​Why We Invested – Cargon

WHY WE INVESTED SERIES

The “Why We Invested” series, published on our Terra Incognita blog, aims to provide investors and founders with insights into the investment opportunities in Emerging Asia, as well as Sturgeon Capital’s strategy to capture them. Each article presents a distilled version of the 20-30 page internal investment memo that we prepare for each company, highlighting the key factors that we believe will drive the success of our investments. We welcome your feedback on our investment thesis and the specific company so that we can share more information and, hopefully, improve as investors.

SUMMARY

Cargon is a digital freight forwarder that connects shippers with carriers for cross-border trade along the modern-day Silk Road. This is a $40bn opportunity that is developing rapidly with investments from international and regional governments into the “Middle Corridor”. However, the market remains highly fragmented and inefficient, offering significant opportunities for disruption.

Sturgeon Capital’s second fund, SEO II, led Cargon’s seed round in 2023 alongside Hustle Fund, Flexport, Reflect Ventures, Caucasus Ventures, Aloqa Ventures, and UzVC. Since then, the company has scaled operations across the region and is rolling out new products for its customers, including financial services. In this piece, Sturgeon Partner Robin Butler, who led the deal and sits on Cargon’s board, digs into the why and how we invested, what the company has achieved since then, and the regional opportunity for Cargon over the next 5-10 years.

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THE PROBLEM & OPPORTUNITY

Central Asia and the Caucasus were at the heart of the old Silk Road. Samarkand, Bukhara and Khiva evoke memories of camel trains laden with spices bound for Europe. Under the Soviet Union, this region was effectively shut off from global trade flows and reoriented towards Russia and Moscow. Since the 1990s, and especially in the last 10 years, the region has re-emerged as an important logistical hub for global trade. There have been three key factors behind this:

1. Uzbekistan’s reforms under President Mirziyoyev, starting in 2016, have reintegrated the country into the region and made cross-border business and trade possible again.

2. China’s ongoing investment in the Belt and Road Initiative (BRI) has been a catalyst for infrastructure development. Major BRI projects in Uzbekistan include the Kamchik Pass railway tunnel and electrified rail lines linking Tashkent with neighbouring countries. These investments are reducing the cost of moving products by land in both directions.

3. Russia’s invasion of Ukraine and subsequent sanctions have reoriented trade routes through this region. Many multinationals have shifted supply chains to prefer the combined land and sea route through Georgia, Azerbaijan, and across the Caspian Sea rather than by land across Russia.

This has had a tangible impact already. Intra-regional trade increased 2.5 times over the last decade to $11bn, and total foreign trade turnover has increased eightfold since 2000 and is now more than $200bn.

Despite this progress, the logistics industry remains outdated. It is still highly fragmented, with the majority of carriers owning 1-5 trucks. Transactions are inefficient, with the majority taking place through offline brokers, who rely on email and phone calls to find, book and manage carriers. This has several consequences:

1. Shippers face delays in finding a carrier for their shipment, have no insights into the chosen carrier’s quality or reliability, and have no visibility on the shipment once it is underway.

2. Carriers are beholden to brokers to source shipments for them, leading to extended periods of inactivity. This is particularly true for return legs, where they can be faced with weeks of delays in another city or an empty journey home, which means no income.

3. Both shippers and carriers are caught in a working capital trap. Shippers want 30-60 days payment terms to manage their working capital. Carriers need payment upfront to cover the cost of consumables and drivers. In some cases, the brokers can partly finance an invoice but at usurious costs for the carriers.

Solving these problems can play a part in the region’s wider economic and social development. Reducing the time and cost of logistics will incentivise greater connectivity within the region and international partners to use it as a transport hub. This can support jobs both within the logistics industry and for the companies it supports. Increasing efficiency can also have a knock-on environmental effect, optimising which carrier should take each load and reducing the number of wasted journeys.

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THE FOUNDERS

Sturgeon first met the Cargon founding team back in August 2021, long before we invested. During the discussion at their offices in Tbilisi, it was clear that they intimately understood the challenges and opportunities for logistics in the region. The combination of Vano’s financial experience with Niko’s supply chain management and Shako’s first-hand operational experience makes a powerful trio of founders. Their bond as childhood friends was also apparent and a strong foundation for taking on the challenge of digitalising an almost entirely offline industry.

When we first met, they were focusing on domestic trade and SMEs, a strategy we did not think could scale in the region. We were also concerned about the ability to grow wallet share with larger customers, which would limit the obtainable market size. However, we stayed in touch and were always impressed by their diligence, perseverance and enthusiasm for tackling the logistics challenges in the region. It was when we caught up in January 2023 that they had pivoted away from domestic SMEs to cross-border enterprises and could demonstrate capturing up to 90% of the logistics spend at some of their larger customers. The team’s diverse expertise and deep understanding of the market enabled them to pivot successfully from SMEs to cross-border enterprises, unlocking a scalable market opportunity. This was the catalyst for re-engaging and ultimately investing.

THE SOLUTION

Enter Cargon, a digital platform that addresses the inefficiencies of cross-border logistics along the new Silk Road by connecting shippers and carriers in a centralised digital ecosystem.

On the shippers’ side, they primarily engage with the platform through the web application to create and manage shipments. The process is fully digitalised, from inputting the data about the shipment to receiving quotations and tracking the shipment on the move. Transparent pricing is a key value for Cargon’s shipping customers, especially large multinational companies such as Mondelez and PepsiCo, which otherwise face the risk of corruption through the supply chain. Full visibility over the shipment on the move helps them plan their supply chain operations more efficiently and proactively manage delays. Cargon has already launched sea freight tracking as part of building out multimodal functionality to give shippers increased visibility over their shipments, with work ongoing to add rail freight as well.

On the carrier side, they rely on the mobile application to receive information about shipments, bid on those that are interesting, and then manage the shipment once confirmed. Instead of waiting for a phone call or email, they can focus on running and growing their business through the app. In the latest version, they can manage all of their shipments, not just those from the Cargon platform, so that they spend more time within the Cargon ecosystem, leading to higher engagement with the Cargon load board and increased stickiness to the product.

Overlaid across both the shipper and carrier applications are Cargon’s additional services, in particular, financial services. As the counterparty to the shipper, Cargon can offer the carriers a factoring product that is secured by the shipper’s invoice. This alleviates the carriers’ working capital challenges while allowing the shipper to maintain their standard 30-60-day payment terms. For Cargon, it unlocks additional margin through the discount on the invoice amount paid to the carrier. Depending on the market, Cargon works with different financial partners to provide these factoring services and is also working on launching a larger working capital financing product for the shippers in 2025. As a freight services provider for shippers, Cargon is well-positioned to offer trade financing services to importers up until delivery to the destination country. Throughout the transit period, Cargon physically holds the cargo, which reduces the financing risk compared to standard bank financing procedures. Additionally, international trade financing is greatly underserved in the region, presenting a unique opportunity for Cargon.

Operating in this region is inherently complex, and even more so in the case of logistics. First, the speed of technology adoption among Cargon’s customers is uneven. There are heightened counterparty risks, something that we have worked closely with Cargon to address through a systematic, automated counterparty and order-based review system. Solving the question of working capital for the carriers and Cargon is perhaps the main challenge to scaling and varies in each market. For example, factoring is reasonably well developed in Georgia but is nascent in Kazakhstan and non-existent in Uzbekistan. Cargon, therefore, has to adapt its strategy and source of funding in each market accordingly, something that Sturgeon’s on-the-ground network can help to address.

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WHY WE INVESTED

Having known the company for more than two years, Sturgeon’s decision to lead their seed round in 2023 was unanimous across the team:

1. The business model has been tried, tested and proven globally across both developed and emerging markets. While there have been notable failures, such as Convoy in the US, others, such as Flexport and Sennder, have scaled to compete with the established market players in the US and Europe. In emerging markets, companies such as Nowports in Mexico and Blackbuck in India have captured significant market share as their regions digitalise.

2. The addressable market is large, highly fragmented and inefficient. With $40bn in total value and $10bn in road logistics alone, Cargon has a long runway for growth. The fragmentation of the market means there is no established incumbent competition, with the main threat being shippers’ and carriers’ willingness and ability to adopt technological solutions. The growth in mobile phone and internet penetration, combined with increased adoption of basic technology products such as P2P payments and food delivery, is reducing that challenge rapidly. Inefficiency combined with fragmentation means that not only can Cargon’s product be significantly better for both sides of the equation, but it can earn a higher take rate on a larger market share at scale.

3. The company has proven it can acquire and retain large enterprise customers, including the likes of Mondelez, Nestle, and PepsiCo. Not only has Cargon acquired these customers, but they have been able to capture up to 90% of their shipments along certain routes. Cargon has also demonstrated its ability to expand into new markets, starting with Armenia before we invested and since launching in Azerbaijan, Kazakhstan and Uzbekistan. Combined these validate the obtainable market opportunity for the company in the region.

4. As the company scales, it can compound its first-mover advantage into long-term competitive moats. Based on our conversations with shipping customers during due diligence, these shippers optimise their choice of carrier by 60% for price, 30% for quality of service, and 10% for other factors. Cargon’s multimarket presence is the foundation for network effects. As the density of carrier supply on a route increases, Cargon gets better prices from carriers, which in turn increases the demand from shippers and creates a positive flywheel effect for Cargon. Constantly improving the quality of the product leads to a better quality of service for both shippers and carriers, increasing their stickiness to the platform. Integrating financial products increases this stickiness further and enables better pricing terms for both sides of the equation.

5. Based on the market opportunity, we forecast that the company can generate +$500m in gross revenue at a minimum 10% take rate by 2030. We believe there are opportunities to increase the take rate closer to 20%, as regional network effects lead to lower prices and additional services unlock more value for Cargon.

Cargon exemplifies the type of regional champion Sturgeon’s investment thesis is built on and embodies our mission of backing technology-driven solutions for transforming emerging markets. We had the chance to get to know the founders over an extended period of time, seeing their ability to execute first-hand and building a strong relationship. They are operating in a large, growing market with the tailwind of investment, which is ripe for technology disruption. We led the round and were able to bring onboard international and regional co-investors who can support the company in its expansion. Finally, the company is having a tangible impact on its users, particularly through integrating financial services for previously overlooked and underserved segments and is driving economic development for the region.

LOOKING AHEAD

Since our investment in 2023 alongside Hustle Fund, Flexport, Reflect Ventures, Caucasus Ventures and Aloqa Ventures, Cargon has successfully expanded its operations across the region. This was the main objective for 2024 and has been met 100%, with support from Sturgeon’s team on the ground in Kazakhstan and Uzbekistan in particular. We have started to see the early signs of those network effects we mentioned above, as customers from Georgia connect Cargon with their teams in other markets, and Cargon’s team in one country can fulfil shipper requests from another.

As we enter 2025, Cargon is in negotiations for up to $10m in debt funding for the factoring product that will enable them to scale towards a target of $50m in gross revenue by the end of the year. This is still the early innings of one of the most exciting opportunities we have seen in the region, one that we believe has a long runway of growth ahead of it. Cargon can become the digital bridge between East and West, enabling companies to ship products by land from Shanghai to Rotterdam with 100% visibility through one platform. By leveraging technology to solve fundamental inefficiencies, it is not only driving regional connectivity but crucial economic growth. If you are an investor or partner interested in supporting Cargon’s journey, particularly with deeper integrations in China, Turkey and Europe and with rolling out a broader range of financial products, then we would like to hear from you!

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