Future Proof

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

Featured Episode

While Covid-19 has pushed technology deeper into the deskless workforce, it’s also elucidating shortcomings of existing tools not optimized for the unique challenges of specific industries and regions of the world.

In this conversation between Kris Kemeny, Managing Director of the venture arm for Tekfen, one of Turkey’s largest industrial conglomerates, and BSV investor John Mannes, we discuss how founders can build for the global deskless workforce while localizing solutions for customers.

Kris Kemeny:

Status quo was always walk and talk, and now we're having to shift to sitting and clicking.


John Mannes:

This is Episode Eight of Future Proof. Today, we're talking with Kris Kemeny, Managing Director of Tekfen's Venture arm. Tekfen is one of Turkey's largest industrial conglomerates, with activities in agriculture, manufacturing, and construction. For those of us based in the United States, we've become accustomed to weekly changes in COVID outbreak severity between cities and states. But what's often lost in the news cycle is the variance between countries. Despite wide variations in case counts between nations, one fact rings true nearly everywhere, desk-less workers are back in the field, making machines, tending to crops, and building buildings.


John Mannes:

Turkey is no different, but as founders race to build tools to support desk-less workers, it's important to remember that while all workers are in need of tools, the exact tools that are needed differ widely between applications and geographic contexts. With more desk-less workers in the world than office workers, many emerging subcategories will be large enough to sustain venture scale businesses in and of themselves. Welcome, Kris. Thanks so much for joining us on Future Proof. I'd love to just give listeners a little bit of a sense for your background, and if you could also tell us a bit about Tekfen as well, that would be super helpful for folks that may not have heard of the company before.


Kris Kemeny:

My name is Kris Kemeny, Managing Director of Tekfen Ventures. Tekfen Ventures is an early stage venture fund backed by Tekfen Holding, a publicly traded industrial conglomerate based in Istanbul, Turkey that focuses on the agribusiness, industrial contracting, and manufacturing verticals. We're Turkey's largest fertilizer manufacturer. We're also a large player in seeds and other inputs, and we have orchard operations where we are Turkey's, I think, second largest fruit growing and import export operation. None of those are unique, but they are uniquely large in that part of the world and have been operated highly efficiently and with the future and progress in mind. We partner with a holding company and our colleagues on the operating side of the business to understand regularly what key challenges we're having.


John Mannes:

So would you say overall since this entity was created within the company that the number of pilots and POCs and work with the tech community and startups has increased? Is that a fair general takeaway?


Kris Kemeny:

That is an absolutely fair general takeaway.


John Mannes:

Are most of your sales in Turkey or are they domestic here in the United States?


Kris Kemeny:

Tekfen's fertilizer sales are almost all in Turkey. Some being sold to neighboring countries in that geography. Our fruit exports are predominantly bound for Europe and Asia, and the contracting arm does much of their projects in the Middle East area.


John Mannes:

So thinking specifically then, in that context of the last six to nine months, everybody is familiar with COVID and the impact that that's had on the economy, folks are familiar with what's happened with oil prices recently, same thing with the trade war, just broader economic volatility on top of all of that. How would you say as a company that the operational and technological priorities have shifted in order to embrace that new normal?


Kris Kemeny:

Obviously, the last six months have been quite unique and different and challenging for our organization as they have for much of the world. The key priority during this period has been a priority for Tekfen Holding for decades. And so there's maybe nothing new there, although the way that we've had to implement it is new, and that priority is safety. The operations of Tekfen, as much as possible, shifted to remote work beginning in March. It was a slow return back to the office for those of our colleagues who actually work in an office, and we're hovering probably at around 50% capacity, but this is also an evolving decision that's regularly revisited every couple of weeks, every month, to ascertain if things should be re-evaluated and we should slow the progress of that return to work.


Kris Kemeny:

The challenge, I think, for us has been adapting to this new type of work. Although thankfully, these are things that have been invested in at an organizational level starting a number of years ago, and so it caused less disruption than it might have had we chosen to wait. It's also important to state that much of what we're talking about in terms of being able to do work remotely doesn't apply to many parts of our operation. Today, you cannot build without people, unfortunately. We have to still show up to work, for those of us on the construction sites. We have to still show up to work, for those of us that work at our fertilizer plants.


John Mannes:

And just to give folks a sense, how many folks are there roughly within Tekfen that are working in some of these field types of roles?


Kris Kemeny:

20,000, approximately. Yeah, it's about 80% of our workforce is in the field, which means in a factory, in an orchard, on a construction site. That's part of a reality I think for individuals that are working in these industries. They are critical and they can't be replaced with anything we have available today, and so we've had to ask them to continue to show up to work.


John Mannes:

Coming out of this whole experience in the last six months, we talked about how volatile it's been, we talked about differences across geographies. What are the top two or three things that you're most excited about that you'd like to see founders working on?


Kris Kemeny:

The last six months have exposed the whole world, but particularly these industries, to three big shocks, three large buckets of disruption. Demand, supply chain, and work process or labor. All of this has exposed the high level of vulnerability and lack of modern resilience that the industries of feeding, building, and supplying the world operate in. The most impactful solutions are all going to address one of three sets of problems. They're going to make these industries less environmentally impactful. I think that's key to any future we want to live in. They're going to make them less labor intensive, at least as an optionality. That might come in the form of automation, robotics, or a broad mentation, and they're going to make them less analog, and that's going to create new opportunities to optimize how these industries operate.


John Mannes:

From Tekfen's perspective, was there any critical technology investment or work that had to be done on your side in order to help folks get back to work?


Kris Kemeny:

In many of these industries, the status quo was always to walk and talk, and now we're having to shift to sitting and clicking, particularly on the productivity and management and progress tracking. That's only possible if you've taken from pen and paper workflows and turned them into digitally enabled tools, datasets, and optimization paths. The two medium term needs that will be addressed and are being addressed by technology that we're on the lookout for have to do with environmental impact and supply chain resilience. These industries today are responsible for probably about three-quarters of global greenhouse gas emissions through energy consumption and emissions. And when you think about their supply chains, as I mentioned earlier, there's a highly concentrated, highly price-driven, and consequently highly vulnerable set of supply chains that power and underpin the way that we're feeding and building and supplying the world today.


John Mannes:

Okay, so given all of that, I mean, I think that also provides an interesting context, especially for founders based here in the United States thinking about a lot of the solutions and deployments ultimately are probably going to happen on the ground in Turkey, in Europe, in parts of Asia, especially when we think about things like autonomy. I think there's an interesting question to be had there around deployments and in a lot of these geographies that are frankly very far away from a lot of founders here in United States, there's some interesting open questions around automation, particularly as it relates to the economics of automation and areas outside of the United States. Do you guys have perspective there around what types of technologies you've seen have been most successful in deployment in these regions and maybe just tying that back to open opportunities where you have yet to see enough companies being started?


Kris Kemeny:

Yeah, so I think that's a great question. These industries, when you think about construction, when you think about commodities are inputs manufacturing like fertilizer, the truth is there are a lot of similarities, but each of these have regional analogs because there's economic and business incentives to have more localized or at least regional production and service capabilities. We focus on investing in businesses that we think have global applicability in terms of their solution and potential adoption. That being said, adoption is a curve and happens over time, and specifically when you're thinking about growing your business and expanding into new geographies, like, for example, Europe, Turkey, or the Middle East, you have to be aware of the local environment, price points, language, connectivity, communications, kind of regulations. All those things come into play.


Kris Kemeny:

As you mentioned, the breakeven point for adopting certain technologies is highly dependent on the economics and the prevailing wages of a certain area. Obviously, when you think about high wages being paid to, say, a skilled laborer in the Bay Area or New York City, it's going to be higher than the equivalent worker that's working in, say, the south of Turkey. And so the adoption will come a couple of years later when the price point makes a little more sense, but that is the benefit of technology, is that it does scale over time. It does allow you to provide the same technology, maybe not in perfect sequence, but hopefully over time to be able to diffuse into and benefit the whole world.


John Mannes:

I think the same question could be applicable on the workflow automation side, definitely on the supply chain side, understanding that you guys are looking again to invest in the macro trends and are prioritizing that maybe over a specific arbitrage opportunity in one country or another. The main question that I'm just trying to get at is, from a founder's perspective, if you're thinking about automation or workflow automation or supply chain in a geography that's not the United States and you're looking with everything that's happening with COVID and everything that's happening with the broader economy, it's pretty clear that certain regions are doing a lot better than other regions, that, that is very dependent with time, that there is a lot of relocation, particularly in manufacturing. And we've talked about this on other episodes where folks that are producing in China have opened up second facilities in India or Vietnam, folks that were maybe looking to have a single office in London are looking to have an office in both Asia and also Africa.


John Mannes:

There's just a lot more diversification that we're seeing across supply chains, across manufacturing, across construction, and I'm just trying to think about specific lessons for founders that they might be able to take away from an organization like Tekfen as they prioritize what to build to any extent that that can be informed by variances and exposure from other geographies and other industries within those spaces?


Kris Kemeny:

Yeah. Look, I think workflow and digitization happens with more customization, and so there's increased opportunity for localized targeted innovation to be created, because it takes almost as long to build as it does to adapt a solution to a different language. And then you have to think about the unique workflows of doing construction on a pipeline project in Azerbaijan, or you have workers who speak many different languages. You might not always have great connectivity. Not everyone has cell phone. So how do you think about digitizing that workflow? If you're working with a large contractor like Tekfen, we likely have some unique requirements that are more specific to us than maybe another contractor. And so I think there is real opportunity to build a best in class and successful business by finding these unaddressed opportunities and working with partners to create something that fits the local language, the custom workflow, the unique requirements of specific types of construction in specific regions and for a subset of the customers.


John Mannes:

Yeah, that makes sense. If you were to distill all of that into some simple advice for founders, what would you say?


Kris Kemeny:

Make sure that the users, that the data complexity, that the lack of connectivity, that the general environment and needs are being taken into account when the solutions are developed. We think those two things have to go hand in hand.


John Mannes:

Well, thank you very much, Kris. I really appreciate all of the amazing context that you've given us and exposure to a number of industries that I know folks are just dying to learn more about. So thank you so much for your time, Kris.


Kris Kemeny:

Thank you, John. Really appreciate it.


John Mannes:

While there's likely to be some lag time in the adoption of autonomous machines in geographies with less tight labor markets, supply chains are the unifying achilles heel for any industrial company, regardless of operating context. Many supply chains have become so consolidated over the last few decades that they expose businesses to immense geographic risk, and we've seen that play out in real time with COVID. Companies around the world, on both the supply side and the demand side of production, are seeing more change than any time in recent history. This change is bringing opportunity to companies that can build and scale global solutions that leverage local knowledge to solve cross-border problems. 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 all of the industries discussed here today 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:

Previous Episodes

While most industries have had enough to manage with Covid-19, the oil and gas sector has had to manage the pandemic, along with a fierce price war between Russia and Saudi Arabia and broader existential questions about its identity in the face of the energy transition.

In this conversation between Iain Cooper, a nearly 30 year veteran of multinational oil field services company Schlumbrager and current CEO of drone gas emissions inspection startup SeekOps, and BSV investor John Mannes, we discuss how each facet of the oil & gas industry has been impacted by Covid-19 and unpack the impact of these macro shocks on technology adoption.

Iain Cooper:

The oil industry got hit with the double whammy of COVID and the depressed oil price.


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 seven of Future Proof. Today we're talking with Iain Cooper, fresh off a nearly 30 year run with multi-national oil field services company, Schlumberger, where Iain ran Research, Product and, ultimately, Corporate Venture. Iain has taken up a new role as CEO of SeekOps, a drone startup providing end-to-end gas emissions inspections.


John Mannes:

The oil industry has no comp for the amount of change it's had to withstand in the last year. For most of the economy, COVID slashing demand and forcing work from home upon office workers was enough to cope with, but oil has had these normal side effects mixed with a cocktail of other woes. From a high speed collision between Saudi Arabia and Russia that resulted in the drastic oversupply of oil and subsequent market crash to the broader energy transition that has the entire oil and gas ecosystem of producers and service providers grappling with their role in a post oil economy, the net result is an industry that continues to be hungry for technology to facilitate a smooth energy transition and keep operational efficiency moving in the right direction. Welcome, Iain, let's start off with a bit of background.


Iain Cooper:

So Iain Cooper. Scottish spelling of Iain, so born in Inverness, Scotland a long time ago. Joined Schlumberger about 30 years ago, straight out of doing a PhD in meteorology, of all things. I still keep a keen interest in the weather. Spent time in Schlumberger developing and managing technology development, R&D in a variety of business segments, cross drilling, fracturing, cementing. Then about 12 years ago, I founded a VC group within Schlumberger and we wanted to be a unique kind of corporate VC, where we really partnered with the companies we invested in to adopt or accelerate those companies into the oil field.


John Mannes:

Awesome. And we're just so lucky to have you, the wealth of experience. Every time we sit down and have a conversation, I learn something. So listeners will learn a lot from this, for sure. So maybe just to start off, why don't we give listeners a little bit of a rundown on what's been happening in oil and gas in the last six months? And I know it's a lot between COVID and geopolitics and oil prices.


Iain Cooper:

The oil industry got hit with the double whammy of COVID and the depressed oil price. Some would even question that we ever came out of the last downturn. And certainly companies like BP publicly saying, "It's not lower for longer. It's lower forever," certainly, I think make everyone rethink how they look at technology development, technology deployment in those industries.


Iain Cooper:

The main thing I've seen, and particularly from the operators and certainly now from the service sector as well, has been to focus on the energy transition and how they participate in the de-carbonization of their industry. But also to transition into the renewable space, into the hydrogen economy, into lithium production, which was something Schlumberger did just before I left with a public investment into a small company in technology. That's been the main trend, is seeing how they participate in what to them is a very new area and to me, the dichotomy between the service sector and the operators who have very different approaches in how they address the transition.


John Mannes:

The first lens to view oil and gas, of course, is the traditional upstream, midstream, downstream framework. Are you seeing that technology investment in de-carbonization in all three of those spaces as a main priority? Or are you seeing any differences in one space or another?


Iain Cooper:

The main focus I've seen has certainly been around the upstream side. That's primarily where I've operated, of course, as well. Certainly we're starting to see it come into the midstream side. I would say downstream certainly has always had a focus on emissions, perhaps less so the upstream space. But I would say the focus on the upstream side in terms of investment over the last few years has really been on lowering cost of service delivery, lowering cost of equipment, removing personnel from hazardous environments and from the well side in general, and then looking at consistency of delivery, service quality.


Iain Cooper:

So obviously there's been a big focus on digital transformation to support those kinds of activities. And I would say that's really been the key area across the whole of the oil and gas domain, upstream, midstream, downstream, has been the digital transformation, which has perhaps been a little slower and taken a little longer than some other industry verticals.


John Mannes:

And then the other lens that I think a lot of people think about the oil and gas industry from is oil field services versus the traditional majors. And so if you're comparing a Halliburton or Schlumberger in terms of how they think about technology with an Exxon or a Shell or a BP, how would you explain that dichotomy and where you're seeing each of those entities focus?


Iain Cooper:

That's a very good question and it's always been one that has baffled me a little. And again, in the 29 years I was there is, how can they work together on technology development, the operator and the service company better? Because certainly it's a competitive market in terms of pricing for the services. I think it was unique that the service sector really was a follower when it came to venture investment. So certainly you had the bellwether investment groups like Chevron and this year at Conoco. And now, of course, BP. And, of course, BP Ventures actually started with energy transition technologies, moved into downstream, upstream oil and gas and then reverted back into renewable energy. And the service sector has only really just participated in that energy transition sector.


Iain Cooper:

What's been interesting as well has been the number of co-investments I think the service sector has now done with the operators because obviously the early adopters, early customers are some of the portfolio companies there. So for something that perhaps shouldn't work well together, it's surprising that they have. And I think it's really due to a lot of the personnel that have been in the VC base between the operators and the service sector. I think there's been an openness, frankly, perhaps that you see more so than the operational side.


John Mannes:

All right, interesting. So one thing we hear a lot, at least on the traditional institutional venture side, is that getting adoption through an oil field services company can actually make more sense as a startup than trying to go after one of the majors. Do you think that still holds true?


Iain Cooper:

As with all here, I think it depends. It depends on the exact stage that the technology's at. Sometimes it's better to have a broad interest across multiple operators just because the environments can be significantly different. Certainly the operators don't necessarily want the service companies involved too early, particularly if a service company is an exit for that portfolio company. So you may see an operator Series A funded portfolio company resist a Series A investment from a service company just because they really want to explore a much broader domain with that portfolio company. And then perhaps when it looks like one of the service companies is really probably a more suited exit for them, to then bring them in at a later stage at B or C.


John Mannes:

There were a bunch of themes you brought up in that overall background there, partly the energy transition piece, part of thinking about remote work and what's happening in the oil industry right now, post COVID. I want to tackle a couple of these items. You mentioned that you had left Schlumberger after nearly 30 years there are now at a company, SeekOps, that's sitting in the middle of this one boom in interest on the regulatory side and how do we capture and measure a lot of these methane emissions, but then also very timely with what's happening with COVID with respect to remote work and trying to figure out how to collect some of these measurements at distance. So can you give folks just a little bit of background on that and where you really see the opportunity there, particularly post COVID?


Iain Cooper:

I was always very impressed with the accuracy of their technology. The fact that they were agnostic to the platform they deployed the technology on, I think it was obviously a little fortuitous that they're already focused on remote working with their drone deployed services. But there's always been a consciousness around removing people from dangerous environments as well. You were starting to see more and more remote operations, autonomous operations. And, in fact, the next stage beyond simple drone deployment, it's completely autonomous deployment. That's certainly something that I think attracted me to this space.


Iain Cooper:

And then obviously the push towards environmental sustainability governance from some of the larger companies really taking note that can't fix leaks without really measuring their intensity. Even when I was at Schlumberger, obviously that was a measurement company from its formation. It was natural to look at something that would really quantify leaks, not just detect them, because I think it's important to know exactly what it is you're looking at in terms of emission rates, not just from an environmental and sustainability reporting perspective, but really what is the solution to fix it and ultimately avoid leaks in the future.


Iain Cooper:

To me, there's a cascade of scales around emissions. Schlumberger was an investor in GHGSat, which looks at very large scale leaks, that can cover a huge amount of space, obviously from space. They just launched their second satellite successfully as well. And then that can be complimented by the smallest scale measurements all the way down to the handheld sensors that are used today. Ultimately, an operator doesn't want to have all of these providers separately. They're going to want to have some sort of integrated service. And that puts the camera back on the integrated service companies as being the ultimate aggregator of these kinds of technologies.


John Mannes:

How do you think about the lens with which investors view these types of companies? And you wore that hat for a number of years on the venture side. Sitting in Silicon Valley right now, from the perspective of an institutional VC, we all know the history, right? Like Kleiner Perkins with their Green Growth Fund notoriously put Uber into their Green Growth Fund, but just sitting here and trying to think about how to even categorize these sorts of companies. You yourself mentioned that they're in part around operational efficiency and service efficiency. You have these new regulations. You need to capture this information. This is the cheapest, most accurate, most efficient way to do that.


John Mannes:

On the other hand, there's also this amazing clean energy value proposition. How are all these folks actually looking at these companies? When you talk to the senior leadership in some of these oil field services companies or traditional majors, do they really think of a company like SeekOps as a clean tech company or a company that would be fitting of a green growth title? Or is it truly a lot more around operational efficiency?


Iain Cooper:

That's a very good question. And I think a lot of the operator VCs were burnt by [Clean Tech 1.0 00:00:10:09]. Are we in [Clean Tech 2.0 00:10:09] still? I think we're probably beyond that. And I like to think of it more broadly as the energy transition. Where does a company like SeekOps or GHGSat fit? I think if we're helping reduce emissions or the de-carbonization of the oil and gas business, to me, that's a clean technology. But, of course, it's also about operational efficiency. So I don't think the two are mutually exclusive. I think you can have both.


Iain Cooper:

And, of course, we're not the only ones in that space as well. I think what's interesting as well in this space is the number of beta aggregators, like the [Kairos 00:10:50] folks, who are looking at really doing some smart analytics on the huge volumes of data that people like ourselves and GHGSat will be producing. And I think there's room for everybody in this space, but it's going to take someone to actually pull it together to get a complete holistic solution. That is ultimately going to be a clean technology solution because it's going to lead to de-carbonization.


John Mannes:

Do you think the operational efficiency piece is a prerequisite? Do you think SeekOps is successful, if there was theoretically no angle for operational efficiency?


Iain Cooper:

I think you have to have an element of that because that's what the operators are looking for and certainly one of the specifications they give you. We've got to drive cost out of the system. Cost is part of that operational efficiency and personnel reduction is another one. And technology like SeekOps certainly ticks both of those boxes, but I think you have to have both to really give a full solution.


John Mannes:

Let's talk a little bit more about the operations specifically within the oil and gas sector post COVID. One of the industries in the United States and globally where you have just so many remote workers and folks that are working in the field, it's virtually impossible to think about remote work in an industry like oil and gas in the same way that you do in technology, where for most of us we've been working from our living rooms and bedrooms for the last few months. What are you seeing as far as operational changes in the sector as a result of COVID? And how many of them do you think are likely to stick around?


Iain Cooper:

Oil and gas certainly has always been an industry that focused, number one, on health and safety. I think all of the health protocols put in place, particularly for offshore workers, workers that are going to be in close proximity to rigs, were not abnormal for that environment. So I think in terms of the standards within the industry, have always been above and beyond reproach. I haven't seen anything different to say otherwise in a post COVID environment.


Iain Cooper:

As we're going through the digital transformation as well, that's certainly something that will continue to accelerate post COVID. Learning from the huge volumes of data that we continue to acquire in this business and how to operate more efficiently, more remotely and piggybacking off some of the increases in telemetry rates and data security will lead to [inaudible 00:12:53] offshore and operational environment. So I don't see that changing much either in the post COVID world. There'll certainly be a little more nervousness to go into the industry. And we've seen that. I've got kids of college age that certainly would think twice about the energy industry in its current shape or form. I think partly that's an education issue as well, frankly, because I still think it's one of the most exciting industries to go into.


John Mannes:

No, that makes sense. And oil and gas is always interesting to me too, just because of the size and scale of the infrastructure projects themselves. These aren't things, as you know, that are decided and rotating like six to 12 month budget decisions. These are two, three, four, five, 10, even sometimes longer decisions that are made as to where drilling is going to occur, where infrastructure investment is going to happen, how that is going to work from a labor standpoint. And something like COVID, I would have to imagine, is a blip on the radar when it comes to the overall timeline for a project or a well.


Iain Cooper:

It's not just ourselves there. I think it's the extraction industries in general. I've talked to a couple of the major mining companies and they're certainly seeing and looking to technology to transform their business as well. And again, primarily digital, but also looking at leveraging things like oil and gas technologies so that they can be more efficient.


Iain Cooper:

And there always used to be this disparity between price points between oil and gas and mining, but obviously as oil and gas is focused on lowering cost of service delivery or in cost of CapEx, looking at the mining sector, they're having to go deeper, have more complex environments in which they're working for their resource. You're starting to see alignments there that perhaps you wouldn't necessarily have seen before. So I think there's another opportunity there for broader technology investments that span broader extraction industries.


John Mannes:

You mentioned labor, in particular, a second ago. And you talked about education as being a bit of a barrier in the sense that folks aren't as interested in oil and gas at this time in history. We've all watched the rise of RigUp, particularly on the labor marketplace side. And I think of all of the companies to come out of the oil and gas sector in the last couple of years, that's probably one of the most prominent, at least out here in the Valley. What are you seeing about that value proposition, again, particularly in a post COVID world and one world oil prices are where they are? Are you still seeing those labor markets as tight as they were a year or two ago?


Iain Cooper:

If we got patent formed, it would have been created. It was almost a necessity, I think, to have something like that marketplace created, particularly given with a loss of experience out of the industry, particularly out of the operators and service companies over the last five or six years. I think the ability to really drill down into the specific personnel for what is still fairly skilled jobs, it's going to be interesting to me being on the outside now to see how the service sector evolves, because obviously the service sector had always focused on technology and the skilled services that they provide with their specifically owned personnel. You may see more and more third-party technology delivery platforms moving forward.


John Mannes:

Well, that was what I was getting at here with this, is that we've seen the rise of full-stack businesses, companies that are trying to provide some sort of end-to-end value add service enabled by technology, which in any sense... I was sitting here last night, thinking through some of these questions and trying to draw the exact distinction between what it means to be a third-party services provider in oil and gas versus a technology company. At a certain point, they become the same thing. So when you think about the future of this world, do you expect to see more RigUps? Do you expect to see more folks that are tech enabled and providing services in the oil and gas industry at reasonable margins that are able to just start eating some of these processes away entirely?


Iain Cooper:

You're absolutely right. I see it not just beyond oil and gas as well. I see many service sectors where you had the brain trust, for want of a better word, within specific companies. If you look at what the young workforce want today, they don't necessarily want to tie themselves to a specific provider anymore. So I think the marketplace will proliferate.


Iain Cooper:

Now, whether again, it comes crashing down again or there's some consolidation... If I was entering the energy space now, it's obviously a very different world from when I joined, why do people join the energy business? It was exciting work, exciting environments and the ability to travel. That hasn't gone away. I just think the mechanisms by which you can do that have grown significantly.


John Mannes:

Do you see specific opportunities on the technology side for tasks that could easily be outsourced or automated by some kind of third-party technology provider, particularly things that would contribute significantly to margin to a lot of these businesses?


Iain Cooper:

We've seen that with some of the investments folks like Honeywell and Siemens have made into the oil and gas space. I think they clearly see there's a role for them in assisting with the automation of these industries. And so, yeah, absolutely. I think you'll see more perhaps non traditional oil and gas companies see that there's value in that space, whether it's around the digital side or the hardware side of automation.


John Mannes:

Are there specific tasks though, I guess, when you think about the industry that you think are particularly ripe for automation, given the state of AI and machine learning and RPA and such today?


Iain Cooper:

You should be able to drill a well, drill and complete the well, completely, remotely and autonomously. Making up connections, swapping out drill bits, following a trajectory, that's all something that really could be done by computer. Production enhancement fracturing as well does lend itself for automation. Again, most of these things you're following a plan or then responding to real-time data as you modify the plan on the fly. That's a general optimization skillset that certainly could apply anywhere in the industry.


John Mannes:

What about procurement? We talked a lot about CapEx here. Is that an area where you see a lot of opportunity for automation or outsourcing?


Iain Cooper:

Whereas in industry, manage huge amount of equipment globally, moving it all over the place, perhaps less than optimally in some cases. And so again, technology that can facilitate the optimization of logistics, à la Walmart, I think is certainly something that Exxon wish they were certainly looking at.


John Mannes:

One other big category you and I have also talked about in the past is decommissioning of aging infrastructure. This is something we've been paying a lot of attention to just given the amount of spend from oil companies that's been going into managing aging infrastructure that has to continue to run and then decommissioning pieces that are just basically excess at this point. So I'm curious what you're seeing around technology for those particular applications and whether you've seen any tech companies capturing some of that spend and solving real problems in the field.


Iain Cooper:

Schlumberger invested in one particular company, BiSN, that was developing liquid metal seals so that you would not necessarily have to have large amounts of cement, which had always been known to be potentially a leak [inaudible 00:00:19:14]. They actually grew significantly during the downturn, again, primarily driven by plug and abandonment. When there's typically a downturn, you do see the operators refocus on the P&A type of jobs. I always felt that was a good opportunity again, to deliver holistic services around that while decommissioning. BiSN certainly was one of those that stood out for me. And again, obviously it was one of those that had an interesting mix of investors that was a service company and operator and even competitor service companies being on the same investor role.


John Mannes:

Do you see opportunities as well for software there? Or I suppose this goes back to some of the earlier discussion around hardware and operations to solve real problems in this industry. Is there still an opportunity for a software-only company to be able to make a major difference in something like aging infrastructure?


Iain Cooper:

I think so. I think decommissioning has always seemed to be at the low end of the market where margins tend to be a little tighter. So anywhere where you optimize on the planning, logistics, equipment, relocation is ripe for innovation. And so I think, yeah, certainly on the optimized planning side, I would say there's an opportunity there.


John Mannes:

Let's talk a little bit about then maybe refining optimization, just like massive multi-variable problem. What we've seen at least in the market in the last couple of years is just the excess capacity driving down margins. You talked a little bit about logistics. Can you give folks a little bit more context on where the opportunity might be there and if you were a founder, how you might go about starting to solve some of those problems?


Iain Cooper:

I was thinking more on the upstream side there where you're mobilizing multiple crews to multiple locations with multiple equipment. So you've got a really large multi-parameter optimization problem, particularly scheduling of personnel on top of that. And this is where someone like a RigUp actually has quite a lot of influence, I would think because they've got the personnel directory by which they could potentially optimize particular crews. And you could certainly imagine combined crews from multiple service companies, perhaps in the future, based on location, skillset, access to tools. There's an opportunity to change the paradigm of operator contractor service company into a more open kind of delivery.


John Mannes:

You emphasized upstream. Is that at the expense of downstream in the sense that maybe there's just less of an opportunity there?


Iain Cooper:

Downstream is a little more static. Now, you've got a refinery. It's a bit more like a traditional chemical company. There's still quite a bit of optimization that can be done and obviously you're monitoring to optimize processes within the refinery. But in the upstream side, you really got a [inaudible 00:21:46] space that you're trying to manage.


John Mannes:

Specifically, maybe focusing on upstream for the purposes of this conversation, where do you see the biggest opportunities for increased efficiency on just pure workflows?


Iain Cooper:

We started to see that. We invested in Possible at Schlumberger, which was looking at standardized work instructions and being able to communicate, that have sign off-on instructions and then also be able to give immediate assistance to folks when they needed to look at repairing a valve, et cetera. Anything that facilitates the ability of people in the field to respond quickly to environments that are not normal or not expected, will be important.


Iain Cooper:

So being able to do that cradle-to-grave management, of being able to schedule a job, put the people in place, schedule the job itself, have systems that can manage change in real time while you're doing that job and then ultimately spit out the automated reports needed to either validate the job or for regulatory reporting that touches on security, data management, analytics, telemetry. It's a very complex problem that we're trying to solve, as complex as deep space missions. And it's right here at home.


John Mannes:

If we're thinking about increasing... Obviously, there's only so many levers you can pull in business. One of them being cutting costs. The other one being increasing revenue. If you're a startup founder and you want to solve one of these two problems within oil and gas, what would be your recommendation?


Iain Cooper:

Cost always comes first. The operators are always trying to drive. You do see cycles. It does depend on even the individual personnel within those companies. We're always being driven on price.


John Mannes:

Awesome. Well, thank you, Iain, so much. This was incredibly interesting and really thankful that you were able to spend some time with us and share some wisdom with these founders.


Iain Cooper:

Thank you. I never tire of talking about the time I had in the VC. I obviously loved my time on the oil field side with Schlumberger. [inaudible 00:23:37] no better company to have spent 29 years with in terms of being able to access the world and look at a broad range of technologies.


John Mannes:

A unique facet of the oil industry is the size and scale of infrastructure and operations investments around the world. While oil's had to reckon with more change than most, it has one of the strongest foundations of any industry on the planet. Budgets and returns are thought of on much longer time horizons than your average tech startup. This enables the industry to move forward amidst volatility. Startups like RigUp has shown the world how disruptive technology can be to the oil industry. And the next set of unicorns in the space will help oil producers find their footing in a world transitioning away from oil. Tech-enabled services, and automation more broadly, is poised to become even more important to the industry as pressure to control margins becomes even greater. We see opportunities for tech companies to build massive businesses supporting the decommissioning of aging infrastructure, automating procurement, supporting midstream operations and optimizing both labor and logistics.


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 Basis Set's full research on oil and gas 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:
Oil & Gas

73% of companies surveyed in a new report, identify as having encountered major issues in their supply chains as a result of Covid-19. The disruption has been so significant, that major brands are reconsidering once sacred supply chain doctrine. Companies are considering moving operations out of China, holding more inventory in stock and collaborating with competitors to source.

In this conversation between David Shillingford, the chairman of DHL Resilience360 and CEO of its holding company Rising Tide Digital, and BSV investor John Mannes, we discuss a new report quantifying the impact of Covid-19 on global supply chains and discuss the implications for the tech ecosystem.

David Shillingford:

... Where companies were not as prepared as they expected to be, or would like to have been.

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 six of Future Proof.

John Mannes:

Today, we're talking with David Shillingford, the CEO of Rising Tide Digital, a holding company that alongside DHL owns Resilience 360, a software platform that helps companies manage their supply chain risk.

John Mannes:

Six months into the pandemic, we finally have data to draw conclusions about the impact COVID-19 had on global supply chains. Resilience 360 and the Business Continuity Institute are publishing a report concluding that over half of companies had no plan in place to cover extreme supply chain shocks. As a result of disruptions, nearly 60% of companies surveyed are looking to diversify their supply chains post COVID with China facing the biggest loss in supplier demand. Nearly 70% of companies plan to source goods more locally post pandemic and over 12% of companies plan to increase their use of outsourced logistics services like 3PLs to move warehousing staff off full time payroll for greater cash flow flexibility.

John Mannes:

David, thank you so much for joining us today. Why don't we get started? Just tell us a little bit about Resilience 360 and your connection to DHL.

David Shillingford:

Sure. Thank you for having me on the program. Resilience 360 was created inside DHL's global innovation center and over the years has been built out across the DHL network and hundreds of large shippers across the world into a global end to end supply chain risk management platform that is looking both at supply and supplier risk, as well as logistics. We're able to have a global view of our client's networks through Resilience 360 and predictive models that are predicted during planning at the shipment level and to be able to look at supply and networks to multiple tiers.

John Mannes:

And tell us a little bit about the research that you and your team have been putting together.

David Shillingford:

We partnered with the Business Continuity Institute to publish a report that was based on a survey of over 300 companies in over 70 countries to try and get a broad view of how companies have been responding to COVID outbreak and things that they've done to change their operations and to get some insights as to whether those are temporary or more permanent.

John Mannes:

Would you be able to give listeners a little bit of background on the key takeaways from this report? Particularly what's most important to folks in the technology space.

David Shillingford:

Well, companies were not as prepared they expected to be or would like to have been. They had fairly good visibility to tier one and suppliers beyond tier one, that varied quite a lot from industry to industry, but certainly are investing more in that, the diversification of suppliers and desire to onshore is a trend that we saw in the report and a trend towards more outsourcing of logistic services, more use of 3PLs and more focused on demand forecasting and the technology that can make that a more agile process.

John Mannes:

Sure. Well, I'm really excited about the discussion today. It's a rare opportunity for us to actually have some data to start to think about the impact of COVID-19 on supply chains. I want to start off with one high level, almost philosophical discussion around this report. Specifically centered around the way in which organizations think about planning for events that are in some sense, very random. This report is primarily focused around efforts that companies can take in order to make their supply chains more robust, more resilient. We're talking about pretty drastic changes around even fundamental things about how inventory should be kept. When you talk with these corporations and you interact with them as they manage supply chain risk, what advice do you give them to make sure that they don't overreact?

David Shillingford:

There's a few things that are important to add to that as context. First is that the pandemic should not be seen in isolation for a couple of different reasons. In terms of the pandemic itself, it's unclear quite how long the disruption is going to go on for. So, there are actions that have to be taken in direct response to the pandemic. There is every chance that there will be future pandemics.

David Shillingford:

And even if it isn't a pandemic, there are other risks that are structural and that are macro. Climate change would be an example of that. Nearly all of the types of actions that companies need to be taking to most effectively respond to the outbreak, are actually very similar to the types of actions that they would be taking to respond to large geopolitical, natural hazards that we know are going to happen in the future. We don't know how big they are going to be. We don't know where they're going to be. But we know they're going to happen. And it is more often now that companies are saying, "Okay, so I can see why I need to do this. The question now is how do I do it? How do I get from here to there? And how do I justify the return on investment in doing so?"

John Mannes:

One piece of data that stood out to me was how many companies were thinking about holding more inventory on hand post-COVID. And it flies in the face of the wisdom that we at least think about in the venture community around trying to reduce the amount of inventory that companies have to hold and using machine learning and data analytics to try to reduce that. How do you square those two things together?

David Shillingford:

Good question. The answer to that comes down to breaking the data down. In some cases, it makes sense to add more inventory. In other cases, it makes sense to reduce inventory. And that's really on a knife edge at the moment because you've got a very, very strong push and pull between a company saying, "Well, I ran out of inventory as a result of the pandemic. I need more." Which may or may not be correct. And the other end of the spectrum, companies saying, "I have to preserve cash. So I have to reduce inventory overall."

David Shillingford:

It really comes down to choosing the right product to invest in and reducing inventory elsewhere, which of course is where data and AI come in, so that you have more advanced and more dynamic demand sensing, you have more advanced and more dynamic supply risk sensing, and in doing that, it allows you to have the right product in the right place at the right time, and that overall will reduce the amount of inventory that you need and increase profitability, reduce working capital.

John Mannes:

From that framing, it makes sense, right? You think about the overall push to make supply chains more resilient, more nimble, more informed by data, that just becomes about collecting more granular data and analyzing things at scale, which to your point is a trend that has been going on for quite some time. I'm curious, given your positioning, how confident you are that companies are actually going to start to increase adoption of some of these software tools for things like demand prediction or automated procurement that helped them to have more transparency and more visibility into their supply chains?

David Shillingford:

We are certainly seeing a rush of companies who are saying, "I never put budget against supply chain, risk management. I need to do that now, but I want to do it in a way that is integrated with my planning and execution systems. I want to be able to do it in a way that gives me benefit during delays as well as disruptions. I want to be able to see daily benefit from risk analytics." The growth we're seeing this year, I think, is a reflection of that.

John Mannes:

Have you run into anybody on the opposite side of that spectrum? Saying, "We would like to be investing in this area, but unfortunately given budget cuts or reductions in spend, this is actually less of a priority than it was before." Or is that just not something you're seeing?

David Shillingford:

It varies from company to company, there are some industries that have seen demand surges and others that have seen demand drop off very quickly during COVID. So, where a company sits right now in terms of the organizational health that they have across a number of different factors is going to be pretty important in answering that question right now.

David Shillingford:

Looking over the next six, 12, 24 months, there are very few companies that are moving away from that or saying that it's not something that they're willing to invest in. Exactly how they do, what they invest in, is going to depend very much on where they are in that journey, but the path towards Industry 4.0, the digitalization journey, is one that almost all companies are on in some shape or form, no doubt that that's going to be accelerated. And if there are companies that are, for whatever reason, unwilling or unable to do that, they're going to fall behind pretty quickly over the next year or two.

John Mannes:

Has that been reflected in your own sales? Would you say you've seen a spike in interest and demand for your software products?

David Shillingford:

Yes, very much.

John Mannes:

Three things that stood out to me from reading the report, just in terms of statistics that I didn't really expect to see and that I'm wondering if there is longterm technology opportunity, and one was the rapid increase in demand in the charter industry sector, given the downturn and detrimental impact on air transportation broadly. I just thought that was an interesting side caveat of all of this. There was also some discussion in the report around pharmaceutical companies and efforts towards joint sourcing of materials. Also a category where I am at least not aware of a ton of activity in the startup world or technology world to try to help facilitate that.

John Mannes:

And the third was around trade credit periods and efforts to rebuild supply chains while also having enough trust built into them that companies are able to get access to longer trade credit periods for examples. And then there were many other interesting things as well, even the warehouse space piece that I'm remembering around some of the research that CVRE had done. Did any of those strike you as being perhaps longer term or more interesting to you in terms of the ways in which technology will need to shift to help companies deal with some of that new demand?

David Shillingford:

So often a technology only becomes really valuable when an entire network or a sub-network is using that technology and it comes down to data sharing and, as you noted, trust. And that's the difficult part, to bring an ecosystem into a single technology and really leverage that technology to get some significant efficiencies, whether it's to do with shed sourcing or trade credit.

David Shillingford:

So, that to us is the big challenge and one of the reasons that we made the acquisition of Resilience 360 and they already had the network built, there was already sharing going on across the DHL network and hundreds of shippers. And you can then prove out the system. So getting that flywheel going is actually extremely difficult because you've got to get the data to prove the case, but often people say, "Well, prove it to me before I share my data with you." And people are increasingly and rightly so protective of their data.

John Mannes:

Well, let's dig into one piece of that definitely relevant to us from the machine learning and automation perspective. Supplier data has been something that's been notoriously difficult to collect at scale. In some cases, if you're working with Fortune 500 companies that already have undertaken robust due diligence into their supply chains, some of that data might be able to be capturable. But a lot of it isn't super real time, and even the data that is real time often isn't granular enough to do some of the prediction work that we were just discussing. How do you see that changing particularly post-COVID? Is that going to come a cultural shift among suppliers to start sharing data? Is that going to just take time as software proliferates deeper into those supply chains? What is the right way to think about that?

David Shillingford:

It will take time. But we believe that there are a number of ways in which the move in that direction will be accelerated around COVID, but also around technology. So, essentially for that to really move forward, that needs to be the will to share data and the ability to share data. So the will is shifting in the right direction and that's both on, on the part of the customer and the supplier and the recognition right now that the more data that is shared the better that they will be able to mutually support each other.

David Shillingford:

That's a shift in the right direction, but it's not a silver bullet. It's not binary. It will be gradual and it will ebb and flow depending upon the climate that we're in. But generally speaking, that's moving in the right direction. The ability is what is more transformational and that is the technology that now exists to collect the data.

David Shillingford:

And what we see in the market at the moment continues to be a relatively manual one-to-one data collection process, where the manufacturer is asking the supplier to fill out a survey and more and more there is a degree of commonality across that data collection, but it's still a relatively manual process.

David Shillingford:

What we think is an interesting opportunity is to augment that process with big data ,artificial intelligence, network graph technology, and to be able to essentially build that network from the outside in using data that our client might not necessarily have access to and taking their supplier data as a seed data set, to start building out the network graph from data that we can access from elsewhere, and to be able to infer and define and ultimately refine what that network looks like.

John Mannes:

Do you notice that much of that incentive down to the suppliers, does your data, comes from the larger corporations or the buyers putting pressure on their supply chains? Or do you think there's any way in the longer term that there might be ways to actually incentivize those suppliers directly to start to share more of that data?

David Shillingford:

I would agree that traditionally it has been larger companies that have a significant degree of leverage, essentially mandating that certain surveys get filled out. The incentive is largely to do with having the right business relationship, but it may be that other incentives can be built into those types of programs, but much easier to do that when there's an obvious ROI on both sides of the equation, from the sharing of that data. If one or both parties look at it and shrug their shoulders and consider it simply to be a matter of compliance, then it's difficult to build incentives around that.

David Shillingford:

So, as things move and ultimately out of COVID, there should be a greater awareness of the value of sharing that data and that should make it easier to build incentives around that process at the same time as reducing the inertia of sharing data through technology.

David Shillingford:

And you can look at, take the financial services industry. Insurance is a good example of where an insurer will request a certain amount of data from a policy holder and that has always been an onerous thing that brokers and agents facilitate. But increasingly an insurer is able to go to a policy holder and say, "This is what we think the answers are to our questions. Are we right or wrong?" We see the same thing in banking and know your customer. So we expect that that type of facilitation is going to help quite a lot going forward.

John Mannes:

The comment there around financial services and insurance is actually a particularly interesting and prescient one given this market, and especially given the cash flow discussion in the report for some of these downstream suppliers in any cases that are mid-market or below, in some case SMDs. Have you seen a shift or do you have any data that points to increase in consumption of financial services or insurance products on behalf of that long tail of suppliers that might be an interesting data offload?

David Shillingford:

A number of supply chain specific risk transfer products have been brought to market, and they tend to be either at the shipment level, a buy it when you need it trip transit type coverage, which for a lot of companies just isn't enough and it's hard to access, or they'd be more complete end to end supply chain risk transfer programs. And the challenge there, of course, is getting the data about the end to end supply chain and where the risk really sits.

David Shillingford:

There are significant risk transfer opportunities at both levels of granularity, but only when the data and the user experience exists to make that attractive enough and therefore to have enough policy holders to be able to pull the risk and build traditional insurance products around it. We think in the next five years that that will become much more mainstream, but it has to start with the data and collecting the data initially has to have operational benefit to the policy holder. Not start with risk transfer, but start with operational benefit and then build risk transfer products on top of that data once it's been collected.

John Mannes:

And why do you think that's the case? That it doesn't make a lot of sense to go to market directly as a risk transfer solution, that that operational value proposition has to exist as well?

David Shillingford:

On paper, it makes sense. But in reality, you have the capital assets and insurance company, and then you have a broker or an agent, and then you have a risk manager at the corporation, and then there's another two or three steps between that person and where the operational data exists. And the operational data is siloed across 20 different divisions in 100 ERPs. And getting that throughout that chain, ultimately to the underwriter, there's just too many steps and too much fragmentation of data to be able to do that without a very, very compelling ROI right now.

John Mannes:

You see opportunities down market then, in organizations that perhaps aren't as complex or were more cloud native from day one and have more centralized data system?

David Shillingford:

Yeah. It'll definitely be easier to build risk transfer for products for companies like that. And just to be clear, there's a ton of insurance in supply gen at the moment, but it tends to be more traditional property and business interruption insurance that has four walls around it because it's a factory or because it's a warehouse, but less from an end to end standpoint.

John Mannes:

I'm trying to think about this from the perspective of an early stage company. And obviously it benefits you all to have your own proprietary data that you're collecting from these folks that allows you to start to explore these different products and services that require this data. But I think the question that's probably on the minds of a lot of founders in this space is if you're not one of these larger companies that has access to all of this data and a preexisting customer base, how do you compete? And if you don't compete on data and you don't build products for prediction or analytics that require that data, then what do you build?

David Shillingford:

There are two different types of products that relate to data. One is where you need to have a level of data aggregation in order to deliver value to the market and your clients and the other is where you can deliver value on day one. If you look at the IoT space, if it is valuable to somebody to know exactly where a particular load of cargo is right now and therefore what time you might expect it to arrive, you can create value at the shipment level without having to aggregate.

John Mannes:

The report itself pointed at some interesting trends around companies reassuring and reducing dependency on China. I don't know whether you had data that was granular enough to look at that on a country by country basis, but do you at least anecdotally have a sense for whether that's universally true across global large companies or whether that is particularly emphasized here in the United States where things like the trade war and other macro shocks have been pushing us in that direction for the better part of a couple of years now?

David Shillingford:

The result would certainly indicate that there are people who are looking to move away from China and manufacturing in the Far East, not universal, not in very large numbers. It's going to be very specific to different industries and to different types of companies, different sizes of companies. Because of the interconnections.

David Shillingford:

If you've got three tiers of suppliers in the Far East, to move your middle supplier out of the Far East makes no sense at all because you're divorcing it from the other two suppliers upstream and downstream of that supplier. It'll be easier for some than others. The other thing that relates to this is the acceleration of automation. If bringing my final assembly back to the US didn't make sense five years ago because of the cost of labor, if I'm able to do that with a smaller labor force through automation, then the equation may have flipped on its head.

John Mannes:

Can you elaborate a little bit on the takeaway in the report around increased demand for 3PLs? I'm curious what you've seen with DHL as a case study here.

David Shillingford:

DHL during COVID has been a good example of where scale and variety matters a lot. To be able to have a global network that allows you to switch between modes and between carriers has been a great strength for DHL during COVID. And what we saw in the survey is more companies saying that they would be inclined to use 3PLs because of the level of flexibility that it gives them.

John Mannes:

The report also makes mention of an increase in demand for outsource logistics services as a result of COVID-19. Is that largely driven by these corporates looking for more flexibility from their balance sheets?

David Shillingford:

The more uncertain the world is, or people feel that it is, the more flexibility and agility they are looking for and outsourcing is certainly in line with that.

John Mannes:

Okay, let's wrap up then with just some general advice that you have for founders in this ecosystem. If you are going to start a new venture in supply chain, how would you think about vetting an idea and building something of value to many of these Fortune 2000 companies that are clearly at an inflection point rethinking their supply chains?

David Shillingford:

The advice I'd give to a startup and to entrepreneurs is to think very carefully about market adoption and scaling. There's a lot of problems to be solved in supply chain. There's a lot of great technology in the space, but there is often a big gap between that and market adoption because by and large, the clients are very large. They are fragmented, they are looking at a lot of different options and speed to market and speed of adoption is something that will either significantly aid a startup or become a significant impediment. So, thinking about the go to market plan, market adoption, how do you get in front of the right person at the right company is always important, but critically so when we look at the supply chain space.

John Mannes:

Well, thank you so much, David. I really appreciate you taking the time to give us all this background. The report was super helpful. I hope folks do check it out and read some of the additional statistics that were collected and wish you all the best.

David Shillingford:

My pleasure. Thank you for the opportunity.

John Mannes:

It's clear that COVID-19 is changing supply chains for the long run for some of the biggest companies in the world. We expect to see lots of supplier turnover in the coming months as smaller manufacturers are unable to stay afloat through the ongoing crisis. Entirely new supply chains will be built in new markets. Japan and Osteon member countries have already been highly proactive in offering financial incentives to move operations within their borders.

John Mannes:

New companies will be born from this volatility and turnover, both companies making it easier to identify vet and onboard suppliers, as well as companies making it easier to source and produce locally. Especially thoughtful approaches will help companies retain critical cash in these uncertain times. For more statistics on COVID supply chain impact, check out COVID-19: The Future of Supply Chain report, available from DHL Resilience 360's site. 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 logistics@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:

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

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