At the risk of sounding like Chauncy Gardner – the witless antihero played brilliantly by Peter Sellers in his last movie role – I believe the world of venture capital to be like a garden.
If the soil is rich, new shoots struggle tentatively out of the ground. A late frost, a heavy rain, or a clumsy overseer can crush the life out of the sprouts. If the new shoots can find a dependable water source, have a bit of protection from the elements, and gain a few inches in height, they have the chance to make it to the next stage of life – strengthening their stalks in preparation for bearing fruit.
As both plants and start-ups grow, numerous problems can and do occur, but the most delicate part of the lifecycle is early on. This point was brought home to me recently when I spoke with the founders of Congruent, a ClimateTech-focused venture capital firm that specializes in early stage investing.
Whether you are invested in venture funds or not, you should be cheering for Congruent’s founders, Abe Yokell and Josh Posamentier, since they are working very hard to make sure their portfolio companies dig humanity out of the climate hole we have dug for ourselves.
Congruent just closed its second fund and has a war chest of $175 million to spend on early stage ClimateTech ventures. The partners originally targeted a fund size of $125 million, but simply could not stop institutional investors from sending them checks. This is what happens when there is widespread and growing understanding that the new climate normal is not normal.
Looking through Congruent’s list of portfolio companies – most of which were funded through its original $92 million fund – I found a lot to like. Like me, Abe and Josh are interested in VPPs and in the power of innovative software and hardware solutions in grid modernization. I was also happy to discover someone else in the venture world who thinks controlled environment agriculture is a necessity yet is deeply suspicious about vertical farms’ business models.
(Span, a company that has reinvented the electric panel to help prepare homeowners for an electrified future, is one of Congruent’s portfolio companies.)
In addition to these areas of mutual interest, I also found some fascinating companies operating in areas I’ve never thought about – specialty insurance for distributed energy producers, robotic recycling sorters, and tools to genetically enhance microscopic organisms to increase the health of soil biomes.
These are terrific ideas that I’d like to learn more about. I’ve told Yokell and Posamentier that I’d like to start working through their portfolio for my articles in this column, so expect to hear more about them in the coming months.
Not only are the startups Congruent is investing in interesting, the very position of Congruent as a nurturer of tender ClimateTech shoots is unique and vitally important. There are painfully few funds that are focused on investing capital into early-stage ClimateTech ventures, and of those, Congruent is the largest.
To understand why the early-stage ClimateTech funding world is so sparse, one must understand how the venture capital “garden” works.
As money gets made in a new corner of the market, a complex network forms to support the new field’s development. Social media darlings whose names you know – Instagram, WhatsApp, YouTube, and the like – are the most visible actors in the Candy Crush Economy, but their growth has been made possible because of the rich ecosystems of angel investors, venture capital funds, lawyers, bankers, and other providers and partners.
Just as mycorrhizal networks perform vital functions for the plants growing in fields and forests (see my May Climate Catalysts article, Fantastic Fungi), the commercial networks that evolve to serve and nurture a particular field represent an irreplaceable natural resource.
Entrepreneurs in a field become rich and act as angel investors. These angels provide seed investments to the next wave of entrepreneurs and help their investees with introductions to potential employees, partners, and investors. If the idea takes root, angels introduce the emergent shoots of companies to early-stage venture firms.
Early-stage venture firms help their investees with their wider web of connections and provide guidance on strategy, personnel, and organization.
Early-stage venture firms also have good connections with later-stage venture firms. As the seedling starts to grow stronger and as more industry insiders begin to hear and talk about what the new firm is doing, introductions to those later-stage venture firms are made, and more growth capital flows to the company.
(AMP Robotics, another of Congruent’s portfolio companies, is pioneering the use of AI-powered robots to sort waste at recycling centers.)
Look back over the past few paragraphs and notice how many times I used the word “connection” – doing so, you’ll get a glimpse at the degree to which the venture world hinges on professional networks.
I am convinced that even the best idea is worth exactly nothing if that idea doesn’t get connected to the right advisors, customers, and investors.*
Here’s the kicker about ClimateTech: the ClimateTech garden and its supporting ecosystem was thoroughly uprooted by the fall-out from the Financial Crisis.
Back in the mid-aughts, ClimateTech’s predecessor, “CleanTech” was the investing flavor of the month thanks to soaring oil prices, food shortages, and increased concerns about ecological issues. A huge amount of institutional money poured into startups focused on commercializing algal-based transportation fuel, commercializing esoteric battery chemistry technology, and building innovative solar panels.
The financial crisis wrought havoc among established companies, but the ripples caused by the crisis – crashing oil prices and general deflationary trends – also destroyed the operating model of many CleanTech start-ups. Chinese dumping of solar panels on the U.S. market caused yet more problems (see also, Solyndra), and there were probably some unreasonable expectations about technical capabilities (see also, KiOR).
These investment losses arguably set back the CleanTech / ClimateTech world by a decade because they decimated the ecosystem that allows new ventures to flourish and grow.
CleanTech entrepreneurs did not become billionaires, so don’t function as angels to ClimateTech entrepreneurs. Experienced early-stage CleanTech venture fund partners threw in the towel and retired to ranches in Wyoming. Engineers who might have been working on more efficient solar power panels suddenly started shifting their attention to creating the next Candy Crush company. In a terrific long-form interview, Congruent’s Yokell describes being literally abandoned by a conversation partner at a 2011 holiday party when he confessed to working in CleanTech venture capital.
Nearly a decade passed before institutional investors were ready to start harvesting from the CleanTech / ClimateTech garden again. Now, as humanity faces some daunting challenges and a new generation of entrepreneurs realizes that solving those challenges represents an opportunity of enormous proportions, venture capitalists like Yokell and Posamentier have their work cut out for them. Shepherding a new venture to success is hard enough; bootstrapping a new economic sector represents something orders of magnitude more difficult.
Yokell and Posamentier understand the stakes and are working hard on the ClimateTech vanguard. They know, as I know, that capitalism holds the best chance for humanity to adapt to the daunting challenges posed by climate change and that building a sustainable economy represents an investment opportunity that will make the Industrial Revolution look penny ante.
Intelligent investors take note.
* NOTE: In a consulting engagement a few years ago, I crunched the numbers on thousands of successful “exits” (cases in which a start-up sells to a larger company or goes public through an IPO) and found that a dense network of professional connections increases the value of a start-up idea by around three times. A good idea represents the bare minimum requirement to build a successful venture.