Dynamo Ventures, a supply chain-focused seed stage venture capital fund based in Chattanooga, Tennessee, announced Wednesday that it had successfully raised a $43.21 million Fund II.
That’s more than double the size of Dynamo’s $18 million Fund I, which it raised in 2016 and has now fully deployed into a portfolio of companies. Dynamo said that it will continue to write seed-stage checks, typically between $250,000 and $1.2 million, to FreightTech startups that are looking for product/market fit.
Dynamo, which is run by partners Ted Alling, Jon Bradford, Barry Large and Santosh Sankar, was founded in Chattanooga after freight brokerage Access America sold to Coyote Logistics in 2014 and Coyote was in turn bought by UPS in 2015.
Sankar and Bradford said that there were two major tailwinds for Dynamo’s fundraising process this time: the way that the COVID-19 pandemic made industry outsiders and individual consumers feel the pain of supply chain disruptions and the performance of Dynamo’s Fund I portfolio companies.
“When we first started raising money pre-pandemic, we heard questions like, ‘How big is the supply chain [sector], for you to have a specialized fund’?” Bradford recalled. “By the end of the raise, the question we heard was, ‘Why aren’t more investors involved in the space?’”
“The supply chain was optimized to within an inch of its life prior to the pandemic,” Bradford continued, arguing that cost-based optimization often resulted in fragility. Then the Suez blockage happened, accompanied by a semiconductor shortage and a container crisis, leading to a new consensus around the need for flexibility, resilience and faster decision-making in supply chains. The perennial problems of forecasting demand, managing inventory, and efficiently utilizing transportation and storage capacity have taken on a new urgency, especially among venture capitalists used to thinking about the movement of bits rather than atoms.
Sankar said that Dynamo Fund I’s performance put it in the top 5% of seed funds of its vintage on a net total value to paid-in (TVPI) basis. Net TVPI refers to the ratio between the amount of money Dynamo’s investors put in and the total value of Dynamo’s positions in its portfolio companies, and is often used to gauge the performance of funds that are too young to have fully paid back their limited partners.
Dynamo’s portfolio was buoyed by Sennder, a German digital freight brokerage that raised a $240 million Series D at a $1.45 billion post-money valuation earlier this month, making it Dynamo’s first unicorn. Dynamo first invested in Sennder in 2017. Other Dynamo portfolio companies that have seen their valuations rise recently include Atlanta-based digital warehouse and distribution network STORD (valued at $505 million as of March 2021) and Irish drone delivery service Manna Aero, which closed its Series A at the end of April. As expected from a risky seed-stage portfolio, some bets didn’t work out: Starsky Robotics, a promising autonomous trucking carrier incubated at Y Combinator that Dynamo backed in 2017, failed in 2020.
Dynamo’s performance was strong enough to persuade its Fund I investors to double down, and then it kept raising more money.
“Our Fund I LPs committed the same amount or more,” Sankar said. “They said, ‘We see the future of a franchise here, and we want to support it.’”
Sankar said that, following a broader VC trend, Dynamo was deploying more capital at any given opportunity and that along with the size of the fund, initial check sizes and reserves held for follow-on investment have also essentially doubled.
Plentiful capital is chasing relatively fewer top-notch entrepreneurs, Bradford said, and that means that for VCs, accelerating the investment process can become a differentiator. He said that Dynamo had recently met with and invested in a team from San Francisco, and the total time elapsed between the first email contact to the wiring of cash was eight weeks.
“Money isn’t necessarily coming down the stack,” Bradford explained, saying that Dynamo hadn’t felt pressure from later-stage VC funds investing in seed stage, “but we’re writing checks faster.” Bradford said that Dynamo had seen more “preemptive rounds,” where, for example, a company could raise a Series A just a few months after a seed round, instead of waiting the customary year or so between investments to spend its money on building the company.
Those preemptive rounds are pulling valuations up and putting pressure on growth funds to invest in Series A and B rounds, but there’s a risk that young startups may struggle to grow into their higher valuations, Bradford said.
“The markets are all over the place,” Bradford said. “We’re staying in our lane and sticking to what we’re good at: supply chain and mobility.”