Investment Notes: Switchboard
Why AfterWork Ventures invested in Switchboard - a supply chain integration platform allowing users to integrate and exchange data with any supply chain system.
Trade and the transfer of goods is the fundamental pillar on which the economy is built. Yet, given trade is as old as civilisation, it’s little wonder the shared systems and practices that underpin supply chain businesses are often less robust than we’d like to believe, and subject to a litany of legacy issues.
Digitisation of operations (through the likes of ERPs, inventory management systems, and online marketplaces) has been a major unlock in increasing the ability for businesses to manage their suppliers, inventory, and customer relationships. However the siloed nature of these systems has often meant that connectivity and interoperability has lagged.
Many businesses still rely on ‘paper & pen’ processes, copying from email, or manual input of data between systems to do business. Even more sophisticated enterprises rely on bespoke integrations to communicate between systems or across organisation, using a framework known as electronic data interchange (EDI), first introduced in the 1970s. However, this too introduces its own set of problems, as integrations have historically been built on a bespoke, ‘point-to-point’ basis, with a cottage industry of EDI consultants and developers, charging large upfront fees that price out all but the highest volume partnerships.
Thankfully, Switchboard are on a mission to redefine a new normal for the industry via their shared supply chain integration platform. Businesses need only integrate once with Switchboard in order to exchange data with any supply chain system, including suppliers, customers, and logistics providers. Founded by Hugh Dixson, Switchboard aspires to be the connective tissue for supply chains across the globe.
AfterWork are delighted to be two-time backers of the Switchboard team, reinvesting in their latest seed round alongside Investible, TEN13, Skalata, and Archangel as well as their pre-seed round in late 2022.
What we loved about the opportunity
Bringing the backbone of the modern economy into the modern era
EDI connections form the digital backbone of the supply chain for manufacturers, retailers, distributors, and logistics providers. Yet it is widely acknowledged that building EDI connections are often inefficient, time-consuming and expensive.
More specifically, whilst EDI technology itself is an elegant solution to a thorny problem, issues typically arise due to the lack of standard processes to connect with, onboard and manage trading partners. Between multiple trading partners (e.g. suppliers), each might transact using different channels, file formats, and data requirements, resulting in bespoke customisation and maintenance for each ‘link’ in the supply chain.
Switchboard’s insight is in leveraging the best parts of the EDI framework and maintaining the accepted practices of the industry, whilst building a modern platform to mitigate the time and effort required for customers to build, add, and maintain new connections within their supply chain. Much like how Zapier built the middleware ‘glue’ to connect the vast network of web apps, Switchboard is building a single integration point to connect any supply chain systems their customers and their trading partners might use.
Building software network effects on top of supply chain network
Network effects occur when a product is able to create incrementally more value with each new user it services. Some of the largest tech companies in the world are built upon the value of their network - lauded both for the raw value they are able to create for their customers, as well as the moat-like effects they build to prevent competitors snapping at their heels. SaaS businesses (and their VC investors) are rightfully obsessed with identifying network effects at play and understanding how they can be leveraged in their own businesses.
Switchboard’s middleware solution is a natural fit for this thesis, leveraging the inherent trading networks already present in customers’ supply chains as the blueprint for a software network effect of their own. It’s clear to see how the value proposition for Switchboard is so much greater for a customer when 10 of their trading partners are already live on the platform from day 1.
Likewise, these existing networks offer natural pathways for the closely related concept of virality - in which new customers quickly expose a multiplicative number of their trading partners to Switchboard’s offering and seed potential exponential growth!
Strong achievements on the smell of an oily rag
AfterWork has been proud to back Hugh and the Switchboard team since their pre-seed round in late 2022. We’ve been blown away by their ability to achieve so much from a standing start, including bringing a working product to market and into the hands of early customers including a number of household logos.
Switchboard’s success can only be attributed to Hugh’s intimate knowledge of the problem space prior to building Switchboard, both in terms of functional exposure and professional experience to build this business. As employee #5 at logistic and freight scale-up Ofload, Hugh saw first-hand the inefficiencies and common failure modes of transport communication that led him to Switchboard. Likewise, as part of the Australian Uber business prior, Hugh has lived the journey from fledgling startup to meaningful scaleup turned tech giant that puts him in great stead to lead Switchboard on a similar journey.
The Challenges we saw
Kickstarting the flywheel of network effects
Whilst incredibly powerful at scale, network effects are notoriously difficult to kickstart - the so-called ‘cold start problem. The key challenge of businesses like Switchboard is ensuring sufficient value is created for customers 1, 10, 100 and beyond. Thankfully, the status quo of EDI integrations suggests there is plenty of value to be created in connecting even the first 2 trading partners on the Switchboard platform.
Similarly, the nature of Switchboard as the connective tissue between distinct organisations (i.e. trading partners) introduces a unique complexity to their go-to-market motion; requiring ‘activation’ of trading partners on top of a traditional sales motion. The answer here is inevitably a combination of product and sales; the former placing the onus on Switchboard to ensure trading partner onboarding is as seamless and friction-free as possible, whilst the latter requires working hand-in-glove with customers to take their trading partners on the journey.
Getting the unit economics right in the short term
The power of Switchboard’s solution is the deep repeatability of their tech solution, and the ability to re-use integrations for systems shared across multiple customers. Nonetheless, in the short term creating these integrations inevitably resembles much of the one-off work of the EDI consultants Switchboard is looking to replace.
Symmetrically, the reallocation of what was historically a capex investment to recurring opex is the foundation of SaaS as a business model. Yet short term unit economics, and managing of cash conversion cycles for upfront product and integration builds is a key consideration as Switchboard’s shift from a stable (yet capped upside) ‘time & materials’ services model to consumption-based pricing akin to their more natural middleware peers.
Questions we had for the team
Is there enough activation energy to shift a legacy industry into a new norm for EDI connections?
Ultimately, Switchboard are taking a bet that their modern approach to a legacy problem will resonate with an industry that has been stuck in a suboptimal state for decades. Supply chain and logistics represent the ‘last horizon’ for digitisation, with high technical and operational barriers to entry.
There is huge economic value to be created in reorienting the industry around a shared platform where the burden of connectivity and EDI can be effectively shared across the network via Switchboard’s unified platform. However doing so requires taking a leap into the unknown as we move away from a services-led model, and rallying enough early believers around a shared mission to inspire the early majority in quick succession.
At the end of the day, we take confidence in knowing Hugh and the Switchboard team are the right individuals to crack this knot. Complementing Hugh’s past first hand experiences at Ofload and Uber witnessing similar industries break out of an inefficient equilibrium to a new global maxima using tech.
How we built conviction
When we first met Hugh we were blown away by the clarity of thought he brought to the industry and problem statement Switchboard was seeking to address. Since then we’ve been impressed twice over to see his ability to quickly build and scale a working platform, rally early customers around a shared vision, and put Switchboard on the track to becoming the connective tissue of supply chains across the globe.