mannes, an investor at Basis Set Ventures, early stage venture capital fund investing in founders, transforming the way people work across all parts of the economy, from factories to offices.

John Mannes:

We're starting something new here at Basis Set and we're calling it future proof. We'll be hosting industry leaders racing to future proof their businesses and seize opportunities created by AI and automation. Episodes will focus on how an industry is changing in response to an inflection point, and what it all means for startup founders.

John Mannes:

Right now we're in the midst of the decades largest watershed moment, so our first episodes will unpack the impact of coronavirus on global markets.

John Mannes:

Our first guest, Jeff McCaig is the third generation owner of Trimac, North America's third largest dry bulk and tanker company. Jeff's also an owner of the Calgary Flames. He's joined today by Trevor Adey, who leads up digital initiatives inside of Trimac.

John Mannes:

I want to set up this conversation by referencing the last watershed moment in logistics, 9/11. 11,000 US trucking companies failed in the years after as a result of increased insurance expenses and regulation. On average, pretax income dropped by 25% and margins collapsed. Those that survived figured out how to manage costs. So bluntly, what we're trying to figure out is the equivalent strategy for 2020, and what role technology has to play.

John Mannes:

Jeff, you've been at the helm of Trimac through multiple recessions. Could you have ever imagined that something like this would happen?

Jeff McCaig:

No. This is unique in lots of ways.

John Mannes:

If we were running a trucking company in United States, what would our last few days have looked like?

Jeff McCaig:

What we've seen is are our regular normal routines have been significantly disrupted and some demand for our capacity has fallen off. But at the same time, other things that have picked up. For example, chemical companies that were formerly shipping a chemical for a certain application, say in the automobile industry, automobile industry isn't working currently, or is slowing down significantly, and they're redirecting that capacity towards pharmaceuticals and food products, where there is increased demand now as a result of the health crisis that's going on, so it's significantly disrupting, but not necessarily reducing, the demand for our services and the capacity that we have.

John Mannes:

How has Trimac been handling this? Has it been effectively daily meetings, all hands with executives inside the business?

Jeff McCaig:

Yeah, it's a combination of a lot of different things and you see this across multiple industries, I'm sure. But as you say, it's all hands on deck daily, if not multiple meetings daily, to coordinate activities across our network, which is the US and all of Canada.

Jeff McCaig:

And then making sure that all of our office based workers are able to work from home so that we're complying with the containment strategies that our governments are putting in place, and still being able to support our drivers who are on the front lines of this crisis, delivering these essential services, to be able to perform their jobs and get the goods delivered without putting themselves at any risk.

Jeff McCaig:

And there's been lots of little and big problems associated with just doing that that I can go into, but that's the overview of how we're responding to the crisis.

John Mannes:

Well, so before we go too deep into the current coronavirus situation, I want to make sure that listeners have some background on what's been happening within the trucking industry over the last 10 years. And I guess this is directed toward both Trevor and Jeff. If you could each just share a couple of the things that are lead ups to this crisis.

John Mannes:

I know that a lot of the issues around the driver shortage for example, are exacerbated by what's going on here. So maybe each of you can take a little bit of time to talk through what you think has been most impactful in the last few years across the industry.

Jeff McCaig:

Well, sure I'll start. You mentioned the primary trend in the industry is a shortage of truck drivers and that's been true for a very long time now and it's getting increasingly acute and a crisis like this exacerbates the problem. It's a combination of very long hours in the trucking industry, increasingly congested infrastructure, and the restrictions that are placed on the trucks both in terms of the highways and the pickup and delivery sites that they're accessing. So it's a very real challenge to maintain our capacity with highly skilled, highly professional, safe, truck drivers.

Trevor Adey:

I'm happy to jump in next and just talk about the area that I've been working with Trimac and that is around digital transformation. And, as Jeff said, maybe most tactical and strategic issues for trucking is the availability of truck drivers and the demographic of truck drivers and attracting new truck drivers. So that's a massive problem in both Canada and the United States, that everybody is aware of.

Trevor Adey:

You may or may not know it, but I think truck driver is the largest employer in Canada and one of the largest in the US, but probably the role is not as appealing as it has been in the past. So, that is definitely an issue. And then another issue that's really relevant is the digital transformation of the trucking business.

Trevor Adey:

As Jeff mentioned, he's been in the business for four decades. I myself have only been in this business now for about five years. I'm from the tech and software sector and there are a lot of folks like me that were in different dimensions of the tech sector, or in the venture capital sector, that have the ambition that the ways of working in trucking can be changed a great deal by bringing in new technologies, in the same way Uber changed the taxi business. That new technologies can change the alignment between our customers' demands as to where they want their loads and where our assets are to get those loads there in the most efficient way.

Trevor Adey:

So I would say that that is the theory that my work is concentrated on with Trimac and another big dimension of change and very relevant to this current crisis.

John Mannes:

So thinking about those in reverse and starting with the technology adoption and digital transformation piece, one of the unfortunate results of 9/11, at least with respect to global trade, was a slowdown in the adoption of digital trade technology, a slow down in the digitization of digital trade, particularly at the level of US customs and global customs. Single window initiatives, for example, were pushed back by at least 10 years in a number of countries, while folks refocused on safety priorities as opposed to trade facilitation priorities.

John Mannes:

So do you worry at all that the current coronavirus situation will elongate the timeline for adoption of technology within the trucking industry?

Trevor Adey:

So, I'm happy to take that first and then I'll let Jeff back me up. The main thing I would say that makes particularly poignant new technologies is the target of human beings in this crisis. So if AI, autonomous driving, if machines make our requirement for humans less critical to operate the supply chain, then we can solve supply chain crises.

Trevor Adey:

Well, I think anything is possible. It certainly seems to me to be a very compelling hypothesis that if we had more self driving trucks, if we had more automation in the supply chain, if we had better digital views into the end to end supply chain, we would be in a better position to respond to this crisis.

Jeff McCaig:

And my small addition to that is international trade, which by definition has to have a marine component to it, is a double edged sword for trucking. And really I believe that it only affects the kinds of trucking that is done in this country and on this continent in the sense that if we're not getting goods from overseas because trade is slowing down to the same degree we were, or would have [inaudible 00:09:07] on a steeper path, then those goods will be produced inside the country so that the routing will be different. So we'll pick up inside the country and then deliver to a point in the country, because the last mile has to be done by truck of some kind. And it's just a question of is it from a port to a warehouse facility and then distributed, or is it from a facility that's making those goods here and delivered to a consumer of the good inside North America.

John Mannes:

So what I take from that is that, at least for now, the core technology priorities haven't really changed, and it's more of an exacerbation of previous concerns around driver shortages, autonomy becoming even more important, the adoption of some of these digital technologies from a company agility standpoint, only growing more important.

John Mannes:

What are you telling vendors right now and companies that are working with Trimac on various software solutions, and has that conversation come up around specific features and functionality that are becoming more important in the wake of this crisis?

Trevor Adey:

So I'll jump in and again I'll let Jeff back me up. I think everybody right now is in the mode of almost shut down and take a sober second thought too crisis situations that you can respond tactically through a central command center. And all technology expansions, from my perspective, I'll just say, not just my professional life, my personal life, it's like, yes, we're going to look at those things, but we almost need to get through the next month with the systems that are in place and human intervention, and then we'll put more energy into better systems to solve the crisis after we get through this short term situation, which it seems like if you're away from your phone for two hours to work out, things are changing significantly every minute.

Trevor Adey:

So, if I can say that simply, I'd say that I think the industry will double down on digital transformation. However, I don't think that'll happen until we get through this incredible crisis that we're in right now. And I'm hopeful that will happen in the next 60 days.

Jeff McCaig:

Maybe just to take a little bit of a contrarian perspective there, compared to other transportation modes, like trains, airplanes, even pipelines and marine, trucking is a larger sector than any of them and it's much more fragmented and balkanized, and in crisis situations which require rapid adjustment to demand, trucking is or go to. And it's probably a strength that it is structured the way it is because it can respond more quickly because trucking terminals don't get shut down like an airport might, or congested, or border crossings that you only have one choice with some of the other modes. But with trucking you can access other points, other border points.

Jeff McCaig:

So trucking is a very large but very fragmented and flexible and I think, John, you used the word agile, and I think that's one of its strengths in responding to these things.

Jeff McCaig:

That's not to say that we won't adopt technology, but I don't think it'll be technology that further centralizes it in a way that removes that agility because that's one of our strengths.

John Mannes:

Other industries that are more centralized have gotten very proactive in the last few days, particularly the airline industry, cruise industry, that are a lot more consolidated than the trucking industry, around setting best practices for operation. That being said, there is an obvious cost to that in that those industries have been hit a lot harder and have struggled to operate under this crisis at full capacity.

John Mannes:

Do you worry at all that the fragmentation of the trucking industry actually presents a challenge from a best practices and collaborative response standpoint, or are there folks taking the lead within the trucking industry to set practices for driver safety, for example?

Jeff McCaig:

You're right that there is an issue there for sure in terms of best practices, because in a fragmented industry, as opposed to one that's more consolidated, you can't distribute that and get compliance as quickly.

Jeff McCaig:

The only thing I would, and it sounds like I'm being defensive about the trucking industry and maybe I am, but the trucking industry is so competitive and runs on such thin margins, that the adoption of new and more efficient ways and safer ways of doing things happens very quickly because if you don't, you're left behind. You're not in the game anymore. And it's the competitive environment that causes those things to happen. Not the dictate of a government or regulatory body.

John Mannes:

Have you seen yet that perhaps what is most advantageous from a competitive standpoint has been in opposition or adversarial in any way to what is best from a safety standpoint?

Jeff McCaig:

There is conflicts. There's no question about that. And my own company has a motto, service with safety, and sometimes service is in conflict with safety. The service might dictate that you run an extra hour. Safety would say, pull over if you're tired and get the rest you need. So those things can be in conflict from time to time and require judgment as to how you manage those conflicts.

John Mannes:

And it may be too early to have concrete suggestions and recommendations given, to Trevor's point, that things are changing, seemingly, by the hour, related to this crisis. But what advice would you recommend that trucking companies give to employees, both drivers and also operations folks, with respect to this virus? And how do you think about what this might look like three, four, or five months down the road if it continues at its current pace and resembles the crisis that happened in China?

Jeff McCaig:

Well, we want to do everything we can to support our drivers because they're doing things that are essential to addressing the crisis and recovering from it. And I think there are things that we're looking at now, in the form of new technologies that will help us in the future be better at supporting our drivers when there are crises like these that need to be addressed and that we can make them more effective, more efficient, better at doing the things that they need to do to address the problems that we're addressing.

Jeff McCaig:

So I'm not saying there isn't a role for technology. Almost certainly there is. And it's in the form of communication. That's the one thing I hear constantly in any environment that I'm in lately with regard to addressing these issues is communication is the key thing, and as long as we can do a good job of that, and we'll get better at it with technology, we'll be able to respond.

John Mannes:

Do you believe that most of trucking will continue to operate throughout the crisis, or do you think that there's going to be a need for a structural reshuffling if things continue to get worse?

Jeff McCaig:

I think that trucking will continue to operate through the crisis. It's not clear to me what we'll have to do differently in order to respond. I know we're doing some things differently already.

Jeff McCaig:

For example, when a truck driver makes a delivery, he often gets out of his cab and goes into a room to talk to the individual responsible for that unloading facility, and we're saying don't do that. Do it through the window, do it through your phone, but avoid the contact. The whole social distancing thing. Truck stops that have formerly been available to a driver as he goes on longer haul, some of them are closing down. How do we supply, make sure our drivers have places to rest to eat and to use hygienic facilities? So there's lots of things that are coming up as we go through this, but as I say, it's a very large, very fragmented, but very competitive industry and we'll figure those things out.

John Mannes:

Of course. Trevor, building on some of those points that Jeff just made, the consistent theme that I get from this is remote work is finding its place within the trucking industry, perhaps from a social distancing standpoint, from a driver perspective, but there have also been a lot of reports of folks at headquarters and in operations roles in the trucking industry, working remote.

John Mannes:

How have you seen that playing out throughout the industry and what sorts of technologies do you think are going to be necessary assuming that this sticks around for a longer period of time?

Trevor Adey:

From my perspective, this is the biggest impact technology issue, not just to affect trucking, but to affect all forms of work, all forms of education. I'm sure you've seen the reports of emissions over Italy and China during this time and how mobile work in mobile education can change the world that we live in, in terms of that crisis. So I'm sure how we run our operations in trucking from our control centers, just like many, many other industries, will change. And I really think we have to ask ourselves, why hasn't this changed?

Trevor Adey:

You always hear people say, and I look at the tech companies here in San Francisco, why is Facebook and Google putting all their employees on these buses and charting and bringing them into these big centers? Do they really need to do that? Can't some of those employees, or I would say a lot of them, work out of their home?

Trevor Adey:

I think the new normal will be, even if you are less efficient if you work remotely, it's something that has to happen. And I would apply that to education as well. I have four daughters and when they moved to being educated from the home, whether they're in universities, two of them are, whether they're in grade schools, to my mind it should be fluid. All the curriculum, all the content, should be online. They should be able to fluidly go from in class to out of class, and that is just not the case.

Trevor Adey:

So I know I'm getting a little bit off topic, but to my mind, this issue of working remotely, and I think it could be talked about a lot more grand than that, and educating remotely, could be the one big positive takeaway from this whole coronavirus experience.

John Mannes:

What have been some barriers to Trimac, and the trucking industry broadly, in adopting remote work for its employees? And what do you think founders can do to build for that future?

Jeff McCaig:

Just to put our employees into two categories. One the people that are doing the work inside offices and there's really no significant barriers there, were just you're getting better at doing it and our systems are improving and I think that will continue along a pace.

Jeff McCaig:

But with regard to our drivers and supporting them locally, so that they don't have to come into centralized facilities and they can get their orders and pick up their loads and be supported along the routes and know when the next load is, that's communication technology that is in the cab of the truck and that's improving dramatically as we speak too. It'll get better and better. And I think that as we get better at doing that, we'll be able to accomplish more with less. In other words, fewer trucks and trailers and terminals will be able to deliver the same amount of goods. Whereas the goods grow, the existing fleets and systems will be able to handle more.

Trevor Adey:

Just adding onto that, the more the entire supply chain is digital and leveraging from all the new industrial IOT 5G technologies, all the different platforms, the more the cash and the goods flow as efficiently as possible from that, then I think we'll all be better off and I think there's still lots of heavy lifting to be done and still lots of capital to be gained in that pursuit.

John Mannes:

Well, with that, thank you both Jeff and Trevor for coming on today. I know that founders will appreciate the candidness. You both have such a wealth of experience in the trucking space and folks are lucky to be following your lead. Thank you.

Jeff McCaig:

Thank you.

Trevor Adey:

Thanks, John.

John Mannes:

We're going to need more tailored tools for facilitating remote work in the trucking industry. For many office workers, remote is a binary concept. You're either back to back in a conference room, or you're back to back in a Zoom room. But for America's million plus truckers, remote is a spectrum. Does it mean driving? Does it mean staying in a cab when making a drop off? Does it mean eating at a truck stop?

John Mannes:

Any new tools and services built for the trucking industry need to consider these on the ground realities if they're going to support operations during COVID-19. The rapid fragmentation of trucking companies post Motor Carrier Act of 1980 contributes to the complexity of defining new industry best practices. This means that many trucking companies are on their own in dealing with existing driver shortage challenges and new expectations around the management of coronavirus.

John Mannes:

I hope you enjoyed today's episode of Future Proof. We'll be posting episodes on Spotify, iTunes, and SoundCloud. So watch for our next episode, check out basisset.ventures if you're interested in reading our full research on trucking and how we see AI transforming other industries.

John Mannes:

If anyone wants to chat about anything related to the future of trucking or the impact of COVID-19 on industry, feel free to drop me a note anytime at john@basisset.ventures. Thank you.

For more information on this topic, check out BSV's research:
Trucking Operations