Longtime venture capitalists Abe Yokell and Josh Posamentier have decided to do something that nearly all of their Silicon Valley peers have been avoiding: invest in early-stage cleantech startups.
The two are actually calling it investing in “sustainability technology,” and together they’ve launched a new fund called Congruent Ventures, which they discussed with GTM for the first time this week.
According to a filing with the Securities and Exchange Commission, the fund is raising $50 million for seed and Series A rounds. There’s also another $50 million that will be used for follow-on investments. The duo says they’ve already made their first investment, though they declined to name the startup, and they plan to do approximately 10 investments of around $1 million each per year.
While small, the new fund is notable. It's one of a very small number that are still willing to make bets on early-stage entrepreneurs and startups that are building companies around energy technologies, new kinds of materials, advanced manufacturing and agriculture. Most investors backing these types of companies are investing at a much later stage, hoping it will make those investments less risky, or are opting for these investments only when they’re based on software and computing innovations.
For the few investors that are still committed to these types of early-stage companies, there are still big opportunities. The megatrends that provided the basis for the original cleantech wave are stronger than ever: World populations are increasing and more people are moving to cities, the climate is changing, and countries and cities are shifting to lower-carbon technologies.
With fewer investors hunting for deals, there’s also less competition. Most of these rare investors are developing new funds, instead of trying to do more investments under firms that have mostly moved away from cleantech. The idea is to tell a new and more positive story to limited partners looking to put their money to work.
Other new funds include 1955 Capital, created by former Khosla Ventures partner Andrew Chung, and Breakthrough Energy Ventures, a fund with a billion dollars from investors Bill Gates, Vinod Khosla and John Doerr. Green Bay Ventures, a $130 million fund from NEA co-founder Dick Kramlich, has indicated it will also do early-stage energy, manufacturing and transportation investments.
Yokell and Posamentier said they’re looking for sustainability technologies that are hardware- and software-based, and plan to make investments across a full spectrum of sectors. “We think the babies are being thrown out with the bathwater when it comes to hardware. There are some good hardware investments out there,” said Yokell, who spent 13 years with RockPort Capital Partners investing in cleantech companies.
In a conference room at RockPort Capital’s offices in San Francisco, Yokell and Posamentier laid out some of their philosophies and plans for how Congruent Ventures will make money investing in this difficult sector. Part of their strategy lies in how they’re structuring the fund; the other part is their collective experience of seeing the inflating and deflating of the cleantech bubble over the years.
The investors see Congruent Ventures as a new type of fund that collaborates closely with follow-on investors. The two partners will make the early-stage investments through their $50 million fund. Then a group of partners, who are investing in the $50 million follow-on fund, can opt for additional investments in the selected companies.
“The challenge with this sector right now is that if you’re trying to do early-stage investing, you have to have some of the follow-on capital prebaked, or at least predisposed. There is a big financing gap between early and late [stage] right now,” said Yokell.
While the pair declined to identify their limited partners, Yokell described some of them as investors in the space who don’t currently have an investing team, along with others who are looking to bring more capital into the earlier stages of the sector. In that way, Congruent Ventures could act as a feeder fund and screening mechanism, and also a confidence booster for bigger firms.
The structure is highly unusual and could be difficult to implement. Yokell confirmed that for the follow-on fund, “There’s no legal commitment for them to do anything.”
Beyond the fund structure, the partners shared similar philosophies about ways to invest.
Posamentier, who was formerly a partner with Prelude Ventures, acknowledged the capital intensity of cleantech. However, he argued that it hasn’t been that much worse than other sectors -- only that mistakes were made on when to deploy large amounts of capital.
“I think for a lot of the challenging investments in cleantech, the trigger was pulled too early on the capital investment. By the time you knew it worked or didn't work, it was entirely too late to throttle that investment,” said Posamentier.
Another way to de-risk investments is to leverage the ecosystem that has built up around cleantech over the years, said Posamentier.
“Today you can build an advanced materials company that really doesn't have to put in a dime of capex, because there’s already manufacturing infrastructure they can use out there.” There are also newer incubator and accelerator programs like Cyclotron Road and Greentown Labs that were created specifically to support hardware-oriented energy, materials and manufacturing entrepreneurs.
Posamentier said the new ecosystem and infrastructure for early-stage cleantech startups is similar to how consumer web startups can rely on Amazon Web Services and database providers to lower their costs. It’s also similar to how the semiconductor industry moved to fab-less chip companies. “Cleantech is moving to that more mature business model,” he said.
Few think cleantech investing will hit the heights of the bubble of years ago. But Congruent Ventures is part of a trend of investors trying out new models. “I think there will be some amount of resurgence. It’s not going to be huge,” said Yokell.
Other investors are backing the themes of sustainability with their own unique methods. Andrew Chung of 1955 Capital is focused on bringing technologies born in the U.S. and Europe to be commercialized in China and other developing countries. Chung was able to help a handful of startups work on commercializing technologies in China through Khosla Ventures.
It’s unclear how successful these ventures will be. But the world needs new energy, materials, manufacturing and agriculture innovations more than ever. And Yokell and Posamentier want to stay ahead of the trend. “If you don't have the early-stage stuff starting, you’re not going to have the late-stage stuff. It’s got to start somewhere," said Yokell.