Joshua Posamentier and Abe Yokell have spent the last seven years on the LP circuit, tirelessly pitching LPs on the financial and ESG (environmental, social, and governance) benefits of investing in climate tech.
“We’ve had hundreds — I don’t even want to fess to how many — but hundreds of conversations over the years,” Yokell, a managing partner at Congruent Ventures, told TechCrunch+. Some of those conversations ended with the limited partners investing in one of Congruent’s funds, but for the most part, they didn’t. “We’re used to getting rejected. That’s part of our life.”
Well, the shoe is on the other foot now. When raising Congruent’s third fund, the hard part wasn’t finding limited partners but figuring out who to turn down. The firm had originally hoped to raise $200 million, a small step up from its second $175 million fund. Investors thought that was far too modest, and instead offered $600 million, a threefold oversubscription.
Congruent turned down $325 million of that, ultimately raising $275 million. (TechCrunch+ first reported on the fund in November.) “This is really the first time we have seen this complete abundance of interest,” Yokell said.
The decision wasn’t easy, but the team felt that they didn’t want to expand too quickly.
“Fund size is your strategy,” Yokell said. “The right thing isn’t to do more deals when you bloat the fund size; it’s to do bigger deals. And you can’t do bigger deals at seed that make sense, in our opinion, from a returns perspective.”
“There’s a natural inclination that’s like, ‘Oh, we can raise more money. We should raise more money,’” said Posamentier, who is also a managing partner at Congruent. “The problem is, if you want to write a $500,000 check for a pre-seed startup that has nothing, is a $500 million or $1 billion fund going to do that and then going to pay any attention to it at all? We want to keep it small.”
For Posamentier, it’s more about actually being useful to the companies the firm invests in.
“We like affecting the outcomes of our companies,” Posamentier said, “which sounds a little suspicious, like, ‘We’re here to help you’ or ‘We’re adding value,’ — just pick your cliché. The later the stage you get to, the more built out these teams are, the less help they need, the less you matter. Then you’re just another check.”
Neither Posamentier nor Yokell see the firm changing its strategy or approach to early-stage investing. Congruent will be seeking out companies in the same verticals it has invested in before, with the same business models, and firms that are focused on North America. “Anything that has a positive climate impact is fair game,” Yokell said.
“We’ve been on roughly the same eight-to-ten-new-company-per-year cadence since we started,” Posamentier said. “That’s a little bit of a coincidence. It’s a little bit of ‘This is what the team is designed to do.’”
He believes the firm’s size and services it can offer give them an “edge in the market” where they can get better pricing and better access to deals.
Congruent’s LPs appear to agree. The new fund includes some returning investors, including the California State Teachers’ Retirement System, the Grantham Foundation, the University of California, Sobrato Capital, Strategic Investment Group, and clients advised by Cambridge Associates. The list also adds some new names, including Northwestern University and Vintage Investment Partners, as well as other institutions representing other endowments, pensions, foundations and sovereign wealth funds.
“One of our founding purposes was to try to bring institutional capital back into climate,” Yokell said. The fruits of that labor appear to be paying off.
Congruent’s experience fundraising this year runs counter to broader industry trends. Venture capital firms are on track to raise just $57 billion this year, according to PitchBook-NVCA Venture Monitor. That would make 2023 the first year since 2017 that the entire space has raised less than $70 billion.
Earlier this year, Congruent announced that it had closed a separate $300 million fund that would focus on Series B and C companies mostly already within the firm’s portfolio. Together with this new fund, the firm has raised over $550 million this year alone, nearly double all of its previous funds combined.
Why the sudden surge in interest? There are a few drivers, Yokell speculated.
For one, there are relatively few investment managers with track records in climate tech, leaving LPs interested in the sector with only a handful of options. Second, as of April, the firm had closed three funds, which means that Congruent is “emerging from manager jail” — the firm can now provide LPs with enough evidence that they’ll be good stewards of the money.
Lastly, Yokell and Posamentier have been leading Congruent for the better part of a decade, and neither have shown any interest in splitting up or radically changing the direction of the firm.
Despite headwinds caused by rising interest rates and a generally bearish venture capital market, both partners remain bullish on climate tech. Recent policy changes, like the Inflation Reduction Act and Europe’s Green Deal, have certainly given startups in the space a boost, but what the two partners are keeping their eye on is the pile of cash institutional investors want to invest in climate.
“Those floodgates haven’t really, really opened,” Posamentier said.
Note: The story has been updated to reflect the fact that Congruent raised $275 million, not $250 million as initially filed with the SEC.