Untangling the Supply Chain • VC Santosh Sankar

Co-founder of venture capital firm Dynamo,  Santosh Sankar, joins Niki from Chattanooga to explain how the supply chain became everyone’s business during the pandemic - and the solutions his portfolio companies are building to fix it.

“In the background has been this thing, supply chain, and when it works, we don't think about it. When it breaks down, there's a lot of concern, and there's a lot of conversation to be had.”  -Santosh Sankar

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Transcript

Intro: 

[music plays]

Niki:  I’m Niki Christoff, and welcome to Tech’ed Up. 

Today, we’re talking about all things supply chain with the Co-Founder and Managing Partner of Dynamo Ventures, Santosh Sankar. Remember the days when you didn’t panic-buy toilet paper? We talk about how logistics and mobility tech went from a niche investment opportunity to a very big business.

Transcript

Niki: Today, remotely calling in from Tennessee, I have Santosh Sankar. You are in Tennessee right now, right?

Santosh: I am. I am calling from our offices in Chattanooga, Tennessee, the Dynamo of Dixie. 

Niki: Okay, [chuckles] so you're gonna need to explain what that means, which is maybe what we'll start with. So you were the founder of a venture capital firm, Dynamo Ventures. It's a seed-stage firm that invests in supply chain and mobility tech. [Santosh: Yup] Tell me more about how you ended up in Tennessee and a little bit about the work you guys are doing. 

Santosh: Yeah. Yeah. So, I'm Santosh, co-founder and managing partner of Dynamo here. We named our firm, in part, as a tribute to Chattanooga, where we're based, and Chattanooga used to be called the “Dynamo of Dixie” back in its heyday.

So it was an epicenter for trade for culture. It was at the crossroads of a lot of different folks coming in and out. And the one thing you'll hear people talk about is how Al Capone used to stay at one of the hotels here, back when he was at his peak, kind of, being involved in whatever he was involved in whatever he was involved in.

Niki: Crime? [chuckling] 

Santosh: Yeah, crime. I'd rather not associate with Al Capone too heavily. 

Niki: I love that we're leading with Al Capone [Santosh: laughs} and the Dynamo of Dixie. Continue. Yes. The attributes of Chattanooga, [chuckling]

Santosh: It was a really important point in trade for the native Americans. And it's because of the way the Ridge actually is cut, and it opens, and the Tennessee river flows through. So, for as long as there've been, kind of, people around this area, Chattanooga's been very rich in logistics, supply chain, know-how, and knowledge.

And, back in 2016, my partners and I decided to raise a seed fund and make an attempt at formalizing an investment practice around supply chain and mobility. And back then, we were a practicing VC in Tennessee in supply-chain. Like what is, what, what the hell? And, like, people used to laugh at us.

And I remember people thought we were crazy. They wouldn't take us seriously. 

And it was like, you know what? Like we just have to keep our head down, and we need to stay true to our north star. And when we showed up to the table, we would, y’know, remind people we're only good at really one thing, and it's this industry. And we're able to leverage our domain expertise and our networks to help you as a founder. 

And we did that all here based in Chattanooga. And with that, by the way, we don't have any geographic bounds. So it's not that I only invest in Tennessee or in the Southeast. About a third of our investments are abroad. So as far out as Indonesia, we have a couple in Mexico we've done recently. So we're very proud of, of being able to, and in some ways, kind of export some of that heritage understanding of Chattanooga and supply chain across the world as we think about technology permeating this industry, 

Niki: I love that expression, heritage understanding because, y’know, Tennessee's obviously known for FedEx.

You've got FedEx on one side of you; you've got UPS on the other side. You do have these different forms of transport that are sort of native to it, but you, you've been prescient in two ways. When I look at your career, one is locating a venture capital fund, not in Silicon Valley or New York, which, as you said, was probably, people gave you a lot of side-eye several years ago.

You and I actually, how we ended up kind of semi-crossing paths, which was more me just cold calling you was because you were at a conference for investors who are not from the coasts. [Santosh: Yeah] And so it's this, it's a growing burgeoning space. And when you add to that you can work from anywhere, and that talent can be located anywhere, it makes a lot of sense to be located in a place like Tennessee versus New York City. But nobody would've necessarily thought that back then. 

Santosh: Yeah. Yeah, that's right. Y’know, and, and, and kind of what kind of started with there… Chattanooga became important cuz of the way the roads, river, rail converged over time. And the conversations I remember we had just in the suite next door to us here today was like,” Is this the right thing to do? Why or why not?” And I, we, like, went through a, a series of evaluations and we kept coming back to, but what we're going to be strong at is being that connector and using, kind of, our, our relationships with the incumbents to better inform how we invest in the future of the industry.

And it's just frankly, really hard to do if you're not in proximity, right? Like, there is a trust that you build when you can see, y’know, The VP of Warehousing or, you know, the Head of Technology at one of the largest warehousers in North America on a regular basis. 

We found that for us, our model worked better when we were here. Right? And in a similar way, I'm not going to tell you and look you in the eye and say, “I can build the best AI robotics fund based in Chattanooga.”  That's just a bold lie. [Niki: laughs]  Right? But if I say supply chain and I give you context, it's like, “Oh, that makes a lot of sense!”  

Niki: Yeah, it does. Okay. Which leads us to the second thing you were prescient about, which is supply chain. Like, I gotta be honest, until March and April of 2020. I never thought much about supply chain.

So again, you're years before the pandemic talking supply chain, seed stage companies that are really working on different parts of this complex ecosystem, but I'd love to just hear your hot take on how people pivoted toward you, likely, I'm assuming, once the pandemic hit. 

Santosh: Everything that we think about in our portfolio operates in and around became dinner table conversation. Right? Would you have thought that you would've had a Thanksgiving conversation about like a container ship trying to do an E-brake turn in the Suez Canal and therefore you need a panic-buy toilet paper in the middle of a global pandemic? 

So, like, in the background has been this thing, supply chain, and when it works, we don't think about it. When it breaks down, there's a lot of concern, and there's a lot of conversation to be had. And, y’know, very conservatively, we estimate that this is about 10% of global output, global GDP, and all the activities that constitute supply chain. 

And I'll tell you, in 2019, when we were raising our second fund, I had large money managers who were questioning why there needed to be a specialist fund and, quote-unquote, is this large enough for you to dedicate your whole fund and life to? And it was just like, well, here's the data, right?

So, like, I'm holding this pen, and people won't be able to see it, but how does this pen get to us? Well, it goes through five major steps in the supply chain, and the first step is around manufacturing. Right?  It generally is probably made overseas and it comes off of a manufacturing line. But everything associated with this pen, so the type of software that might be used to monitor how it's produced, the various management of suppliers, right? In order to ensure that you get the, the plastics, you get, the ink, you get the labeling, all of that is within scope and all of the risk associated with that. ‘Cause one thing COVID taught us is if one person slips here, you can't make this pen. You have to go figure out how to fill that gap.

Niki: I mean, I've always been very pro-free trade, pro-globalization, pro-all of it. And suddenly, I'm thinking, we're, we're extremely dependent on the public health outcomes of other countries and their policies and their ports and the, and that's not over. Like, we just suddenly got, y’know, a really swift wake-up call, but like that's not over.

And I'm starting to rethink even my whole perspective on not having manufacturing in the U.S. But your point is every part of the pen is made somewhere else, most likely.

Santosh: Yeah, it’s most likely made somewhere else and, right?  I'm, I'm looking at my AirPod case, and it says “Designed by Apple in California,” but what, what else does it say?  “Assembled in Vietnam.” Right?

So, all these things need to make their way to our front porch someway, somehow. So when it rolls off the manufacturing line, so, that's the first area we call or we scope into supply chain. The second area we call international logistics. So this has to do with crossing borders, managing tariffs and duties, customs complexities, ships, and planes. Think about it that way. 

When you come to the U.S., you're likely gonna come through the Port of L.A., Long Beach, if you have ordered something that is originating in Asia. Right? And in the Port of L.A. Long Beach, you enter what we call the surface transportation, part of supply chain. This is the third area, and there's just a really fancy way of saying anything that has to do with trucks and trains. 

So we then end up in the fourth area, supply chain around, warehousing and fulfillment, and these tend to be very regionalized. So you'll tend to see these centers across the, the country. But their job is to hold the inventory and then release them when somebody's made an order, and it is ready for fulfillment delivery. And that practical delivery bit, that end piece, is what we call “Last Mile.” So actually getting the goods to us, to you as a consumer, or maybe as a business when you're sitting in your office. 

These are the five areas of supply chain. And for us, all of this is within scope. And the thing that people think about naturally now is like, oh, if it's like has to do with the movement of goods, it's like, that's cool. That's within your scope. It's like, yes, but whenever something moves, right? When a, a pair of AirPods come my way, what do you get as Apple? You get cash. 

So we've now entered this inning over the last six to eight years as we've digitized supply chain. All of the money movement is also now being questioned. And it's like, how do we innovate around that? Okay. What about risk? We have all this data, right? That's who has a canal issue? There's a big insurance liability that was building up as that ship was being, kind of, moved out and dislodged. Right. All these things are, are in scope now for us as investors. 

Niki: I find this totally fascinating. The idea that you're now thinking through. I mean, total insurance, I remember whatever was it a Japanese company? [Santosh: mm-hmm] I was like, oh man, bummer for,  bummer for those, those guys [chuckling]. Again, to your point, that it's dinner table conversation. 

Santosh: So, whenever anything comes your way, whenever cargo moves, there's usually a money flow, right? ‘Cause I've, I've bought something. I need to pay that, that, that end provider of goods; in this case, it might be Apple. But even when you look further up the Apple supply chain, there are money flows. And what you'll actually find is some of these people, cash flow-wise, might be on their side where they might months in advance have to front the cash in order to retool their manufacturing line but they don't necessarily see the proceeds of the sale of this AirPod for maybe a year after that. 

Niki:  So this is like business innovation. So, basically thinking through, like, not everybody’s sitting on a gajillion dollars of cash and can wait, but the people who need it;  also, there were prices changed kind of in the middle of contracts, right?

Because suddenly you had these, like, there are only so many spots at the port. Is that a real thing? Am I…

Santosh: You're talking about spot freight and, and contract freight and, and, and you are right. So, the spot market is what if, if you were to tell me, “Santosh, I need a container right now, cuz I'm going to take my podcast series and put it on CDs” for whatever reason, “And therefore I need a shipping container. “ So,  if I were to go online right now or call my freight forward, he, or she, would gimme a spot break. Now when you, like really kill it, and you're like, you know, all kinds of memorabilia for the podcast.  So when you make it, and you need, you know, hundreds, if not thousands of containers, you are able to get, what's called a contract rate. 

So a lot of the large organizations, Walmart, Amazon, and Target, can operate under these contracts. And basically, it's a discount to spot, and these are generally negotiated late into the early part of the following year. And that allows you to kind of lock in some of the costs. And what you're talking about is how spot rates kind of skyrocketed through COVID. And some of that was because there weren't enough containers in the right parts of the world in order to move freight. But also, a lot of these things are moving a lot slower cuz you saw shutdowns of ports, you saw crews abandoned or left marooned overseas, right? 

Like you had, like, some humanitarian issues that the industry is yet to fully reconcile with and figure out, “How do we not do that again?” ‘Cause at the end of the day, like, these are people we're leaving behind. And I think for, for some of your listeners, like that's like a worthwhile place to, you know, spend time as you think about policy and supply chain coming together. A lot of what supply chain is being stressed and burdened by is around labor.  [Niki: mm-hmm]. And how are we thinking about education and kind of the, the PR around it to make some of these jobs, y’know; and then on the flip side of that also is, as you talk about automation. Automation in the conversations we've been a part of in the boardroom settings we've been in has come to the top, and it's coming to the top because labor is no longer available. When it's available, it's extremely cost-prohibitive. And also, we just went through a time in the world where we couldn't put people inside manufacturing and warehouse environments. So things became less resilient. And a lot of what Fortune 500 decision-makers are thinking about is,  “How do I not allow my toilet paper fulfillment center to fail me again? Or how can I continue processing meat when there's another outbreak or a pandemic or disease of some kind.” 

Niki: I think automation's really interesting. So I worked at Uber for a couple of years, and you know, part of the, the pitch was, well, we're gonna eventually the drivers will be replaced by self-driving cars. And I was like, these cars don't work in the rain. They still don't work in the rain! [Santosh: They still don’t!] It's still, they're, [Santosh: Yeah] that's why they're, that's why they're in Phoenix. [chuckles] Self-driving trucks, which I'm obsessed with, are moving faster. And, I think, are a really interesting solution to a labor shortage like domestically, still not right around the corner.

And we kind of know now whether it's climate and weather events, whether it's public health and pandemic events, whether it's geopolitical instability, like, we just can't rely on this seamless, y’know, everything was just working the way it was back when you started this. It's like, “No, actually, there's gonna be major hiccups.”

And one thing I'd like to see more D.C. thinking about more is; we often talk about, like, I just think it's not realistic to bring manufacturing jobs to the U.S. because they're just so expensive. It doesn't mean that you can't bring jobs to the U.S. around logistics and manufacturing. You absolutely can. 

And I love innovation in the startups and thinking through the business model, innovation, and moving things online and cloud-based. Yes!  But I often wonder, like, why are those AirPods made in Vietnam? Why aren't they made in Mexico? Which would give people a reason, by the way, to stay in Mexico, if they could actually do something, that's not, y’know. [interrupts self]  It occurs to me that there could be pressure put on U.S., huge U.S.companies to move their labor, if not into the U.S., closer to the U.S., because the closer it is, it's slightly de-risked.

Is that like a crazy concept, or do you even have a thought about it? 

Santosh: Yeah, we're actually in, in, in the middle of, kind of, finalizing our perspectives in and around nearshoring, onshoring, friendshoring. There, there are many different terms and what you're; so, so, so there's a few different threads, there, and I, I'm gonna try to pull on them.

The, the first part is around sovereignty of supply chains that, that you're mentioning and when it's closer or so, when it's home or closer to home, within friendly borders, we maintain a level of security around that supply chain. And the most obvious one is semiconductors, and they're, you know, critical to everything that, that we touch. Like, I had a fridge I didn't get for two years because it didn't have a, a semi- a fridge! Right.? 

Niki: [interrupts] It's insane! My assistant’s laptop hasn't worked in three months. She's waiting for it. It's like, crazy-time. 

Santosh: Yeah. Yeah. And like these aren't, oftentimes they're not complex chips. They're actually the high volume, low margin chips that, ultimately, aren't being produced.

 But, kind of broad strokes, like, semiconductors are very important to defense and intelligence. We've come to realize that, you know what, a lot of our chips don't get made in the U.S. We don't have these fabrication capabilities that are modern. We've actually, over time, I believe, like, in the early nineties, around certain EPA legislation if my memory serves me right. We encouraged all this to get pushed elsewhere. And the thing we're now reconciling with is, like, there are a lot of people pouring a lot of money into bringing 'em back.

And that's where we think about sovereignty. And that's where we think the things that'll come back, whether it's onshoring or nearshoring, are gonna be more thoughtful in the sense that they're likely gonna be high value. And because there's a sovereignty element, there's a level of price insensitivity to it.  So you are willing to pay more to get 'em produced. And over time, that's gonna give you a base where you can automate those functions away, and you can now pull, kind of, the next things that make sense economically. So, it's not that everything will come back, but we're gonna have to go through this selective period. 

Niki: I think it's such an interesting time and obviously a boon for the fund you're creating because you have seed stage, so pre-revenue companies have been thinking about this. These founding teams have been thinking about these various pain points within the supply chain system. And now suddenly every boardroom's thinking about it, the government's thinking about it. We can't have the Department of Defense, you know, with a tin cup out trying to get semiconductor chips [chuckling], like we gotta have [Santosh: Yeah, yeah!]  a plan and balance that against, you don't wanna go too far the other direction where everything becomes nativist and then builds [interrupts self]. It can't be all made here. It's just not realistic. 

And we sometimes just don't even have, I don't know, I'm like a truther on Teslas, which is an unpopular opinion, but lithium batteries, like we're not, they're in Afghanistan. We're not gonna make those batteries in the U.S. But thinking ahead of time about the environmental implications, the geo, geopolitical implications, the human rights implications. We're in a particular moment in time where I think you're right on some of those issues. We're price insensitive cuz we're just gonna pay for it because we have to. 

Santosh: To your point, electrification is, is a trend that's pushing fast and, and furious because of the broader concerns around environmental health and sustainability. And yet building batteries might be one of the most environmentally damning things ever. 

Niki: I mean, totally!  And by the way, acid car batteries are completely recyclable. This is why I, like, go to dinner parties and, like, complain about Teslas. And everyone's like, “Who invited this lady who’s talking about acid batteries?” But it’s true!  [Santosh: Buzzkill!]  [chuckling] 

[both laugh] 

I’m such a buzzkill!  I’m like a Tesla buzzkill. [chuckling] But I think that, yeah, we're, we're sometimes solving one problem without thinking through like, just think three or four or five steps ahead given this moment we've had in time. Okay!  I could talk about this all day, but tell me a couple of things I've heard you say on other podcasts that you look for founding teams versus particular technologies. But what are a couple of things in your portfolio you're particularly excited about? 

Santosh: Yeah, so kind of on the, on the realm of batteries, we actually have a battery investment, that, it, it's, it's under the radar. So I'll be brief on it. Part of what they are enabling is allowing you to use recycled materials in order to support the buildout of the cell, and the way they've actually designed their technology, you're able to get twice the range without physically expanding the footprint or size of the cell. And that has obviously kind of meaningful impact on the consumer experience, but also as you think about sustainability, and being able to recycle these things, being good stewards of the environment.

We've, made an investment, late last year in a company called Solvento.  And I mentioned them earlier, but what they're providing for truckers is this working capital solution. And our prior conversation just now about nearshoring, onshoring well, Mexico is gonna be one of the largest beneficiaries of that, potentially.

And you're gonna see the trade lane. So, trade lane is basically exactly what it sounds like moving trade across the lane. With that exploding on the back of manufacturing being in Mexico, right? You're gonna see a growth in their trucking industry. You'll see growth in pockets of the U.S. trucking industry, and you'll need more capital to support it.

And perhaps one of our investments that has been quite public-facing this year is a company called Gatik AI. And they're based in the Bay Area, but the vast majority of their deployments are actually kind of off the coast, so to speak. So, Bentonville, Arkansas; Indiana, Kansas. You name it. And what they allow you to do is they, build autonomous box trucks, and these box trucks tend to operate very consistent routes, right? Every day you pick up here, and you distribute over here, or you're gonna pick up here, drop here, pick up here, drop here. 

So these are environments that are very conducive to autonomy because you've reduced the number of unknown unknowns.  And now they're moving freight for Walmart, George Pacific Co, a large Canadian pharmacy chain, and several others that haven't been announced yet. But that's like autonomy actually, y’know, coming to fruition. So, we'll start to see it scale out from these constrained situation scenarios. We think over the next probably 10 to 15 years.

Niki:  But city driving and passenger vehicles is so much harder to automate than what you're talking about. Like, I'm from Indiana; it's just straight roads. And if you have good, really well painted, like lane lines. [chuckling]  I mean, that sounds silly, but that's what automation needs. If you fix the potholes and have good signage, you really can automate that much more quickly than trying to navigate a city, which is, as you said, so many unknowns.

I'm very excited about this, like, place for tech [Santosh: Yeah!] and because those are hard jobs.  Like, long haul trucking, they're hard jobs, and you still need humans for the, the endpoints of it. So, I'm a big fan. I'm also very big on this idea of putting more capital into Mexico. I'd never heard the term “nearshoring,” or what was it you said, “friend-”? 

Santosh: [interrupts]  Friendshoring. 

Niki: Friendshoring! But I love the idea of that also because it helps, maybe, take some pressure off of this, like, immigration issue we have. If you can find, like, if you're putting capital into this neighboring country in a positive way, who knows?  I'm sure tons of people will, like, disagree with me about that, but I think it’s a good idea.

Santosh: I, I will say I, I have a friend Maggie, and she spends her life, like, thinking about, like, defense innovation, national security innovation. And she did point out, “Hey, like there are parts of the nearshoring to Mexico that may or may not work out ‘cuz of, just frankly, security.” Where she pointed out, “Over the last, like, decade, two decades, you've seen organized crime in Mexico, actually fragment, and selfishly you want it to be consolidated again ‘cuz you can monitor and control it better.”  And that could actually be an impediment in setting up manufacturing facilities in the more remote locations that would have very attractive labor pools. 

Niki: These are really complicated issues, but at least thinking creatively about some of it, but that's, that's a great point. Like, if it, it's not a secure situation. I used to, very early in my career; I did white collar criminal defense. And the number one issue we were dealing with was bribery of officials just to get whatever business done in whatever country because that's the price of doing business. [Santosh: mm-hmm]  And so corruption, safety, security, and then also dealing with American consumers and what they're willing to pay or not pay and the timeline they're willing to have. I don't know. These are all really complicated issues. [Santosh: Yeah]  But I'm so glad you're working on it!

Okay. In the last couple minutes that we have, we're gonna shift gears abruptly. One of the other things I think you were very early to is starting a podcast. You've had a podcast that has been in sort of different evolutions for a while. But if you have, like, the reason I bring this up is, I cannot tell you how many people ask me about a podcast. “Should I do a podcast?” I'm like, “No, you don't have time to do a podcast. I don't have time to do a podcast. It takes so much work.” 

You make content to highlight the investments you're making and the issues you're studying. Tell me a little bit about how you've thought about that as it's evolved over time. Cuz you've been in the game longer than a lot of people.

Santosh: Yeah.  I, I was actually just kind of pulling up, it, it looks like our, our first episode dropped October 31st, 2018. So I feel like, wow!  And, yeah, it, it's, it's a lot of work in the sense that you have to make a concerted effort similar to what you did. Right? Like being willing to send a cold email, half those people don't respond. When they respond, they're a pain in the butt to schedule with. Which I apologize for [Niki: chuckling]  it's but like-  

Niki: [interrupts] We're just happy you’re here!

Santosh: It goes on and on but when, when people show up, they, they kind of are hoping like this is a silver bullet to like getting leads faster. And I tell 'em, like, whether it's a podcast or written content, like, there's no silver bullet to speed. Like, you need to be willing to strap in, build a process and a level of consistency, and hold yourself accountable, and responsible to being consistent. And it's a long game, right? 

And, and the reason we did it was to, again, Chattanooga supply chain, VCs. How do we get people to realize that you come to us when you're talking about these things? And part of that is being very intentional in how we thought about content and the different platforms we built on.  But, I just spent probably two hours interview and prepping for four episodes I have to record this week. And I use it as a way to kind of learn and learn in different ways. So, I can learn about new business models we're thinking about, I can learn about opportunity areas we might have kind of gone stale on, or maybe we wrote off, you know, intentionally or unintentionally, but I can also have access to people that I otherwise would not have access to. 

But it's a, it's a very kind of thoughtful way to relationship building perhaps, is, is the way to summarize it. But there's, yeah, there's no silver bullet here. If you're gonna do it, do it right. Take out the time, prepare before every episode. Understand what you're trying to get out of it. And really it's like, if you get two, three things out of a speaker, that's magic! Most people are not good enough interviewees in order to give you even one thing that's worth kind of, you know, an “aha” for your audience. So you also learn as an investor. I spend my life talking to people, learning about them, listening. It reinforces that and forces me, forces me to be present with them. 

Niki: I've only been doing a podcast for, for six months, and we'll end on this, which is, I started doing this to learn. I started it to try to learn about crypto, and it became a way as I prepped for every episode; I learned something about a new person, or a person I should know but don't know that well, and what they're working on. My goal is in every episode for people listening to hear one new thing, and it keeps my Rolodex sort of fresh, and I meet people who might, down the line, be good connective tissue, even with each other. So it's helpful for my broader network. [Santosh: Mm-hmm] And it is definitely good to hear you say like, just, you have to stick with it, cuz it, it's a lot, a lot of work.

Also, I'm so grateful to you coming on because I know you have a podcast, and it is, it's a big time commitment. So maybe we end on that, [chuckling] which is I'm so glad we crossed paths through our [Santosh: yeah!] podcast life and tech life. And, and I'm excited about the work you're doing and I, I really appreciate you taking the time.

Santosh: I appreciate being on here. Thanks for inviting me. Thanks for thinking of me. And if anybody needs to find me, has, has any questions. I'm at @santoshsankar on Twitter.

Outro: 

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