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BFD Expert Voices - Climate Deals

BFD Expert Voices

🪖 Today's issue features a deep dive from Alan on how climate tech startups once focused on saving the planet are shifting their attention toward defending the U.S.

Tom Stepien is the CEO of a company that spent nearly a decade developing a battery that could withstand extreme heat and cold. And then one day the Army called.

Why it matters: Military spending on resources such as batteries, low-carbon fuels, on-site power, and electric vehicles has become a vital source of capital for certain climate tech companies.

The big picture: Stepien's battery startup, South 8 Technologies, is among a crop of climate startups that have expanded from sustainability to national security — a lucrative source of funding amid a venture investment slowdown. 

Follow the money: The startups are pursuing grants and contracts that can range from a few hundred thousand dollars to tens of millions.

Case in point: Air Company, a startup that began as a vodka distiller, announced a $65 million contract in February 2023 to supply the U.S. Air Force with jet fuel made from captured CO2.

Verne, a hydrogen fuel system developer once focused on decarbonizing the trucking industry, received a $248,000 contract in May to adapt its system for the Army to produce fuel in the field. 

Between the lines: "It's good money," said Verne CTO David Jaramillo, referring to the Army contract. "It helped compensate for the longer time it was taking to fundraise."

Flashback: Climate tech's military deals mark a reversal from the past, when the sector's founders tended to avoid the Pentagon and its bureaucracy.

"You needed basical"It's good money," said Verne CTO David Jaramillo, referring to the Army contract. "It helped compensate for the longer time it was taking to fundraise." a consultant and former U.S. Air Force senior advisor. "Most startups don't have that kind of time."

The latest: The Defense Department accelerated its contracting with climate tech firms in 2022, after Russia invaded Ukraine and after AI's growth took hold.

For companies that secure a contract, the U.S. defense agency now promises one of the fastest tracks to commercialization.

"We knocked on the obvious doors in Detroit and got a lot of interest — but everyone is just testing," Stepien says. "When we went to DOD conferences, we realized that the gestation period is a lot shorter."

Green tech goes camouflage

Illustration of a shining lightbulb with an army camouflage overlay

Startups that expanded their mission into defense work span the entire scope of climate tech, from sustainable food to clean electricity generation:

The Better Meat, a Sacramento lab-grown protein developer last month received a $1.4 million Defense Department grant to make food supply chains more resilient.

Saildrone vessels, which can map oceans and seafloors, are now being deployed by the Navy to keep an eye on Iran.

Little Place Labs, an Earth imaging service for monitoring wildfires and real estate, is being used by the Air Force to expand maritime surveillance.

Joby Aviation and Archer Aviation make near-silent battery-powered air taxis that are being tested for Air Force sorties.

And geothermal energy developers Fervo Energy and Sage Geosystems are pursuing power projects at Navy and Air Force bases to ease military reliance on vulnerable electric grids.

State of play

A briefcase covered in camouflage print, on a red background.

Winning a defense contract requires climate startups to frame their technology around resilience.

Case in point: Sage Geosystems has secured a U.S. Navy grant and Air Force contract this fall alone. 

The Houston-based geothermal energy developer tailored its Pentagon pitch by describing how on-site power generation and storage would reduce base reliance on vulnerable electric grids.

"It's not about green energy goals. It's security of energy," CEO Cindy Taff said in an interview.

Stunning stat: The Defense Department is America's single biggest energy customer and one of the largest energy consumers in the world.

It spent $16.5 billion on energy in fiscal 2023 — 13 times more than the next-closest agency, the U.S. Postal Service.

Between the lines: Cutting that level of fuel consumption doesn't simply save money. It translates to vehicles that can travel farther and fewer fuel convoys exposed to ambushes.

More than 3,000 U.S. soldiers or contractors were killed transporting fuel in Iraq and Afghanistan from 2003 to 2007, or one casualty every 24 convoys, per the Congressional Research Service, citing Army reports.

"If you can produce hydrogen in the field and have hydrogen fueled vehicles, you can charge a much higher price because you're replacing oil that has to be trucked across war zones," Bilal Zuberi, of Lux Capital, says. "DOD will pay three or five or 10x for that." 

Zoom in: South 8, the San Diego-based battery developer, at first planned to sell its charging chemistry to automakers and electric utilities. 

Then it spotted a contract opportunity with the U.S. Army, which became intrigued by the batteries' weather resilience and ability to self-extinguish in the event of a fire. 

"It's a critical unmet need," Anzu Partners partner Jimmy Kan says. "They'll pay companies to optimize for that one thing."

Selling resilience 

Illustration of a green army man about to throw a USB stick as if it's a grenade

The CIA's venture capital arm, In-Q-Tel, in recent years has become a regular investor in climate-related technologies.

By the numbers: In-Q-Tel investment in fuels producers, on-site power developers, and other green startups made up 28.4% of the organization's dealmaking activity from 2022-2024 — leaping from 9.6% over the previous three-year period.

Yes, but: The share this year has tapered as In-Q-Tel has focused on AI and quantum computing.

How it works: The CIA launched In-Q-Tel in 1999 to get access to Silicon Valley innovation.

It's a nonprofit, drawing funding and support not only from the CIA but also the National Security Agency, Department of Homeland Security, FBI, and similar agencies.

Zoom in: In-Q-Tel's decision making is independent of the CIA.

"We are focused on mission impact and getting technology tested and into operational use," In-Q-Tel spokesperson Carrie Sessine tells Axios.

The latest: The organization this year has invested in fuels maker Air Company, biohazard detection startup ExoFlare, fusion energy developer Kyoto Fusion, and advanced materials producers 6K.

"We don't define it as climate tech," Sessine says. "We're looking at technologies that have potential for national and economic security."

What they're saying: Climate-focused investors say In-Q-Tel brings a level of technical expertise and global reach that few venture firms can match, plus a unique ability to attract defense agencies that are shopping for new tech.

"They can help companies get a national security institution as a first customer," Anzu Partners managing partner Whitney Haring-Smith tells Axios.

CIA VC

The Russia-Ukraine war has exposed how closely national security is intertwined with climate tech, especially electricity. 

What they're saying: "The war in Ukraine is first and foremost an energy war," Michael Wu, an Air Force senior advisor turned consultant, tells Axios.

Context: Wu launched a Pentagon energy resilience program during the Obama administration.

He now works with energy and climate-focused companies seeking defense contracts, and he advises the Defense Department on energy issues.

What they're saying: "Our military is a globally networked force built on uninterrupted access to electricity," Wu says.

"We have to treat weapons systems and the infrastructure that supports them as one and the same."

Case in point: Russia's attacks on Ukraine's electric grid have reinforced just how closely military operations are tied to reliable energy access.

"Russia is explicitly targeting Ukrainian energy infrastructure to disrupt Ukrainian life and make things miserable for the Ukrainian population, and to disrupt Ukraine's abilities to defend itself," Wu tells Axios.

The intrigue: The Defense Department's green interest is also undergirded by more direct experiences: soldiers in senior roles who 10-20 years ago guarded fuel convoys in Iraq and Afghanistan; officers at bases damaged by stronger storms or inundated by regular floods from sea-level rise.

"Seeing the oil fires in Iraq burn for a year, having your soldiers ask, 'What are we doing here?' informed an entire generation," Kevin Johnson, a former U.S. Army captain and partner at Caelum Ventures, says. 

"There's an understanding that these are all connected — that to be climate-conscious is not antithetical to being conscious of the needs of our Department of Defense."

Energy in the crosshairs

Illustration of a hand holding a dart with leaves 

🐺 Katie's kids decided they're going to be a wolf pack for Halloween.

🪄 Meanwhile, surprising no one, Alan's 3-year-old is planning to be Elsa from "Frozen."

Thank you to Michael Flaherty and Chris Speckhard for today's edits.

And thank you for reading Climate Deals! Please share with your friends, family and defense tech investors.

October 17, 2024

1 big thing: Green tech goes camouflage