Podcast: VC Brian Aoaeh on the Future of Supply Chain Investment

Highlights From the Conversation

Can you recap your experience and how you got to where you are today with REFASHIOND Ventures?

• The story goes back to business school, where one of the classes I really enjoyed was called “Competitive Advantage from Operations”. The professor really drove home the idea that if you didn’t have your arms around operations, then nothing else would matter in the long run. In the short term you might have some wins, but ultimately you would lose. That stayed with me.
• After graduation in 2008 I joined Jeff Citron at KEC Ventures (noted for stock trading platform Island ECN and Vonage; Jeff is also known for Datek Online).
• We worked on a few generalist funds, but for our third vehicle the team and I started thinking about how we should each pick a specialization. We figured that each person should pick what they were most interested in, what really got our juices flowing. If we did that, we felt we should be able to cover a breadth of sectors. It was during that process that I honed in on supply chain.
• By 2016 it was pretty certain that supply chain was where I would focus—in fact in the same year I authored a blog post on trucking which, to my complete surprise, was very well received by executives in the industry, by startup founders, by other investors, and by academics. It took me by surprise because mostly I was just trying to wrap my head around what was the hell is going on in this massive industry. I did an update on that piece in 2017, and then did a deep dive on shipping. Those posts are what really put me on the map for other people who are really focused on this.
• It was the process of studying and writing those articles that led me to the notion that there really needed to be a community for people who as I describe as being “obsessively enthusiastic” about supply chain and supply chain innovation technology.
• I realized in talking to people after these articles that:
  • On the one hand, builders of technology for supply chain typically understand the technology very well, but don’t necessarily have a strong grasp of what’s happening in the industry.
  • On the other, the buyers (the people in supply chain who are looking for innovations to solve specific problems) understand the problem really well, but not necessarily which specific technology they should be thinking about implementing, or who they should be talking to.
  • If the technology you’re looking at is really bleeding edge, there is also the question of which academics are interested to talking to people in industry. Some academics just want to do their research, but others want to do research and also see how it works out.
  • The supply chain problem is really the same problem in every industry. It’s just because the industries are different that they solve it slightly differently. But basically what you’re trying to do is deploy scarce resources in an environment that is dynamic, uncertain, and constant changing, and, the assets that you have are limited. So, you’re constantly running an optimization, and the minute you take one action, the entire environment has changed, and you now must account for that.

On the New York Supply Chain Meet Up and the Worldwide Supply Chain Federation

• The NYSCMU is an open, multi-disciplinary, grassroots-driven community where we could bring in anyone who is obsessively enthusiastic about supply chain innovation and technology together.
• It came out of the idea that people in different industries are facing similar problems with supply chain. My co-founder and I knew that yes, it would be messy, and yes it was going to be difficult to manage, but it’s in that messiness and that exchange of ideas and collaboration that hopefully some really great innovations can come out.
  • We’ve seen it happen many times already! For example, someone would be presenting on a problem in shipping, and someone in commercial real estate would say, ‘Oh my god we have the exact same problem. Let’s connect so we can have a conversation’.
• The amazing thing is that the community is only three years old (it started in 2017) and has been completely bootstrapped. We started with just me as the one person who thought this would be a good idea, and now there are 2,200+ members in the New York area, and 3,300 around the world.
• When people in other parts of the world heard that we were building a community in New York, some of them reached out and asked us if we would be willing to help them do the work to create a similar community. They also wanted to be directly connected to the organization in NY in order to have connections here, and that led to the Worldwide Supply Chain Federation.
• It turns out that the issues we talk about are global in nature—supply chains are everywhere, dynamic resource allocation problems exist around the world, and there are innovators in every part of the world thinking about these problems and trying to build new technologies to solve them. REFASHIOND co-founder, Lisa Morales-Hellebo, and I talk about this in more detail in our booklet, “The World is a Supply Chain”.

Where does the REFASHIOND venture capital fund fit in?

• While I was at KEC I started developing a thesis on investing in supply chains. But in 2018 we didn’t succeed in raising our third round of funding, so we disbanded the team.
• I had a decision to make. Do I go to another generalist fund to do supply chain, or do I do this as a specialist fund? Based on the experience at KEC and based on my conversations with other investors who were doing supply chain and a bunch of other things in generalist funds, it occurred to me that I needed to do this as a specialist, in the Dave Anderson model.
• The thing I think that differentiates us from other folks is that our definition of supply chain is probably more broad. A supply chain is really any network of organizations that work in collaboration to aid the procurement, production and movement of goods from producers to suppliers. We think of supply chains as, broadly, having two main parts:
  • Information that travels between organizations in the supply chain.
  • Physical goods that travel from producers to end customers.
    • This is something that cuts across industries and sectors.
• Being a supply chain fund (supply chain management, supply chain logistics, supply chain finance) is something we do across industries.

Let’s talk about why supply chain, and why now. In my experience, and the experience of other supply chain professionals, supply chain is biggest piece of the enterprise but is also ironically the least technically advanced and the focus of the least investment. But why did you see a gap and start your own venture fund to go after this space? How come supply chain has missed the radar of investors, and why is it so hot right now?

• The opportunity in supply chain is very difficult to realize if you haven’t spent time in a supply chain environment or have a supply chain background. Many VCs have a finance and consulting background and haven’t spent time in supply chain.
  • I don’t have that dyed-in-the-wool supply chain background either, but the difference between me and some other folks is that I like to spend time digging into things, and I’ve spent at least 7 years of my professional experience in the back of this.
• Operations is the part of supply chain that is inside the four walls of your business. Everything that is important for what you do but that sits outside of your business we call supply chain. So naturally operations and supply chain are interlocking.
• My experience has always been in the back office, and I didn’t realize this until I was teaching my course at NYU, but any costs related to supply chain can account for 30% – 80% of sales.
  • Restaurants are at the low end at around 30%.
  • Energy is at the high end at 79%.
    • Therefore any innovations or technologies that can help you get around these costs are really really big.
• For any company that wants to improve its profit margins, there are two strategies they can take:
  • A marketing-driven approach, to increase demand.
  • A supply chain-focused approach to drive down costs.
• Driving down supply chain costs is always a strategy that will win. This is because your sales and marketing efforts will always run into the fact that the market will inevitably dictate the price. On the other hand, you have more control over internal costs, so that becomes easier to tune.
• The other reason is that with a sales and marketing approach, ultimately, you’re going to have to invest in capital expenditures (CapEx) to satisfy that additional demand. You’re going to need to buy more machinery, etc., and so you have costs going up.
• In 2014 or 2015 I wrote an article related to this called ‘How Early Stage Tech Startups Can Gain a Competitive Advantage from Operations’.

Is it fair to say that from your point of view, most VCs don’t understand how supply chain works? I feel that even though they’re very smart people, they really are just waking up to its potential.

• I think that’s it. People are waking up to the potential. But it’s a couple of things:
  • It’s not realizing how critical it is to enterprises.
  • 10 years ago it would be difficult to do things that we see innovators doing now, because the technologies were just not mature enough.
• If you talk to some investors who have a background in supply chain, they will tell you a lot of horror stories about technologies that they thought would be ground-breaking but weren’t. The issue there is that at that time, the potential was there but the technology wasn’t mature enough. So the massive companies that had the balance sheet to invest in that sort of thing could do it, but for everyone else it wasn’t realistic. If you invested in technology at that time, you probably lost your shirt, but that has all changed with cloud computing, edge computing, mobile devices, etc.
• For example, the research that forms the basis of Optimal Dynamics, an AI solution for truck routing and scheduling that’s just coming to market, was four decades in the making! It was done by an academic whose life has been devoted to solving these sorts of problems, and he’s done it for transportation, he’s done it for the navy, he’s done it in spare parts, and almost every industry you can think of. When you talk to him, he’ll tell you that his research could have been used in the past by organizations that could afford to implement it internally. But it’s only recently that the technologies became mature enough and cheap enough that they could launch this as a platform that anyone could implement. Those issues all tie together in a way that makes it difficult to see the potential.

I feel the other issue is that there’s a gap between venture capital and private equity. Supply chain isn’t like the typical venture capital investments because you need to put in more than a couple of million dollars. On the other hand, it’s too small for private equity, who are used to putting $50M to $100M. It’s almost like you want to fuse a VC and a PE person—that would be the right mentality.

• Yes, that’s right, because the private equity person would be investing in some large companies, with some investment in technology that works, and the VC has their ear to the ground, looking for what’s coming up that needs a first adopter.
• One way to think about the opportunity is that there is nothing that we do in the world that doesn’t depend on a supply chain, and if we can increase efficiency and cut costs by even a small percentage point, it can be a really, really big deal. If you think of the world as a $90T GDP entity then even a 1% efficiency is a big opportunity.

How do you see the importance of sustainability in supply chain?

• By 2050 we’re going to be more than 10 billion people—and that puts enormous pressure on the supply chains we all rely on. For that very reason, climate change is accelerating.
• There seems to be a complete disconnect between the idea that climate change is happening because of human activity, and the fact that human activity is all driven by supply chain. So if you’re going to fix climate change, you first have to think about fixing supply chain. We really don’t have a choice but to think about how supply chains are built, how they are operated, and how they need to change in order for climate change not to kill us all.
• I’m used to hearing things like, ‘what could possibly be interesting about trucking’, but supply chain is an absolute necessity. I tell people who will listen that it is the biggest investment opportunity that we’re ever going to see in the next couple of decades.

How do you see the investment community rallying around that? I have a lot of conversations with investors, but not all of them are jumping in yet.

• The potential really is huge, but from the perspective of an investor, not all that potential can be realized in the ten years or whatever the investment horizon is for the specific fund or the specific asset class.
• REFASHIOND is more similar than dissimilar to Dave Anderson and Dan Dershem’s Supply Chain Ventures in that I think investing in supply chain requires complete focus. As much as people chuckle at me for it, you have to be obsessively enthusiastic about it!
• That enthusiasm comes from the way I grew up. I’ve had the good fortune of living in a tiny village in West Africa, medium-sized and large cities in West Africa, and also medium and large cities in the United States. One thing I came to understand is how critical supply chains are to society. The societies that are economically strong are the societies that have advanced supply chains. So I think it’s easier for me to come to an appreciation for supply chain than a lot of other people.
• Getting even more personal, I am so willing to devote the time to supply chain because, when I was a teenager, my grandfather, who was a peasant farmer, suffered from rheumatoid arthritis. We lived in a village with no electricity, and my relatives lived below the poverty line so we could only afford the pills he needed for that evening. Years later, I read an article for the Swiss pharmaceutical company Roche, and they were making a statement to the effect that because supply chains in Nigeria are so broken, they end up being marked up between 40% and 700%.
• That got me thinking that the medications I used to pick up for my grandfather could have been marked up because of these broken supply chains. This is the intrinsic thing that has motivated my interest in supply chain.

What do you see as the breakout trends for the next few years in supply chain?

• What we’re looking at in the next few years comes under four broad areas:
  • Next generation logistics: the movement of goods and people is a really big deal. We’re not going to be investing in companies that want to buy trucks, busses and ships, but we are going to be investing in startups that are creating software and possibly hardware that makes it possible to manage those assets, and manage them much more efficiently than was possible in the past.
  • Advanced materials that allow us to divert goods that would have ended up in incinerators and landfills and turn them into new raw materials. Waste from plastics is a big issue for the circular economy, as is waste in fashion and apparel.
  • Advanced manufacturing that enables us to create the things we need most frequently much closer to home, possibly 3D printing. This will help reduce problems in a number of dimensions: waste, pollution, cost. It will also change the way we think about inventory management and could save on costs if it turns out there is simply no demand for what you’ve made.
  • Data and analytics. As the world, and supply chains, become much more digital, how do we harness all the data and information that is being generated to make more timely and more accurate decisions about what supply chains should be doing and how they should be doing it.
• While we think all these areas are exciting, some are further along than others.

Are you seeing other investors reaching out to you to talk about supply chain investment strategies? Any common themes in what they’re asking you?

• Yes. It’s been happening since I did the pieces on trucking. When people reach out with questions, it’s generally it’s because they haven’t spent enough time looking into the value proposition of what they’re looking at.
• Generally they want to know if the problem the company wants to solve is real or not, and if the company succeeds, could it get big enough for what I need as a venture investment.

Listen to the Full Conversation on Supply Chain Next >

More About Brian Aoaeh

Brian studied mathematics and physics for his first degree from Connecticut College. He holds an MBA with a specialization in financial instruments and markets from the Stern School of Business at New York University, and is a CFA Institute charterholder.

Brian is a co-founder and general partner of REFASHIOND Ventures—an NYC-based, early-stage supply chain technology venture firm that is being built to invest in startups refashioning global supply chains. Prior to co-founding REFASHIOND, Brian gained 10 years of experience in investment research and management. He spent 8 of those years building an early-stage venture firm, KEC Ventures, from scratch. The firm grew to $98M of assets distributed across 2 funds and 51 investments, managed by a team of 9 people.

Aside from his work as co-founder and organizer of The New York Supply Chain Meetup and The Worldwide Supply Chain Federation, he is a regular columnist for FreightWaves, and is Adjunct Professor of Operations Management at NYU Tandon School of Engineering. He blogs at Innovation Footprints and is on Twitter @brianlaung

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