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  • Writer's pictureTania Tugonon

Default Dead - Default Alive - Market Touch points

November 29, 2023

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What Happened to Convoy?

When I first heard the news that Convoy was collapsing, it felt like a shock. The shock was not to the same degree as the Bank fallout last spring, but still a major shock. Other than media and press releases, I have no history or background on Convoy but wondered how a top-tier VC-backed Company that had raised over $400M in new equity and debt from prominent investors just 18 months ago could have crashed so fast.

Why does this outcome matter to me? Having worked in the venture capital and innovative tech ecosystem since 2006, I have a sense of pride for high-growth, disruptive companies that are making an impact. Convoy fits this bill. Also, I specialize in capital placement and advise mid to late-stage VC/PE-backed companies, so whenever an event like this happens, even if I am not involved, I try to learn something new and valuable.

About Convoy

Convoy is the nation's leading digital freight network. The Company moves thousands of truckloads around the country each day through its optimized, connected network of carriers, saving money for shippers, increasing earnings for drivers, and eliminating carbon waste for the planet. Convoy uses technology and data to solve problems of waste and inefficiency in the $800B trucking industry, which generates over 87 million metric tons of wasted CO2 emissions from empty trucks. Fortune 500 shippers like Anheuser-Busch, P&G, Niagara, and Unilever trust Convoy to lower costs, increase logistics efficiency and achieve environmental sustainability targets.

Investment History (historical press releases from Techcrunch and others linked below)

Series E - Convoy raises $260M ($160M Equity; $100M Term Loan; and $150M Bank Line of Credit)

Series D - Convoy raises $400M (Equity)

Series C - Convoy raises $185M (Equity)

Series B - Convoy raises $62M (Equity)

Series A - Convoy raises $16M (Equity)

Series Seed - Convoy raises $2.5M (Equity)

All in, it appears the Company raised over $800M in Equity (some of the funding at the later stage may have been Secondary share purchases, but this is not confirmed), and had access to up to $250M of debt (actual amounts available and drawn may have been less depending on the structure of these credit facilities).

The Sudden Announcement - Convoy Shuts down

On October 19, 2023, FreightWaves reported that Convoy would be "closing down its core business operations."

In a memo announcing this, Convoy's CEO and co-founder Dan Lewis wrote, "We spent over 4 months exhausting all viable strategic options for the business. However, none of the options ultimately materialized into anything sufficient to keep the company going in its then current form."

Lewis added that the ultimate reason for the shutdown is caused by Convoy being in “the middle of a massive freight recession and a contraction in the capital markets. This combination ultimately crushed our progress at the same time that it was crushing our logical strategic acquirer — it was the perfect storm.”

Yes, there is an ongoing freight market bear market. Yes, the freight industry is hampered by volume losses, margin compression with higher operating and fuel costs, and more trucks available for less freight. Still, why did this all lead to the Company shutting down abruptly?

Outsider Questions and Unknown Answers

In early 2022, FreightWaves made a prediction about major headwinds in the freight industry. In an article dated March 24, 2022, Craig Fuller, CEO of FreightWaves wrote, “After two years of COVID-induced havoc in global freight markets, volatility has started to abate. FreightWaves’ view of the market has become clearer, and the picture isn’t pretty. We think another sharp, painful downturn in the U.S. truckload market is imminent, and it could be as bad as 2019.”

The FreightWaves industry prediction came out around the time of Convoy’s last equity and debt raise. Presumably, the last equity and debt raise was taking into consideration the potential industry headwinds. Or, was the viewpoint different then? Thinking about the situation, I have many questions (that will all be unanswered, but am still curious):

  • Was the Company anticipating a market contraction or major headwinds at the time of raising the last round, or did it catch Management by surprise?

  • Why did existing investors not step up and provide additional equity in 2023?

  • Why did the Company get into a position where they had to run a sale process (presumably they were burning a lot of cash)?

  • Why did the Company pursue the term debt financing in 2022? Were they anticipating market headwinds and thought of the debt as protection? Were lenders underwriting to a growth plan (presumably), or one that showed contraction?

  • Why did the potential sale offers fall through?

  • How was the company recognizing and reporting revenue considering reported year-over-year declines in revenue (marketplaces have gross and net revenue dynamics)?

  • Why was the Company not more aggressive in making spending cuts and reducing its burn (Convoy had made up to four rounds of layoffs in 2023 prior to its collapse per reports, which points to a slower reaction to make necessary expense cuts)?

  • If the Company took secondary sales in the prior late-stage rounds (not confirmed), how may have this impacted the executive teams’ risk-taking?

Failure to Weather The Storm

“Perfect Storm.”

If you read various articles on Convoy’s demise, the phrase “perfect storm” comes up. Yes, we are in a massive freight industry recession (see more here), but ultimately it is Management’s responsibility to weather the storm and stay Default Alive.

In the Hollywood movie, The Perfect Storm (I recall watching this in the theater but cannot remember the location), George Clooney’s character told the crew that they had a choice to ride through the storm or wait it out in safer waters. The downside of waiting it out was they would lose all of their fish catch (and money).

Could Convoy have weathered their own storm in safer waters in some way to stay in business?

Default Dead

In 2015, Paul Graham wrote a blog post titled, “Default Alive or Default Dead?”. Default Dead simply means that a start-up is not profitable and is not going to turn a profit before running out of money. His blog post has resurfaced today by others in the market given current market conditions, and its continued relevance.

I am sharing several quotes from that original blog post that I feel are relevant to the Convoy market situation.

“The fatal pinch is default dead + slow growth + not enough time to fix it. And the way founders end up in it is by not realizing that's where they're headed.” - Paul Graham

  • Convoy historically secured capital from investors while also raising debt from banks and financial firms to fuel its fast-paced growth. Regrettably, the freight market downturn persisted throughout 2022 and into 2023, causing gross revenues to decline from $800 million in 2021 to a run rate of $500 million in 2023 (per report). In Convoy’s case, they were: “default dead + with declining growth + not enough time to fix the problem.”

“You should always have a plan B as well: you should know (as in write down) precisely what you'll need to do to survive if you can't raise more money, and precisely when you'll have to switch to plan B if plan A isn't working.” - Paul Graham

  • For Convoy, they needed a viable plan C and/or D. I suspect that Plan A would have been to continue raising capital from new or existing investors. Investors stepped up in 2022, but not in 2023. Why? The outcome ended up being to sell the Company, and unfortunately, the M&A sale process was busted (possibly because they did not have other options). Default Alive should have been an option.

“Hiring too fast is by far the biggest killer of startups that raise money.” - Paul Graham

  • Convoy peaked at 1500 employees and was reportedly down to about 500 when the business collapsed. In an effort to stay afloat, Convoy resorted to a series of layoffs, which had a significant impact on their operations. Given the number of layoff rounds, a fair criticism is that the management team failed to promptly respond to shifting market conditions when there was a clear need for more assertive cost reduction measures. A possible criticism is also that Convoy may have hired too fast and aggressively during the good times.

“Kill-or-cure strategies are optimal for VCs because they're protected by the portfolio effect. VCs want to blow you up, in one sense of the phrase or the other. But as a founder your incentives are different. You want above all to survive.” - Paul Graham

  • Sell-side M&A mandates for investment bankers advising cash-burning VC-backed companies are not easy. You build a book, a story to drive Enterprise Value, and run a market process to sell, all while your client is burning cash and may have an ultimate cash $0 date in the near future. Companies, sometimes have to ask themselves the question, should we continue investing for growth to drive topline growth (and presumably interest from buyers), and also burn cash during this time, or should we reduce losses and drive the business to profitability (which may result in slower or no revenue growth). For a sell-side M&A mandate with a cash-burning VC-backed company, it is beneficial to have other options. Otherwise, prospective buyers may just wait until you hit a wall (your cash-out date) and buy your business at a distressed price.

"A related problem that I see a lot is premature scaling—founders take a small business that isn't really working (bad unit economics, typically) and then scale it up because they want impressive growth numbers. This is similar to over-hiring in that it makes the business much harder to fix once it's big, plus they are bleeding cash really fast." - Paul Buchheit

  • According to a report, in its early years, Convoy offered shippers the opportunity to be early adopters at rates that were less than what is seen in the market. This was an attractive deal to many that Convoy was able to scale swiftly. This made it all the more attractive to others, garnering significant market share from major shippers as time passed. In the venture industry and with marketplace businesses, you often see the blitzkrieg scale approach - get big fast and figure out unit economics later. It’s purely speculative, but I wonder how Convoy’s unit economics were when the freight market got challenging. If they had promising unit economics, why did VCs not continue funding the Company and why did the business not sustain liquidity/runway longer?

Closing Thoughts

There are no winners in the Convoy outcome, other than possibly the new potential buyers who may have picked up the asset at a substantial discount, and the group of employees who may be able to retain their jobs at the new firm. Per this announcement, a buyer was found for Convoy’s tech (not sure of the asset valuation and if this announced sale is for all of the Company’s assets, or even if this transaction officially closed). From all indications, Convoy had an amazing team and had built some amazing products and capabilities. It’s a shame that the Company did not make it through this volatile market downturn.


Investor Spotlight

Multiplier Capital is a $1.0B+ growth and venture debt platform specializing in providing secured loans and equity to growing companies backed by venture capital and private equity. The Multiplier partners have invested $1.6B+ in capital across 165+ transactions over the past 20+ years as a team.

Multiplier Capital's portfolio encompasses a wide range of growth industry sectors, with a specific emphasis on enterprise software, digital media, healthcare IT, consumer e-commerce, and tech-enabled services.

Their ideal company partners exhibit consistent and growing revenues exceeding $5 million, a clear path to achieving EBITDA breakeven within 18 to 24 months, a proprietary product or a distinctive niche in the market, and active and supportive equity sponsors driving the business forward.

I first met Ray Boone, GP at Multiplier back in the 2011-2013 timeframe when I was at SVB. We got together for lunch at the high-rise top-floor restaurant at the intersection of the Sunset and Sepulveda in Los Angeles. I suspect the restaurant name has changed, but it’s called West Restaurant and Lounge today. I lost a deal (at least one) to Multiplier back when I was at SVB for Scopely at its Series A stage. That turned out to be a pretty good investment for Multiplier. Look them up.

Check out their website:


Must-Read Industry Reports

In this section, we delve into reports that have piqued our interest and would suggest that you check out.

In spite of the challenges faced throughout the year, the innovation economy has demonstrated remarkable resilience. Additionally, while the runway in US tech has shortened, the decrease has not been as rapid as the decline in VC investments. Companies are effectively extending their runway by implementing strategies to reduce expenses, prioritize profitability, and enhance operational efficiency. The report also highlights the importance of founders taking a more active role in managing their cash allocations, treating it with the same level of attention as other critical business priorities. For the full report, you can access it here:

This report features perspectives gathered from 100 high-ranking executives representing private equity firms with assets under management (AUM) exceeding $1 billion. These firms are located in North America, Europe, the Middle East, Africa (EMEA), and the Asia-Pacific (APAC) region. The report provides extensive insights derived from the collected data. To access the complete report, click on the following link:

This published report by S&P Global provides insights into M&A deals, volume, and sectors. In this quarter, there was a substantial decline in the average transaction size across all sectors, with one notable exception: the Energy sector. Despite having the lowest deal count at 111, it witnessed a remarkable 108% increase in average deal values, reaching $503 million in Q2 2023 compared to the same period in 2022. Additionally, the Energy sector recorded the second-largest deal of the quarter, marked by ONEOK Inc.'s acquisition of Magellan Midstream Partners for a substantial $18.8 billion. Read the full report here:


Next Global Destination: Hong Kong

Hong Kong is considered one of the most important financial centers in the world alongside New York City and London. The Hong Kong stock exchange is the 5th largest in the world, and the city is regarded as the global financial center gateway between China and the rest of the world.

Since 1969, Hong Kong has emerged as a significant financial hub in the Asia-Pacific region, even though it operates without a central bank. Due to its role as a gateway to Mainland China and its function as a regional connector, as well as its appealing legal, tax, and regulatory framework, abundant talent pool, and a well-established capital markets ecosystem, Hong Kong holds a prominent position as a hub for alternative asset management and ownership. Per a 2022 report by the Alternative Investment Management Association (AIMA) in collaboration with Price Waterhouse Coopers (PwC), Hong Kong stands as the preeminent hub for hedge funds in Asia, and it currently ranks as the second-largest private equity center in the Asia-Pacific region, following Mainland China.

The allure for alternative asset managers and investors, especially institutional investors and family offices, lies in the substantial opportunities available to support the rapid growth and entrepreneurial ventures in the Asia Pacific region, spanning technology, e-commerce, sustainability solutions, and various other sectors. In fact, over 740 alternative investors have established offices in Hong Kong to tap into these regional opportunities. Among these include JP Morgan, Deloitte, Goldman Sachs, Bank of America, and Morgan Stanley.

According to recent market research mentioned by AIMA, the assets under management (AUM) in Asia-focused private credit have increased by over two-fold, surging from $27 billion in December 2014 to $57 billion by June 2019. Moreover, according to data from Colliers as cited by Hong Kong Business, Hong Kong ranks fourth in leading global capital markets with a cross-border capital investment reaching US$6.5 billion in H1’23.

The 23rd AVCJ conference took place in Hong Kong recently, and here is a brief video from Daniel D’Aniello, Chairman and Co-Founder of The Carlyle Group. He shares great insights on the region and his firm’s focus in Asia.



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