Santosh Sankar is a venture capitalist who has a wealth of experience investing in the supply chain space. He is a co-founder and director at Dynamo Ventures, a Chattanooga-based logistics and transportation-focused venture capital firm that invests in seed-stage and series A startups. In a recent interview with FreightCaviar, Santosh discussed how his firm values startups and his team’s approach to investing in the industry.
Before starting Dynamo Ventures, Santosh had two entrepreneurial stints, one in IT support and the other in media. Later, Santosh ended up working in a big investment bank, but five years in, he realized that entrepreneurship was his true calling.
“Part of my last role was to engage with private companies and VC backers. During this time, I realized I wanted to become a venture capitalist. I wanted to work with bold, visionary individuals who were smarter and more capable than me. I wanted to be a good partner and bring my strengths to the table,” he said.
The Beginnings of Dynamo
Santosh shares his journey to becoming a venture capitalist and how he and his team approach investing in the industry. Santosh and his team began their journey after meeting his partner Jon Bradford. Jon was the one who defined the idea of Dynamo Ventures. After spending months talking with tons of experts in the supply chain and logistics space, the two laid the foundation for Dynamo’s success.
Some Names in Dynamo’s Portfolio
- Steam Logistics (Chattanooga, TN)
- Stord (Atlanta, GA)
- Senndr Technologies (Berlin, DE)
- Raft (Southwark, GB)
- Gatik AI (Palo Alto, CA)
So how did a freight brokerage like Steam get into Dynamo’s portfolio?
Santosh explains more about Steam Logistics: Steam doesn’t look like your traditional freight forwarding service because it relies on technology to automate everything. They can use technology to deliver better service. Steam has aligned the three parts of the supply chain, including international drayage and domestic brokerage, to create a unique value proposition that few people can truly deliver at scale. This is how they have become a venture-scale business.
The bottleneck in the Venture Space is time, not money.
Time is a precious resource for venture capitalists, as it cannot be scaled. While firms have scaled from tens of millions to billions over the past few years, partner capacity remains a bottleneck.
- Partners have limited capacity to work with founders, but it’s their responsibility to provide stewardship.
- In the first 12 weeks after investing, partners spend 30 minutes weekly with the business to build trust and align goals.
- Venture cycles usually take 18 to 24 months, focusing on what unlocks the next growth capital stage.
- Partners may also spend more time reviewing sales decks, helping build models, and creating board decks.
- Most businesses require growth capital to take market share, grow, and build margin.
Upsides and Downsides of Being a Venture Capitalist
“I have a lot of fun. I get to spend my life meeting interesting people pushing and pulling on the status quo. It’s those situations that catch fire and build the next big thing. But it’s also a lot of hard work.”
Santosh explained how they engage with thousands of companies every year but only invest in a handful.
“Delivering bad news is probably what every VC hates. We say ‘no’ more than we say ‘yes’. But we have to stay confident in our process and perspective. If we make the wrong call, we have to have the humility to revisit it and make changes. We have a saying: strong opinions, loosely held.”
Has Dynamo ever been burned by a company misusing funds?
No, not really. Being the first investor in a business gives them a unique bond and trust with the founding team.
Even as businesses grow to over $100 million, they call on Dynamo for personal and business advice. Because of this, Dynamo tends to have close relationships with its invested companies. They’re able to constructively push back on spending and fund allocation if they ever see anything going in the wrong direction.
Evaluating a Startup’s Potential
According to Santosh, ownership and the amount raised are the two main factors when valuing a startup in the seed stage. Pre-seed and seed-stage valuations are generally driven by these factors, with the founder’s ownership being a key consideration, as it is often diluted. For pre-seed startups, founders usually give away 15-25% of their business, which may be even higher for deep-tech startups. At the seed stage, founders typically give up around 20-25% of their business. The level of dilution at series A is similar to that of the seed stage.
- Seed rounds are typically valued at around $3 to $4 million, resulting in valuations ranging from $12 to $15 million or higher, depending on the dilution.
- The investor’s goal is to assess whether, based on what the startup has done so far, they can provide the necessary milestones in 18 to 24 months to raise the next round of capital. This may range from $8 to $12 million for successful startups.
- For example, a $10 million Series A in the normalized venture environment we’re operating in, you could be looking at valuations of $40 to $50 million dollars – that’s where the world used to be before COVID.
Dynamo aims to lead seed rounds, taking anywhere from half to three-quarters of the round. They aim to own 12% to 15% of the company and take down $1.5 million to $2 million of the round.
Santosh emphasizes the importance of a strong team in a startup’s success.
“If it’s like autonomy, electrification, hydrogen, can we bring subject matter experts there?’ So, we are equally open to, ‘Hey, let’s bring these types of participants and thoughtfully because the pie will grow if they’re involved.’ And ultimately, if we grow the pie, I should still be better off even if I have a smaller piece at the end. That’s what venture is really all about.”
What are some of the changes that have taken place in the venture capital world lately?
- The rise of alternative sources of funding, such as crowdfunding and ICOs.
- The increasing importance of diversity and inclusion in venture capital, both in terms of the founders receiving funding and the investors themselves.
- The growing interest in impact investing focuses on supporting businesses that have a positive social or environmental impact.
- The shift towards remote work and virtual dealmaking has been accelerated by the COVID-19 pandemic.
- The increasing emphasis on data and analytics in the investment process, as well as machine learning and AI use to help make investment decisions.
The venture capital world is constantly evolving, and Santosh says staying up-to-date with these changes is vital for investors and entrepreneurs. “It’s always a great time to start a business in an environment identified as being adverse or difficult. If you can get through those environments, by and large, you’ll succeed when things go well.”
If you wish to connect with Santosh Sankar, reach him on LinkedIn or by email at firstname.lastname@example.org.