VCs are abandoning supply chain tech — except for startups that can cut out the human

• Venture capital funding of supply chain startups was down 56% year-over-year in the third quarter.
• Investment in the area boomed in 2021 as investors saw challenges brought on by the pandemic.
• Investors will follow companies that are on track to profitability and those offering automation.

Venture capital investors' passion for supply chain tech companies appears be cooling as supply chain snarls untangle and the shipping delays of the pandemic fade from view. 

Venture funding for supply chain startups in the third quarter fell to $3.3 billion — down 56% year over year and 37% compared to the second quarter, according to Pitchbook. That's a slightly bigger decline than the broader startup scene.

Before the pandemic, supply chain tech startup funding grew by a few billion every year for most of the last decade. In 2021 investors below up that steady growth, increasing the total by 80% year over year. This year it appears as if 2022's total will land somewhere between the measured growth of 2020 and the extreme heights of 2021.

Startups focusing on last-mile delivery to consumers' homes still receive the largest share of investor dollars, even in an overall depressed environment. Nearly half of the cash invested in supply chain startups went to last-mile companies. 

Itamur Zur, CEO of last-mile startup Veho which raised $170 million in February, told Insider the reason investors never seem to tire of the last mile is that even despite any near-term hiccups, they see the long-term growth of e-commerce as inevitable. 

The current economic uncertainty "may slow down e-commerce for a little bit, but the shift from physical retail to e-commerce is going to continue for the foreseeable future," Zur said. "And that's because e-commerce is easier for customers."

A temporary reckoning

Venture investment in other types of supply chain startups — like technology for trucking and broader supply chain management — traditionally doesn't reach the heights of delivery startups. But Charley Dehoney, vice president of Zebox, a supply chain startup accelerator backed by ocean shipping giant CMA CGM and a cohort of big names in global logistics, said there's a reckoning going on that will bring about better technology in the coming years.

"Deals are still getting done," Dehoney said. What investors are looking for is tech that can reduce the number of people needed for supply chain transactions, he said. Throughout the pandemic, human labor has been a major point of uncertainty. Startups digitizing paper documents and automating mundane tasks like email are of particular interest, he said. 

"They're looking for solutions that can take people out of seats. Companies are looking to do more with fewer people," Dehoney said. The upshot is that companies are more willing to pay for software that can prove that ability, he said. 

"The crisis has totally illuminated that there are massive problems and big businesses to be built in supply chain, so you're seeing a lot more legit technology here," Dehoney said.