“Great things are not done by impulse, but by a series of small things brought together.”

– Vincent Van Gogh

 

The year isn’t quite over, but we figured this is a good time to reflect on the most recurring and surprising themes from 2024 and share what we’re excited about for 2025.

 

Goodbyes and hellos

 

Climate risk is now mortgage risk

In 2024, the traditional insurance industry reached a breaking point, fundamentally reshaping how risks are assessed, priced, and mitigated. As climate change intensified the frequency and severity of natural disasters, insurers abandoned long-held assumptions about predictability and risk distribution. From skyrocketing home insurance premiums to the mass withdrawal of coverage in high-risk areas like California and Florida, it became clear that the conventional pricing models could no longer keep pace with reality.

 

Meanwhile, disaster aid reforms and government interventions aimed to stabilize markets exposed widening gaps in insurance coverage, leaving many vulnerable to catastrophic losses. The compounding risks have not only strained the traditional insurance markets but also highlighted systemic vulnerabilities, as described in “When the Hole Swallows the Donut”.

 

This gap left homeowners and asset owners scrambling for solutions—whether turning to lightly regulated, high-cost alternatives, weather derivatives markets, or self-funded measures like private fire protection systems. In some cases, flash floods like those in Toronto pushed local infrastructure and insurance frameworks to their limits, amplifying calls for systemic change.

 

At the same time, new markets and innovations emerged to address these challenges. The $200 billion surge in alternative risk pricing mechanisms and the broader climate adaptation gap revealed the growing opportunities to invest in this emerging dynamic. Insights like those from Kyla’s analysis and Anant Pai’s reflections underscored the misalignment in how risks are priced and mitigated, particularly in light of climate-driven uncertainties.

 

The link to mortgages? Homeowners didn’t budget for 2x or more increases in insurance costs. But also, if coverage is unavailable or only fractional payouts are received, assets will be significantly impaired.

 

SaaS left the chat

The SaaS model, built on high costs of software creation, maintenance, and consulting disguised as customer success, is being disrupted by AI-driven automation and the falling cost of development. Large language models (LLMs) are eliminating traditional barriers, mirroring how the internet transformed media by democratizing content creation. Just as platforms like Instagram replaced centralized media giants with decentralized creators, monolithic SaaS tools like Salesforce are being supplanted by modular, AI-powered solutions that dynamically meet user needs.

 

This shift is fueled by the rise of “Do-It-For-Me” models, where AI takes over tasks completely, reshaping user expectations and removing the need for complex tools. As software development becomes commoditized, traditional metrics like ARR and per-seat pricing lose relevance, forcing companies to rethink value creation and distribution. The winners will be those who embrace this new, decentralized ecosystem and integrate software seamlessly with user intent and the physical world.

 

Beginning and end of early stage credit funds

When we started in 2013 it was very clear that there were not many capital options for early stage climate outside of SVB and a few venture debt players. It was also obvious to us that for many companies creating energy and mobility assets, there might be more aligned capital beyond venture.

 

We first started testing early stage credit strategies in 2017 and went through 3 main iterations. We started by making a diverse range of investments including batteries, EV fleets, etc. Our second strategy included operating loans. Our final iteration failed to launch as we found ourselves facing competition that didn’t exist 10 years ago.  The landscape now includes scout and pilot funds from Blackstone, KKR etc. This is great for the ecosystem overall and means we can focus on just referring startups to the best capital partners.

 

Some of the lessons we learned:

• Cost of capital – once you figure out underwriting, larger AUM funds can easily price you out.
• Alignment with the VC portfolios – because credit strategies tend to be narrow and VC portfolio appetite is really diverse, the two pipelines land up being quite distinct from each other.
• Conflicts – are manageable but persistently prompted questions from LPs. And we’ve noticed credit funds opting into equity roles are facing similar issues sometimes to the detriment of startups.

 

Electric trucks became better, faster, and cheaper

Electric trucks surged ahead, breaking through economic and practical barriers faster than anyone anticipated. Once thought to be decades away from cost competitiveness with diesel, innovations in battery technology and operational efficiencies have made electric trucks not only cheaper on a total cost of ownership basis but also better suited to meet the needs of drivers and fleets. Companies like Tesla, with its Semi, demonstrated how electric trucks enhance driver satisfaction through quieter rides, better comfort, and reduced stress, which even improved driver retention.

 

Meanwhile, USPS began deploying its electric delivery trucks, addressing long-standing safety and efficiency issues while dramatically improving working conditions for drivers. In Oakland, electric school buses took the value prop further by integrating vehicle-to-grid technology, allowing them to return power to the grid during peak demand, reducing strain on utilities.

 

Startups like Third Sphere portfolio company Nevoya stepped in to tackle lingering adoption barriers by offering cost-effective, pay-as-you-go models and fleet optimization tools, making electric trucking accessible to more customers, more rapidly. There’s still work to do to dispel misconceptions about high upfront costs, but Nevoya is finding this can most easily be managed by winning bids against diesel trucking fleets, even as they grow margins.

 

The onset of climate schizophrenia

On the one hand, it’s likely the IRA will continue to spur clean energy investments, especially in rural areas like Texas, where renewable energy adoption surged despite political opposition. These states, often seen as unlikely champions of climate action, became key players in the economic success of the IRA.

 

On the other hand, Governor Ron DeSantis and many GOP leaders will likely continue to undermine climate efforts, like Florida passing a law that removed “climate change” from state policies, and blocking renewable energy initiatives like offshore wind farms, despite the state’s vulnerability to rising sea levels and extreme weather events. Meanwhile, internal GOP divisions emerged over the IRA, with some Republicans recognizing the law’s economic benefits and job creation potential, particularly in energy sectors, even as others seek to dismantle it.

 

Startup and venture are hard again

Outside of AI investing, 2024 felt like the bursting of both the VC and Cleantech 2.0 bubbles. It’s going to take a bit to unpack all the issues that lead to this but here are the top 3 we’ve observed.

• Green customer myth – we all hoped for a new class of early adopters for climate tech. Some have come through – Microsoft’s nearly single-handed creation of voluntary carbon markets is a good example. But the vast majority of customers will still only pay for better, faster, cheaper. And the “better” being considered usually doesn’t include “better for the planet”, no matter what the marketing team believes.
• Cleantech 1.0 mistakes – the $100m plant required to get to revenue really doesn’t have a natural funder in the capital markets. It’s true that many of today’s biggest companies are tech hardware companies, but they didn’t use the FOAK playbook. There are some interesting FOAK-funding efforts now, and these might help the next batch of startups.
• Investor misalignment –  lenders and growth stage investors now often compete to see who is more misaligned with founders and early investors. An old Elon interview offers a reminder that optimizing for valuation vs better aligned investors almost killed Tesla. The longer story is that early on, their growth stage investor tried to engineer a take-over as the company struggled for cash. This kind of  behaviour came back with a vengeance in 2024.
• Mistaking system economics for customer value, the Not-On-My-System Monster, and the myth of the “drop-in replacement”, as covered in Beware Climate Tech’s Pit of Despair.

 

What we’re excited about for 2025

 

AI for better outcomes

The tech community has a habit of overstating the potential for new tech in the short term. But in the case of AI, this time it’s different! Through our early experiments we’ve already seen improvements in portfolio support and processing new opportunities. This paints a very clear picture that we risk not adopting AI fast enough. Here are a few use cases we are pursuing in 2025:

• Managing time and $ allocation – When we invest in a startup we set clear expectations about having a plan and working towards that. In simple terms, we’re very unlikely to continue investing in teams that miss plan. Can we scale how we track progress, catch issues earlier, and course correct so more teams hit milestones?
• Beyond CRMs – Do we still need a database interface to answer our most persistent question: “Who would be most helpful for this startup to meet right now”?
• High volume investment decisions – we’ll be using some of our LLM tools to go back to a process we loved from when we ran URBAN-X – inviting anyone to pitch. More below… and no we’re not outsourcing our decision making or imagination.

 

Request for Startups

One of our new LLM super powers is a return to our old super power of processing a high volume of pitches. We’re hoping to invest in up to 10 new startups focused on climate adaptation and resilience. Areas of interest include long-term risk modeling, short-term warnings and alerts, climate-resilient infrastructure, nature-based solutions, community organizing, and innovative financing mechanisms.

 

Our evaluation criteria prioritize solutions that are anti-fragile, high growth, high impact, and capable of deploying rapidly. Some example areas were looking for solutions in include strengthening infrastructure for climate risks, developing resilient agriculture and healthcare systems, and leveraging new financial models like climate bonds and parametric insurance. The goal is to get feedback to everyone quickly and surface the best teams.

 

We’ll share the call in January, but we’d love your thoughts and comments on the draft before the holiday break.

 

Request for Talent

As you think about or know others thinking about how they’re going to work on climate in 2025, think of us. Our portfolio of companies are growing and have a few things in common. First, they’re simply focused on making things better, faster and cheaper. They mostly don’t rely on incentives. And they’re sneaking in climate benefits, even if you have to go to their about page to figure out how.

 

Please tell them to shoot an email (with resume/cv/linkedin) to talent@thirdsphere.com and they’ll get back some suggestions of roles that match and a potential intro to the teams from us. Try it yourself.

 

Or share a few of these links: Revivn, Future Motion, Kelvin, Near Space Labs, Circuit, Forward, Urbint

 

Expanding Our Climate Ecosystem Impact

This year we’re saying farewell to two team members – Zeev and Shilpi. Zeev is continuing to work on credit at Turtle Hill – still helping teams with first non-dilutive funds to deploy in areas like building performance, distributed energy resources, rebates and other strategies. Shilpi Kumar is transitioning to Board Partner at Third Sphere and will be taking on a leadership position with the recently announced Bakar Climate Labs at UC Berkeley. This move reflects our ongoing commitment to the climate innovation ecosystem – bridging investment, research, and real-world impact in ways that can meaningfully accelerate climate solutions. Shilpi and Zeev’s expertise and passion remain a core part of our team’s approach.

 

We’re coming up on the end of year 3 of our fellows program. We’re excited that so many fellows continue to work in climate and have gone on to roles at Builders Vision. Cisco Foundation (where two former fellows are now working together!), NY Green Bank, The World Bank, Ensemble VC, Deloitte Sustainability and Anthropic! We’ll make some changes to the program in 2025 as we see more demand from very senior people to join our efforts. More on that soon.

 

Best.

Stonly, Shilpi, Yana, Miela, Roscel and Shaun

 

P.S. As a thank you for making it this far in the newsletter (congrats), we’d like to send you a holiday gift: reply to this email with your mailing address if you’d like a pair of Third Sphere socks. And while you’re at it, let us know if you prefer WhatsApp or Slack for communications.

 

P.P.S. You can still send us old fashioned warm intro emails to let us know about any founders you think we should meet! As a reminder – anything you think is related to climate probably is a fit(our companies span most economics sectors now). Bonus for bad logos and excellent demos.

 

Did someone forward this email to you? Here’s how you make sure not to miss the next one.

You can find our previous updates here.