Technology has evolved to the point where adoption is much harder to avoid – even for old-school ocean ship owners notoriously averse to change. Throw environmental mandates into the mix that heighten pressure to find efficiencies, and it appears the moment for maritime technology and software has finally arrived.
The Marine Money Week conference in New York on June 17-19 featured a much greater emphasis on software than in previous years; clearly, it’s no longer just about financing ships, it’s about financing ship tech as well.
According to Scott Borgerson, co-founder and chief executive officer (CEO) of hedge fund and analytics company CargoMetrics Technologies, “There have been momentous technology disruptions in this industry before – sail to steam, the chronometer, the container, GPS – and now it’s our turn with software and the internet.
“Machine learning, cloud computing, Big Data, AWS [Amazon Web Services] – a lot of that stuff didn’t exist 10 years ago, but now it’s mature enough that [shipping] is ready to embrace change and optimization,” he continued, adding, “Angel capital and venture capital [VC] is starting to wake up to the fact that shipping is about more than just containers. It’s an exciting moment for us in our field.”
Ioannis Martinos, founder and CEO of Signal Maritime, a company that provides analytics-enhanced commercial ship management, made a similar point about ship tech’s current evolutionary stage.
“Until now, the technology has not been able to do some of the things shipping has asked it to do,” he said.
“It’s only now that we’re able to do these things. The reason autonomous cars weren’t possible 10 years ago is that the tech wasn’t there yet. Some of the problems shipping has to solve are autonomous-car-grade in terms of difficulty. I think now is the first time as an industry that we’re able to solve some of these difficult problems.”
According to Marina Hadjipateras, general partner of investment company TrailMix, “We’re at the point now where there’s no turning back. Tech is in shipping to stay, particularly with the environmental regulations. It’s just a matter of who’s going to get on the train first.”
Søren Meyer, chief asset manager of Maersk Tankers, which has a fleet of 165 vessels, emphasized that his company is not just heavily embracing new software and technological solutions to increase rates.
“A big component for us is to drive CO2 emissions down as well,” he affirmed.
The environmental imperative is also playing a role on the talent recruitment side of the equation. When a startup seeks to attract coders and engineers to a product focused on shipping – an industry they likely know nothing about – this angle resonates deeply.
According to Matt Heider, CEO of Nautilus Labs, a software company focused on increasing shipping fuel efficiency, “We’re very oriented toward the environment impact, as a business driving change across all segments of shipping. When we recruit, it’s with that broader vision of reducing fuel consumption and reducing emissions.”
With this backdrop in mind – maturing technology coinciding with rising regulatory pressures that incentivize technology use – what do shipping companies and financiers need to know about maritime tech startups? And conversely, what do startups need to know about shipping and finance?
Following is the advice offered by speakers at Marine Money Week:
Keep it simple and focused
The technology providers that are obtaining financing and attracting shipping clients are taking a targeted approach.
In a general sense, Nautilus Labs’ platform is designed to “help owners drive better commercial outcomes through vessel performance,” but more specifically, when presenting its pitch on its total addressable market (TAM) to investors, it honed that down to a central focus.
“TAM is what ultimately gets the investor excited. When we thought about TAM, we looked at fuel consumption,” said Heider. “That makes it simple and easy to understand. There’s a lot of decisions that go into fuel consumption and you can readily anchor an investor to the size of that problem.”
If a startup tries to sell investors on TAM “focused on the number of ships or the number of companies, it becomes very scary for investors, because shipping is so big and broad and fragmented and such a global industry,” he explained.
Signal Maritime has taken a similarly focused approach. “When we started Signal five years ago, we said, ‘OK, let’s find a very specific problem we want to solve and let’s try to solve that problem with technology’,” explained Martinos.
“In our case, because we are focused on the tanker spot market, the problem we wanted to solve was: ‘Can we improve the TCE [time-charter equivalent rate, or rate per day] performance of our fleet by at least $1,000 a day by using technology?’
“The answer is a resounding ‘yes’. Last year, most Aframaxes [tankers that carry around 750,000 barrels of crude oil each] were earning around $15,000 per ship per day and we were earning $18,000 per ship per day,” he said.
Show potential to expand from initial focus
Having a targeted approach is important at the onset, but it’s also essential to show investors the potential to scale the platform and expand into other areas where solutions can be provided.
Just because Nautilus Labs is focused on fuel efficiency doesn’t mean that’s the end of its story. “There’s billions of waste in terms of fuel consumption, tens of billions in broader market inefficiencies and hundreds of billions or perhaps even a trillion dollars of waste when you’re looking at the entire supply chain,” said Heider.
He continued, “There’s a massive amount of inefficiency due to relying on data that is analyzed infrequently and often incorrectly” as opposed to a model in which “a lot of that decision-making is automated.”
According to Henry Palmer, principal at VC fund Amplifier, “Nautilus Labs is targeting a pain point [fuel] that represents 68 percent of the opex of the ship, but it can scale into other applications in the future. The vast majority of what a ship owner really cares about is asset trading and commercial fixing [chartering]. And once [Nautilus Labs] starts to integrate the onboard and onshore data, commercial fixing and so on is not so far away.”
Give ship owners the proof
Martinos is from a prominent ship-owning family (the owner of Greek shipping company Thenamaris) so he is very familiar with what owners are looking for when it comes to technology.
“The ship owner just wants proof,” he explained. “They don’t want to have to sit there and think about whether or not to invest. They want to have someone do a pilot with them and prove the product, then of course they are willing to invest. If they have 100 ships, they want to test it, prove that it works, then roll it out on 100 ships simultaneously.” The use of the new technology “has to make more money for the ship owner – which is the whole point.”
After Signal’s software was deployed throughout the Thenamaris fleet, and proven in that fleet, it has been marketed to outside companies, and a significant number of participants in the global spot tanker fleet are now using it.
“At the end of the day, nobody cares how nice your interface is and how pretty the buttons are. It’s about how do you make money for your clients and how do you create value for your customers,” said Kevin Humphreys, general manager at engine manufacturer and technology company Wärtsilä.
Educate the investors
To obtaining financing in the first place and get a startup off the ground, you need to ensure that the financier understands shipping – which can be a major hurdle.
“It’s not easy to raise venture capital in an industry with such a critically low amount of existing due diligence,” said Heider. “There’s an education process you have to conduct with potential investors. Then you have to get them excited. Then you have to show the potential. There are a lot of short trips to San Francisco involved.”
According to Julian Counihan, partner at VC fund Schematic Ventures, “Investors review thousands of deals every year, meet with hundreds, and invest in 5 to 10. You need to make their job easier by giving them a great background explanation of the problem.
“I’ve met a lot of industry experts who are disappointed when an investor isn’t up on the lingo. The reality is that investors budget a very specific amount of time for each consideration, and oftentimes, the ‘no’ arises from the fact that they just can’t diligence the opportunity fast enough, so they just step back,” said Counihan.
“They see no problem with the business model or the entrepreneur, but they realize, ‘I won’t be able to get to a ‘yes’ within five days of work, so I’m going to step away.’ Maritime is definitely one of those industries that is outside of the personal networks of the vast majority of investors, so make it easy for them and provide background research and references quickly.”
Make sure VC capital is right for you
Just because a shipping tech company finally does get an offer for financing, it doesn’t mean it should take it. “VC is not always the right partner,” noted Palmer.
According to Heider, “If you get a term sheet that is overly complex, or you’re getting saddled with odd clauses, or have to give up a massive stake for a relatively small capital raise, be wary of that.”
Counihan advised, “Figure out whether your business model is a fit for VC. If you decide to raise VC, you’re entering into a very high-risk, high-return but binary outcome. You’ll be investing way more in infrastructure than your revenues can support, and that will be the way for the first five years, so your probability of a ‘zero’ rises drastically. This is not a fit for all business models, so make sure you understand what you’re getting into.”
Finally, remain humble
The process of obtaining funding is grueling and often disheartening – and even after funding is obtained, the chance of ultimate success is slim, according to speakers at Marine Money Week.
“The most difficult and frustrating thing is getting a lot of indirect ‘nos’,” said Heider, whose company successfully secured $11 million in Series A funding in April.
“Investors will keep the conversation alive. They will smile and be super-nice, but they won’t follow through. There are not a lot of direct ‘nos’ and ‘I don’t want to be involved in maritime.’ Instead, you get a lot of ‘that’s great!’ and ‘that’s really interesting!’ VCs have an inclination to be nice, and not directly disengage, to preserve their optionality.”
Humphreys strongly advised that maritime startups co-develop their products alongside larger partners and warned, “This is a very tough business to have success in, because the cost of customer acquisition is very high. You can’t have any illusions – it’s incredibly difficult to develop new technology and be a new software provider in this industry.”
“There may have been over 100 shipping startups founded in the last 24 months, and when the next recession starts, my guess is that there will not be 100 survivors,” added Borgerson.
“On one hand, there is this opportunity. On the other, there needs to be humility as well an appreciation of how hard and complex these problems are to solve. There is a graveyard full of entrepreneurs and the statistics are not in favor of being successful. Change is hard. Transformation is hard.”