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That won’t stop these investors from trying.

Sometimes it’s called the “missing middle,” sometimes, more ominously, the “valley of death.” Whatever the terminology, it’s undeniable that a chasm lies between a climate company’s early funding rounds and its eventual commercial scale-up, one that’s getting harder and harder to bridge. From the first half of last year to the first half of this one, total Series B funding declined by nearly a quarter; beyond Series C rounds — what the market intelligence platform CTVC calls “growth funding” — it declined by a third.
“The capital needs of these businesses have just outgrown their early stage backers,” Frank O’Sullivan, a managing director for S2G Ventures’ energy investments, told me. “But the infrastructure investors have absolutely no appetite whatsoever for taking on an unproven technology and scaling.” S2G makes both early stage and growth stage investments, and O’Sullivan co-authored a white paper last year on the problem of the “missing middle.” The paper found that of the $270 billion in private capital for clean energy raised between 2017 and 2022, just 20% was allocated to late-stage and growth-focused investments, while 43% went to earlier rounds and 37% toward deploying established tech.
Of course, some of climate tech’s funding gap can be attributed to broader trends in the venture market and economic landscape. Covid-related disruptions and low interest rates led investors to throw money at promising startups, only to see their valuations drop as inflation (with rising interest rates to match) and geopolitical uncertainty cooled down the overheated market. Other companies went directly onto the public market via special purpose acquisition companies, only to underperform expectations. “There is capital to be deployed,” O’Sullivan told me. “But a lot of the companies that need that capital are struggling, really, to swallow hard and take significant restructuring of their previous valuations.”
With clean tech in particular, there’s also frequently a mismatch between the abilities of venture firms, which often make their biggest returns on software startups, and the demands of climate tech. The latter tends to require huge investments in physical infrastructure and support for first-of-a-kind projects, and generally has a longer timeline to profitability than, say, an app. “Venture funding, in some sense, was built for scaling software companies,” Lara Pierpoint, managing director of the new catalytic capital program Trellis Climate, told me. “You’re talking about a capital light business that generally is creating something that enters a white space, and for which there’s huge amounts of market potential.”
It’s much more difficult to build expensive infrastructure that aims to displace fossil fuel facilities and the entire economy that relies on the cheap, reliable power they provide. So while VCs may be enthusiastic about taking a relatively small financial bet on a high-potential early-stage company, that may be all they’re able to do.
Trellis, on the other hand, is a part of the climate nonprofit Prime Coalition and funds first-of-a-kind climate projects with philanthropic capital. The nonprofit structure and philanthropy-focused funding model mean that Trellis can take a different tack on missing middle financing than traditional venture or equity investors. For example, Pierpoint told me it can choose whether to invest in a company or just a specific project. Trellis can also help de-risk projects by providing an “insurance backstop” — basically backup capital in case primary project funding falls short. “We’re looking at expanding the kinds of resources and dollars we can bring to the table in general for the ecosystem, because we think that venture can’t do this alone,” Pierpoint told me.
As with all nonprofits, generating big returns isn’t the focus for Trellis. But for traditional investors, that’s the primary goal. And while growth investments in more technically mature solutions are likely to generate consistent returns, O’Sullivan told me they don’t often provide the rarer but more alluring 10x returns that make early-stage venture capital particularly enticing. “So it’s a more balanced portfolio, typically, in that growth equity category. It’s just that you don’t see the high highs,” he said, explaining that a two to 3x return on investments is more realistic.
Brook Porter, a partner and co-founder at the growth-stage firm G2 Venture Partners, told me that focusing on the missing middle can be extremely profitable, though, and that the key to making real money is correctly identifying a company’s “inflection point” — that is, when it’s poised for significant growth and impact. That is, of course, every investor’s dream. But G2’s whole strategy revolves around identifying exactly when this critical juncture will be, tracking more than 2,000 companies per year to identify the ones best poised for breakout scale-up.
The firm spun off in 2016 from Kleiner Perkins’ Green Growth Fund, where Porter and his three co-founders previously worked as senior partners. This is where they honed their theory of inflection point investing, funding companies such as Uber, drone-maker DJI, and Enphase Energy. Porter told me that helping startups move from proof-of-concept to building “that machine of a business” requires a lot of hand-holding, and that “there aren’t as many investors with that skill set,” so it could take a while for this approach to scale.
On the other end of the funding spectrum, large institutional investors like banks, hedge funds, and asset management firms certainly have the money to help bridge the missing middle, but O’Sullivan and Pierpoint told me they’re generally more interested in fulfilling their internal climate mandates by building out more wind and solar, which generates near-guaranteed returns. These investment giants then look at their remaining cash and think, “Well, we should do something more avant garde. Let’s put money into early-stage venture,” O’Sullivan explained. That’s how many seed and Series A-focused funds raise money.
As O’Sullivan sees it, what’s happening now is “a flaw of the structure of capital allocation at the very highest level.” He thinks we could start by reorienting incentives such that large investors such as banks, asset managers, and pension funds get paid in part for helping bring new climate solutions to market, as opposed to just funding the same old, same old. That would allow them to write “right-sized checks” on the order of $50 million to $100 million to ready-to-scale companies — larger than what a VC firm would write, but smaller than what the big infrastructure investors are used to.
How would those alternate funding models actually work? Well, that’s the real question. Pierpoint said she’s often asked whether a new kind of investor or asset class will be necessary to fill the gap, and while she doesn’t have an answer, what she does know is that the group of climate tech companies that’s ready to commercialize “can’t wait 15 years until we have the exact right form of capital.”
“There needs to be urgency on the part of philanthropists, on the part of infrastructure equity investors, on the part of venture capitalists, to really start showing that we can do this,” Pierpoint told me, “and that we can bring together the right capital stacks to make this happen.”
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On ‘precariously low’ oil stockpiles, China’s ammonia milestone, and a PFAS destroyer
Current conditions: The wildfires in France and Europe are slowing, but three firefighters have died and the looming heat wave could bring yet more disaster • New York and New Jersey are facing flash floods as a storm system makes its way across the Northeast United States • Days of thunderstorms are causing floods across Vientiane, Laos’ sprawling capital.
Last month, I toured Commonwealth Fusion Systems’ headquarters in small-town central Massachusetts. The place was abuzz in activity. On the factory floor side, workers were assembling the magnets needed to ultimately form the torus-shaped reactor — think a giant doughnut with an interior that curves like the core of an apple — called the tokamak. On the actual reactor side, SPARC — the prototype that CFS expects will make history next year as the first private enterprise and only tokamak to ever generate more energy that it took to start the fusion reaction — was starting to look like a functional machine from my view on a second-story walkway overlooking the sterile assembly room. The old joke that fusion is the energy source of tomorrow — and always will be — certainly didn’t ring as funny now. I’ll tell you who isn’t laughing: All the new investors that just poured another $1 billion into CFS. The company announced its latest funding round early this morning, which brings the startup’s total fundraising since its launch as a spinout from the Massachusetts Institute of Technology in 2018 to $4 billion. CFS now accounts for 30% of all the private capital that has flowed into fusion. What distinguishes this round, my colleague Katie Brigham wrote, is that the money is coming from a bunch of institutional investors, such as pension funds and sovereign wealth funds, rather than venture capitalists. On a call with reporters this week, CFS’s newly-named chief financial officer, Lorence Kim, said it’s the first-time institutional investors comprised the majority of the new funding. When I asked the company’s spokeswoman for a percentage estimate breaking down the new versus old investors in this round, she declined to comment. Kim cautioned that the funding isn’t the kind of capital you raise before launching on a stock market. But his hire is notable. The former Goldman Sachs banker famously helped take the pharmaceutical giant Moderna public and held the top financial role through the start of the Covid-19 pandemic.
Meanwhile, a federal Superfund site at a facility in Kentucky once used to enrich uranium for atomic bombs is being transformed into a data center. On Wednesday, the Department of Energy announced a deal between investment giant Brookfield, utility behemoth NextEra Energy, and three local power providers to redevelop portions of the Paducah site into a $100 billion data center campus. “By transforming former DOE sites into engines of innovation and economic growth, we can revitalize communities with increased tax revenue and thousands of jobs, while also strengthening America’s energy security,” Secretary of Energy Chris Wright said in a press release.
The Federal Reserve held the country’s benchmark interest rate steady at Wednesday’s meeting of the U.S. central bank’s top brass. But three bank presidents voted to increase rates as renewed fighting in Iran sent energy prices upward. The dissent “underscored officials’ fraying patience with looking past another price shock on the heels of tariff-related increases last year and with robust demand stemming from the artificial-intelligence buildout,” The Wall Street Journal reported. That is, of course, bad news for renewables and other clean energy developers who rely on cheap upfront money to build, as my colleague Matthew Zeitlin has written.
But there are potentially bigger problems afoot for American energy consumers. U.S. crude stockpiles fell sharply last week as American refineries ramped up production to seize on surging fuel prices as fighting erupted in Iran. The stocks have now reached “precariously low” levels, analysts told the Financial Times, meaning there’s far less cushion if the war worsens the supply shock.
Last month, the energy team at the liberal policy shop Third Way assembled 100 swing voters from across the country to talk about the data centers that poll after poll shows are becoming less and less popular, to put it mildly. The conclusion of the discussions was this: “America’s opposition to data centers has less to do with their feelings about artificial intelligence and more to do with their anger and distrust of large corporations and government.” The findings, shared with me exclusively in advance, showed that most participants were open to a new data center if they believed it would come with tangible benefits for their communities. While some investors, such as “Shark Tank” star Kevin O’Leary, have tried to present those offerings, “the trust isn’t there.” While Emily Becker, the director of Communications for Third Way’s Climate and Energy Program, told me she was “not surprised by how much opposition there was, what was heartening is people understood that benefits were possible. They just didn’t think they would receive them.”
Speaking of data centers and the public trust: NV Energy has accused one of the biggest developers of data centers in Nevada of attempting to illegally bypass state regulators to determine through private arbitration how and when the Berkshire Hathaway-owned utility should provide power to its operations. The lawsuit, filed Friday in Washoe County’s Second Judicial District Court, alleges that the developer, Tract, is trying to skirt the usual process by which the state Public Utilities Commission determines what share of the utility’s electricity should go to the large power user. Tract, according to the complaint, “wants NV Energy to reserve and provide enormous amounts of power for Tract's private development while shifting the infrastructure and energy costs to Nevada families, small businesses, and existing customers who did not cause them.” Sorting out those questions through arbitration would help to “keep these issues hidden” from state regulators and the public, NV Energy said, according to The Nevada Independent.
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When the Biden administration attempted to overhaul regulations on electrical transformers to make the key grid components more efficient, the proposal drew fierce bipartisan pushback amid a years-long nationwide shortage of the equipment. Ultimately, the Biden administration backed down and changed the proposal after receiving public comments. That would have seemed to provide some certainty for factories. But just two years after the final rule won acclaim from across the industry, the Trump administration is now considering revising the requirements for rules set to take effect in 2029. “We’re not aware of anyone asking for this,” Andrew deLaski, executive director of the Appliance Standards Awareness Project, told Utility Dive. The group supported the 2024 transformer rule and other stricter efficiency requirements DOE finalized during the Biden administration.
China has signaled it’s planning to take on what Bloomberg described as a bigger role in steering global negotiations over climate change. The 15th five-year plan published Monday by the Ministry of Ecology and Environment and other key agencies outlines how Beijing “will constructively lead the multilateral governance process to address climate change” and states that “China’s influence, guiding capacity, shaping power, and moral appeal in global climate governance will be significantly enhanced” through the end of the decade. Beijing is already looking to increase how much renewable energy it consumes, as I told you last week.
As you may recall, China is going all in on figuring out how to make green hydrogen work, especially now that the People’s Republic is throwing everything at the wall to diversify its domestic supply of fuels as the Iran War chokes off its regular supply of hydrocarbons. One of the trickier questions with green hydrogen is how to ship the world’s small molecules without leaks. A popular solution is to convert the hydrogen into green ammonia. On Tuesday, SPIC Green Energy announced the successful loading of 3,750 metric tons of green ammonia produced in Jilin Province onto a vessel at the Lianyungang Port in Jiangsu Province and shipped to South Korea. “The shipment represents the world’s largest single-batch delivery of green ammonia,” analyst Jian Wu wrote in his China Hydrogen Bulletin newsletter. “It marks China’s transition from technical demonstration to large-scale international commercial delivery.”
A company promising to put an expiration date on so-called forever chemicals just raised a bunch of money to bring its technology to market. Claros Technologies is developing a proprietary system that can break down the per- and polyfluoroalkyl substances, or PFAS, contaminating millions of Americans’ drinking water systems. This week, the startup closed a $55 million Series B financing round. “Over the past year, Claros has crossed the threshold from breakthrough technology to successful commercial reality,” CEO Michelle Bellanca said in a statement.
Risk-averse but deep-pocked institutional investors join the party.
When the Fusion Industry Association surveyed the sector earlier this month, it found that the industry’s 56 active companies had collectively raised more than $14.2 billion over the past five years. But an ever-larger share of that money is ending up in the hands of one startup: Commonwealth Fusion Systems.
With its latest $1 billion funding round, announced today, the MIT spinout now accounts for nearly 30% of all capital in the industry. The new financing, led by a wave of institutional investors entering the sector for the first time, will support construction of the company’s first commercial power plant in Chesterfield County, Virginia, which CEO Bob Mumgaard says is on track to come online in the early 2030s.
In a media briefing, Mumgaard noted that this latest raise marks “the largest single funding round among fusion energy companies since our last large round of $1.8 billion in 2021.” It brings the total capital raised by CFS to an even $4 billion as the company races to complete construction of SPARC, its demo reactor. If all goes according to plan, it should begin operating sometime next year, proving out the physics and engineering approach underpinning ARC, the planned commercial plant.
The new financing deviates from the typical venture capital round, as it brings in a broad but unnamed mix of “large pension funds, sovereign wealth funds, infrastructure funds doing project finance, and industrial corporates.” These risk-averse investors would typically steer clear of expensive, first-of-a-kind facilities, demonstrating the degree to which CFS has succeeded in building confidence in an industry long critiqued for overpromising and underdelivering.
The company credits the trust it built to its extensive peer-reviewed research as well as its decision to build a tokamak — widely regarded as the most mature fusion reactor design. “I don’t think there’s any other company that’s been as transparent and open with their physics and how it actually works,” Katie Rae, CEO and managing partner at Engine Ventures, told me. Rae has participated in every one of CFS’s funding rounds, and while she says her firm has evaluated virtually every startup in the sector, the company remains its only fusion investment.
But even flush with institutional capital, Mumgaard is clear that the company will need billions more to fully finance ARC and the numerous reactors to follow. It’s unclear where exactly that money will come from, though he’s pushing for government involvement. Alongside the Fusion Industry Association, Mumgaard is advocating for a one-time, roughly $10 billion federal infusion of cash into the broader industry to expand public-private partnerships, build shared research infrastructure, and help finance first-of-a-kind plants in an effort to keep pace with China’s rapidly growing fusion program.
According to reporting from Politico, a Department of Energy official told CFS and other fusion companies that such a level of federal funding is “unrealistic in this environment.” But though insiders argue it’s what the industry needs to scale, Rae says CFS doesn’t depend on it. “I think it is the right kind of investment to make, but we didn’t count on it from an investor perspective,” she told me.
One obvious alternative is the public markets. The IPO window for climate tech has reopened, with geothermal giant Fervo and nuclear fission startup X-energy both completing successful public offerings in recent months. SPACs have also made a comeback, as numerous nuclear companies are opting for this faster, though riskier, path to the public markets. But CFS’s newly appointed CFO, Lorence Kim, said during the briefing that this latest round proves “that the private markets have a lot of capital to deploy toward our mission.” Whether an IPO is in the company’s near future remains an open question, though he cautioned against interpreting his hiring as any indication of “IPO prep in a specific way.”
For what it’s worth though, Kim has taken another high-profile, pre-revenue startup public before: Moderna. As CFO from 2014 to 2020, he helped the company scale its mRNA platform and lead its blockbuster $600 million IPO in late 2018 — the largest ever in the biotech industry at the time. Notably, this all happened before Moderna had an approved product or the Covid pandemic made its signature vaccine a household name, similar to where Commonwealth finds itself today.
“Moderna was in this moment in time where the science worked, and the strategy was focused on execution and scale and deploying capital in a way that could enable real impact on the world,” Kim explained. CFS is now at the same juncture, he said. “And so in the same way that Moderna industrialized mRNA and made it inevitable and made it ubiquitous, it was really clear to me that CFS could do the same for fusion.”
Of course, CFS is not alone in its confidence — other fusion companies are equally bullish on their own approach. Take Inertia Enterprises, a Lawrence Livermore National Laboratory spinout, which last week unveiled its own commercial roadmap for a laser-driven fusion reactor. The company emphasized it’s the only one to have definitively demonstrated the viability of its underlying physics in a real-world experiment, rather than through theoretical work or simulations.
Or take Helion, which has raised $1.5 billion and secured a highly ambitious power purchase agreement with Microsoft to supply electricity to the tech giant by 2028. Or Pacific Fusion, which netted a staggering $900 million Series A to be doled out in milestone-based tranches. There are dozens of others — many with hundreds of millions in funding — pursuing a range of approaches that some of the field’s brightest minds consider technically feasible.
But when I mused to Rae about how exciting it is that institutional investors now appear willing to back an industry once viewed as bordering on science fiction, she was quick to correct me.
“They’re willing to bet on Commonwealth Fusion — that’s what you mean.”
At least one hyperscaler’s big bets seem to be paying off.
This is an edition of Heatmap Daily, an evening review of the day’s news written by our executive editor. Sign up for it here.
Good evening. Let’s start with the news. Meta and Microsoft released their most recent quarterly earnings this evening, and Wall Street was watching to figure out if their enormous AI spending plans are paying off. We were watching because those proposals are shaping one of the most important energy stories today: the data center boom and the sharp return of electricity demand.
The returns were … mixed. Meta missed analysts’ estimates, and its profit fell 14% from the same quarter a year earlier. It increased the lower bound of how much it plans to spend on capital expenditures such as data centers this year, from $125 billion to $130 billion, but left the upper bound of $145 billion unchanged.
Microsoft, meanwhile, said its AI investments are starting to pay off. Revenue at its cloud business, which uses its data center space, increased by 43%, more than analysts expected. It spent $41 billion on capital expenses in the three months ending in June.
Meta’s stock was down 7% in after-hours trading, while Microsoft is up 8%. When Heatmap surveyed climate insiders last year, they ranked Microsoft as among the most decarbonization-friendly hyperscaler and Meta as among the worst.
Permitting odds up — thanks to Shift Key?
I do not regularly follow such things, but this afternoon I was told that the Kalshi market for “Will permitting reform become law this year?” surged to 77% today after trading for days around 50%:
I have no idea why it budged today, but perhaps what moved the market was our new episode of the Shift Key podcast (Apple, Spotify). On today’s show, I spoke with Daniel Palken, a former Capitol Hill policy staffer now at Arnold Ventures, about the current state of permitting reform negotiations in Congress. While we don’t know the exact shape of a deal yet, permitting reform is likely to be the biggest new policy for clean energy that we could get by the end of the year.
Daniel is a fantastic guide to the negotiations, and if you’re curious about the policy at all, I recommend that you listen. Here are few of my takeaways from the conversation:
1. A permitting reform deal will probably have six buckets.
They are (1) changes to the National Environmental Policy Act and the judicial review process that environmental studies face after completion; (2) reforms to the transmission process; (3) changes to the Clean Water Act; (4) a deal to make it harder for presidents to yank permits from approved projects; (5) changes to the National Historic Preservation Act, and (6) “everything else,” a grab bag of smaller fixes including to geothermal energy.
2. Wonky committee politics are shaping the deal.
The National Historic Preservation Act, for instance, is an archeological law that hasn’t been in the mix for previous reform proposals. It’s up for discussion now because Senator Mike Lee of Utah chairs the Senate Energy and Natural Resources Committee — and the NHPA is the major environmental bill under his jurisdiction. Likewise, observers think that a permitting deal has a much better shot of passing during this Congress (as compared to next year) because of an expected series of changes to committee chairs.
3. It’s way, way better to hook data centers to the power grid than run them off behind-the-meter power plants — even if they run off 100% natural gas.
Any permitting reform proposal will seek to expand the transmission system. That could have big benefits for the emissions intensity of data centers. Why? I’ll let Daniel explain:
If you look at the data centers that are hooking up off grid — when they’re not using repurposed jet engines, they’re using 20% thermally efficient gas plants. Whereas if you’re hooked up to the grid, there’s really two types of gas plants that live on the grid. There’s like 60% efficient combined-cycle gas turbines, which are most of the gas power that’s generated, and then there’s peaker [plants], which have low efficiency, but are run at capacity factors of like 5% — so from an emissions perspective, they don’t matter all that much.
So even if solar and wind didn’t exist at all, and nuclear didn’t exist, and hydro didn’t exist, it would still be a much, much cleaner option [to connect data centers to the power grid]. Like we’re talking factors of three in efficiency to connect your data center to the grid if it was purely powered by gas, which is, I think, an important point to understand.
I thought that was an interesting point, and while I’d seen some of those ideas in isolation, I’d never seen them laid out in one place. (And even if grid-scale gas plants are much more efficient than behind-the-meter plants, it’s still even better to power data centers with solar, batteries, and other clean firm power plants — which is also easier when they’re hooked up to the grid.)
I’ll stop glossing the episode and just link to it one more time. Thanks for reading.