A VC in Vacationland

Image by Earth Class Mail via CrunchBase

I'd thought I would follow up my Megabus/truck musings of last week with a review at some start ups that are looking to beat up on FedEx and UPS. Where have we heard this story before? Plenty of times in the last decade and no serious competitor has emerged.  As a matter of fact, they drove DHL out of the US domestic market, after DHL lost millions trying to compete.

Thanks to Curt Woodward, Senior Editor at Xconomy for doing the following interview with the founder of equaship. Note:I corrected the original article since SweetShip has changed its name to equaship.

Remember shelling out big shipping and handling charges for that rotisserie oven you just had to buy from some infomercial? Small retailers sure do—and they remember it fondly.

In fact, when entrepreneurs Ron Wiener and Josh Leichtung were in the catalog business years ago, shipping and handling could actually account for your entire year’s earnings.

“You looked at your 2-to-4 percent at the end of the year, it was all the profit that you made on shipping,” Wiener said. “Amazon’s changed the game.”

Now, to compete with Amazon.com and others offering free and low-cost shipping, small- and medium-sized retailers have had to trim their old reliable revenue stream. That’s been a big win for consumers—another example of computing power and business minds disrupting an old, opaque, inefficient system that was begging to be turned upside down.

But Wiener says smaller retailers have been mostly left out of the positive side of that revolution. The little guys are still using the big carriers like FedEx and UPS for a lot of their shipping, but are unable to command better discounts on their own costs.

“They fight over Amazon. They fight over the big retailers,” Wiener said of the shipping giants. “And they make money on the little guy.”

That’s where Wiener and Leichtung hope to thrive with their new company, Seattle-based equaship (formerly sweetship), which they’re priming to start operating sometime in the second quarter.

equaship aims to aggregate the front end of package collection, customer service and payments (the “first mile” of parcel travel, in shipping parlance) for small and medium retailers. ShipSweet will take those parcels to the shipping companies—particularly the lesser-known networks of regional and local carriers—and use the economies of scale that come from pooling lots of small orders to deliver both profits for equaship and better rates down the line for small businesses.

“We’ll be competitive in most cases for shippers who are under 150 packages a day,” Leichtung said. “But under 50 packages a day, no one will be able to touch us in terms of price.”

Although I know basically nothing about the mechanics of the shipping industry, I was skeptical after hearing the pitch that a small startup could quickly get in front of enough retailers to make a dent in what Wiener paints as a dominating duopoly of FedEx and UPS, with the U.S. Postal Service thrown in for good measure. After all, small business are a highly dispersed, fragmented market.

equaship says it’s targeting two spots to solve that problem:

—Integrating with providers of shipping software systems, sometimes known as the “shopping carts,” who also could get a chance to take a slice of the action.

—Partnering with retailers to build a network of package drop-off locations for retail clients (and any individuals who want to take advantage). Wiener and Leichtung didn’t have any details on that front, but looked like they wanted to say something exciting about a possible retail partnership.

equaship certainly isn’t alone in trying to build a business out of software-driven efficiencies in the shipping business. Bellevue, WA-based Enroute Systems makes a Web-based software platform that helps businesses choose the cheapest and fastest delivery service for their packages. Open Mile (Note from Dave: run by my buddy Evan Schumacher who just got serious funding from Charles River Associates), a startup with bases in Boston and Chicago, lets shipping companies bid on prospective parcels and uses Web and mobile technologies to line things up.

equaship is different because of its focus on concentrating shipping orders on its own, Wiener said. That makes it a more active middleman and less like a matchmaker. That also sounds harder to pull off, of course—while it’s essentially an IT solution, there’s a lot of touch points at package collection, order processing and so forth.

The strength of equaship lies in large part with the team it’s building, Wiener said. The company’s managers and advisers include veterans of Adobe, UPS, Amazon and the U.S. Postal Service—a variety of experience you’d need to tie together traditional retail, software-heavy routing systems, and blue-collar trucking companies.

equaship is the first company to emerge from of the Seattle office of Venture Mechanics, Wiener’s startup incubator project. Wiener, who is listed equaship’s founder and chief executive, says the startup is wrapping up a $1.5 million round of angel investment after about 20 months of being bankrolled through Venture Mechanics. Leichtung is the chief marketing officer.

I asked Wiener if there are any lessons he took from his experience at an up-and-down digital mail startup that he led for five years until stepping down and being replaced by new CEO Sarah Carr. Earth Class Mail relocated to Oregon and was focusing on a reboot, according to this January update from The Oregonian.

While the Internet is killing off traditional mail, Wiener said, it is also enabling more e-commerce and a resulting rise in parcel traffic. He also said equaship would be much less expensive to establish because it will need less brick-and-mortar infrastructure—he predicted it would take 5 percent of the money that was needed to build Earth Class Mail, and would be profitable in less than a year, as opposed to several years.

I am personally a skeptic when it comes to these start-ups. Logistics is all about scale economies best served up in a proprietary network.  When you have to blend together all sorts of other people's networks to make stuff happen, you usually cannot achieve these scale economies.