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WK581 – What’s changed and hasn’t“The times, they are a-changin’.” It’s a strange season for climate tech (and venture). Luckily we’ll be able to get together in a few weeks during SF Climate Week to talk through some of what we’re seeing and doing in response. Come join us.
Customer Reality CheckCustomers are reverting to classic tech adoption – paying for things that are better, faster or cheaper. Only now, many technologies are also better for the planet. And the frequency of climate fueled disasters has moved adaptation and resilience into the spotlight. We’re working with founders to understand where policy pullback and uncertainty is causing sales slowdowns, and where sales are still taking off even without political support. Take EVs. Demand for electric trucking isn’t just coming from blue states like California, but from Texas too. Certainly California has had in place incentives to drive early adoption, but electric trucking is already competitive and in some cases is delivering cheaper alternatives to seemingly unassailable diesel fleets. But that’s not all. Electric school buses are showing how EV fleets are about more than transportation. They can also be used for energy storage, just like static batteries. As one founder pointed out, “EVs aren’t just a climate play anymore. They’re infrastructure.” Other shifts are a bit harder to see. Over the last 12 months there has been a notable slowdown in real estate developers buying sustainable services. Customers have made it clear that they want architecture services that are simply better, faster and cheaper. And they’re perfectly happy to have more sustainable buildings, because this often just makes more economic sense. This led Cove to launch their new Architecture offering. It’s also true that customers have other concerns competing for their attention, even if we believe climate should remain top of the list. Governments are worried more about defense and trade. Most companies are trying to test and deploy LLMs in the kind of frantic activity reminiscent of early dot com efforts to figure out the Internet. And for consumers the degenerate economy beckons. All are now seeing the growing costs associated with climate as once in a 100 year weather events become annual norms.
Annual 100 Year Weather EventsWe’re deep into a new phase of climate adaptation: where private response networks are growing faster than public ones. In LA, a single neighborhood avoided catastrophe through smart design and materials. A 65 year old insurance broker in LA described how he probably won’t rebuild because it’s going to take too long. They consider themselves lucky as they reflect on how many are underinsured or have to leave LA to access the best quality public schools. In a thread that caught our eye, Arianna Armelli shared her team’s analysis of 30,000 wildfire-impacted properties. The implications ripple into real estate, insurance, policy, and venture. Resilience isn’t a vertical anymore—it’s a layer. The definition of resilience and adaptation is also expanding. Most of the conversations over the last 10 years have centered on insurance. However there is so much not covered by insurance for any number of reasons. And all of the physical risk discussion is centered around assets and not people. We’re starting to see conversations about climate and mental health.
Less Hardware. More Robotics.From 2019 to 2024, Climate saw a surge in investment beyond software, including with some of the most notable investors like YC and USV. Voluntary carbon markets, IRA and EU Green New Deal provided some customer signal to encourage investment in areas like FOAK – that is firms that get to revenue after building first of a kind plants, usually requiring 10s of millions of dollars in investment. But as customer demand and policy support stalls, so too will offtake agreements. Like revenue traction signals for SaaS, without offtakes, an already hard FOAK funding path is near impossible.
But FOAKs are just one type of hardware company.
Robotics firms have benefitted from rapid, more capital efficient path to market. And outside of climatetech, there is a growing universe of investors who see robotics as a further way to invest in AI. It helps that some large robots are succeeding in public spaces like Waymo, alongside smaller robots like Kiwibot. There is even more progress beyond the public eye – in construction, logistics, defense, public safety, agriculture.
One major new issue for US hardware companies? Tariffs. Best case, they suck up a lot of time and energy to reorganize supply chains. Those around during Covid will have some muscle memory for this and recall that this diverts resources from other activities like R&D. Here’s a good breakdown of the likely impact on a US bicycle maker, for example. Worst case, the necessary repricing will cut deeply into 2025 sales or margins, making fundraising harder as investors rightfully ask – what are we getting for taking on these additional risks and uncertainties that don’t show up in software?
Otherwise, there’s actually a lot of good news. The customers seem to be there, along with the cost curves. To ensure hardware can succeed, we still have work to do on the capital stack. Capital Stack JengaWe’re now quite a few years into working with teams across a bunch of different capital stacks from revenue-based finance or credit lines to more complex off balance sheet structures. Just like VC syndicates, part of the problem is understanding opportunities for misalignment and we now have quite a few case studies that span the good, bad and ugly of the climate capital stack. While grants are being rolled back and federal funding becomes less clear, Streamline can help —from rewriting proposals to tracking state-level funding. Try it here. For credit we have our own list that we’re testing with founders. We’re cooking up a more formalized and open source resource in collaboration with a few network partners and the help of some great HAAS fellows. You can access a draft version of our list here: Cap Stack Landscape Map (pw: CapStack). Always open to hearing about more credit providers we should have on our radar. Please let us know if there are any credit partners you would want to see in this list! We’ve learned a lot about how VC syndicates work and how they fail. For example, smaller funds are aligned with founders and in trying to avoid dilution, while larger funds have more capital to deploy, so they’re more eager to find reasons to use more capital often insisting on faster growth versus profitability. Credit providers add a few more dimensions to the capital stack puzzle. And we’re seeing some examples of how lenders can become misaligned with VC investors and founders. For example, project finance folks tend to be more focused on more mature technologies, so that if things go wrong, it’s relatively easy to package them up and operate or sell them on. Downside of this is that if a startup is struggling in some way, there may not be incentives to work with the equity investors to help out because, well, there’s already a plan in place to manage the assets without them. At the same time, there are some great counter-examples where asset finance partners have provided the capital and a framework to enable geographic expansion and even acquisitions! So there are lots of reasons for optimism and just like managing VC syndicates, so necessary learnings to help keep folks aligned.
Third Sphere News In keeping up with the latest platforms we’re migrating our blog from Medium to Substack and will continue posting our insights there. Latest insights we’ve posted:
Other portfolio news:
Heading to SF for Climate Week? Here’s where we’ll be:
Jobs + Founder Support
For more, check the Third Sphere job board.
Best. Stonly, Yana, Miela, Roscel and Shaun
P.S. More next month and back on our regular monthly schedule going forward!
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