Why Did Altos Ventures, the Creator of the Coupang and Baedal Minjok Legends, Bet on 'Fulfillment'?

1. In February, it was reported that Altos Ventures made a solitary investment of approximately 12.6 billion won in the software-centric fulfillment company, TechTaka.
2. Altos Ventures, known for its investments in companies like Coupang, Baedal Minjok, Toss, and Danggeun Market, is a venture capital firm that has been consistently ranked as the most desired VC by startup founders and employees for several years. However, it was surprising to see Altos suddenly bet on a fulfillment company.
3. TechTaka, the company Altos invested in, is already known in the industry for its early investments from Naver and Kakao. TechTaka operates the fulfillment solution "Argo" and provides third-party logistics (3PL) services. In March 2022, TechTaka joined Naver's logistics platform NFA (Naver Fulfillment Alliance), and in July of the same year, launched Naver's guaranteed arrival logistics service, seeing a 15-fold increase in shipments within a year.
4. Interestingly, Naver, an initial investor in TechTaka and creator of NFA, had been somewhat passive in logistics investments. Since the second half of 2022, Naver's investment focus shifted from logistics and distribution to C2C and overseas expansion.
5. Despite Naver's retreat from the e-commerce logistics market, why did Altos jump in? What makes the fulfillment business worth the attention now, despite being overlooked in the past? Let's delve into the specifics, using TechTaka as a case study.
6. When Naver actively invested in startups with fulfillment capabilities, including TechTaka, the plan was simple: invest in promising logistics startups and connect them with the volume from sellers on Naver Commerce for stable growth. This strategy was also seen as a way to catch up with Coupang's logistics advantage at a relatively low cost.
7. However, sellers did not respond as Naver hoped at the start of NFA. Many sellers were too small to afford third-party logistics services. Additionally, many sellers operated through consignment sales or purchase agents, not holding inventory themselves.
8. Naver then restructured its business by finding a solution in "brand stores" where major brands are located and launched a "guaranteed arrival" service to increase traffic to companies using Naver's logistics services, thereby starting to increase the volume of goods for NFA partners.
9. However, the nature of e-commerce logistics is such that costs can rise as volume increases. An increase in inventory requires larger warehouses, and the complexity of storing, dispatching, and managing an increasing number of products also grows.
10. Despite the steady increase in users and volume, companies have fallen into this trap, incurring deeper losses or even withdrawing from NFA. For example, the operator of the new product market, Delicious, saw a monthly increase in dispatches by over 40% and a tripling of volume, yet ceased service in February this year. This was partly due to the pressure from large corporations expanding their fulfillment businesses.
11. In this context, TechTaka's performance stood out. TechTaka achieved profitability in fulfillment contribution profits in November and December of last year by capturing both low cost and profitability. This was particularly impressive because it was based on increasing volume through low-cost operations.
12. Altos cited TechTaka's operational efficiency enabled by software as a reason for their investment. The achievement was not just through manpower or warehouse design but through a system, indicating potential for further expansion.
13. Like TechTaka, other fulfillment companies showing potential are emerging. For example, DupHands, the operator of Naver investment company Poomgo, achieved annual profitability in fulfillment business for brands.
14. Fulfillment companies still face uncertainties, as large platforms integrating the entire value chain in e-commerce gain a competitive edge. Coupang is a prime example, managing everything from sales to inventory, dispatch, and delivery, establishing a dominant position in delivery speed, quality, and now cost.
15. Similarly, CJ Korea Express gained an advantage in NFA not just because of its size but because it operates a "delivery network," allowing more operational flexibility and additional margins, providing a competitive edge in pricing.
16. As fast delivery becomes a key factor in customer purchasing decisions, platforms are increasingly pressuring sellers and suppliers to lock their inventory with the platform. This control over inventory benefits the platform but narrows the space for fulfillment companies, as it draws sellers' inventory away from them.
17. Despite concerns, experts believe there is still a substantial market open for fulfillment companies. They argue that while platforms like Coupang can't do everything, fulfillment companies can target D2C (Direct to Customer) volumes to secure significant revenue.
18. As platforms' dominance grows, seller backlash intensifies. For branding or fee reduction, maintaining a significant proportion of direct sales becomes essential, driving demand for fulfillment companies, especially for brands that find it challenging to manage logistics independently.
19. TechTaka's business initiation was partly based on this demand. E-commerce growth has highlighted the importance of logistics services, as demonstrated by Coupang. Thus, providing a competitive logistics system to customers can open new opportunities.
20. There is a demand for quality delivery services independent of Coupang. However, much of this demand will likely come from small sellers and a diverse range of small inventory, potentially a challenging business model even Coupang might have overlooked.
21. Efforts continue in the market, like TechTaka's Argo, which offers an integrated solution beyond warehouse management to transportation and seller tools, showing an intention to compete directly with Coupang at least on the software front.
22. TechTaka is also enhancing its hardware infrastructure by incorporating external logistics companies' infrastructure as "partner centers" based on its robust system.
23. As we've explored the investment in TechTaka and the potential and limitations of the e-commerce fulfillment market, it appears that the domestic e-commerce market will likely continue to be dominated by those with preemptive logistics infrastructure, like Coupang. Competing with these platforms may become increasingly difficult unless backed by substantial capital, like Chinese platforms.
24. The monopolization by a few platforms could reduce market dynamism and diminish the value consumers can enjoy in the long term. However, companies that can complement this need will remain essential.
25. Will fulfillment companies grow as envisioned, creating a new ecosystem with small sellers and brands, or will the logistics ecosystem continue to be reshaped around big tech? We'll keep an eye on these developments and keep you updated.

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