The Middle Layer
Climate tech’s misunderstood business model
If you’ve worked in tech long enough, you’ve been trained to distrust middlemen. This bias didn’t come from nowhere. There are plenty of “middle” companies that add little value and destroy your margin. For the last 20+ years the tech industry has been on a crusade to eliminate the middleman. Entire companies have been built on the value proposition of disintermediation, connecting buyers directly to sellers. VCs threw billions at startups whose pitch decks featured slides with big red X’s through brokers, distributors, the middlemen. Companies were celebrated for their promise to remove friction. And honestly, in software it mostly worked.
To be transparent, when I first started researching climate supply chains and related bottlenecks for this piece I thought I’d be arguing that, like in SaaS, middlemen type companies need to be avoided at all costs. It felt wrong to argue for the middlemen after watching tech eliminating them. But the more I dug into climate tech supply chains the more convinced I became that we actually need these companies for climate tech. The physical, distributed, and variable nature of climate industries creates genuine value for aggregators and intermediaries. Not only are middlemen not the enemy, they might be the ones we’ve been waiting for. I know, weird take, but let me explain.
What is a Middleman Company?
“Middleman” has become a vague pejorative we throw around, so let’s start by aligning on a definition. At its core, a middleman company sits between producers and consumers. They don’t make or use the product, they connect the people who do, and they take a margin for that service. Classic examples include brokers, distributors, dropshippers, you get the idea.
Pre-internet, middlemen companies existed because information was fragmented and expensive. You needed someone who knew all the grain farmers in Iowa and all the bakeries in Chicago. That person had value because connection was hard, as was maintaining that many relationships. Then the internet happened and information got really cheap. Suddenly the entire premise of middleman businesses started to look shaky; why pay someone 15% to connect you to a supplier when you could just… Google them?
The 2000s and 2010s were basically one long funeral procession for middlemen. Real estate agents? Zillow let you find and review homes yourself. Travel agents? Expedia, Kayak, Booking.com replaced them. Recruiters? They got squeezed by LinkedIn. Merchant account providers? Stripe took care of that. And the list goes on.
SaaS companies built their entire GTM motion around eliminating distribution partners. Why sell through VARs when you could have a self-service freemium model and an inside sales team? Why have channel partners taking 20%+ when you could own the customer relationship directly? The economics were compelling. Every eliminated middleman meant more margin, better unit economics, higher valuations. VCs loved it, founders loved it, everyone won except the middlemen.
Why Climate Tech is Different
The thing about software is it’s infinitely scalable and perfectly consistent. When you buy Salesforce, you get the same Salesforce as everyone else. It works the same way in Seattle as it does in Tokyo. There’s no variance in the product, no seasonality, no weather dependency. The product is the product, and it does what it’s supposed to do every single time.
Climate tech is not that. It’s not even close. Climate tech is deeply physical. It’s distributed across geographies. It’s governed by chemistry, biology, weather, and human behavior. It’s affected by things like “did it rain enough this spring” or “was there a hurricane”.
An example; Kelp.
Kelp farming is having a moment in climate tech. It’s ocean-based, fast growing, carbon sequestering, and can be used in animal feed, bioplastics, cosmetics. But it’s grown by small operators, offshore, with limited infrastructure. There are dozens of companies working on kelp cultivation and processing.
However, if you’re trying to build a kelp-based packaging company you don’t want kelp sometimes, you need kelp consistently at the same quality, same delivery schedule, same volume every month, forever. That’s really hard if you’re sourcing from individual kelp farms who might have a bad harvest because the water was too warm, sell out their entire yield to whoever shows up first with cash, or only harvest in certain months. If you’re running that packaging company, you don’t want to manage relationships with 30 kelp farmers across 3 countries. You want one phone number to call, one invoice to pay, one SLA to enforce. You want a middleman.
The Aggregation Problem
This pattern repeats everywhere in climate tech.
Recycled materials? There are thousands of recycling facilities in the US alone, with different capabilities and outputs. Manufacturing companies trying to use recycled inputs aren’t going to contract with hundreds of tiny recyclers and deal with the headache of managing their different material outputs, quality, and compositions. They need an intermediary.
Green hydrogen? As we’ve previously discussed, it’s going to be produced regionally, ideally close to renewable sources, but consumed globally in various applications. Someone needs to handle transportation, storage, certification, and delivery logistics.
Used EV batteries for grid storage? They’re coming from dozens of manufacturers with different form factors, different chemistries, different states of degradation. Utilities and their insurers want standardized, warrantied battery storage systems. They need someone in the middle to make that happen.
Find a market with massively distributed production, a need for consistent supply and/or quality, and customers who want simplicity, and you’ll find a market that needs a middleman.
If you’re a founder or executive, you might be thinking that we can just manage the relationships and work with multiple suppliers. And sure, sometimes, but there are limits. First, transaction costs. Evaluating, contracting, and managing dozens of small suppliers is expensive. You need legal review for every contract, quality assurance processes for every source, accounts payable to handle all the invoices, and procurement to manage relationships. For a $50M company trying to source a relatively new input, this might represent 2-3 FTEs of overhead. That’s real money.
Second, information asymmetry. The supply landscape in climate tech is fragmented. Who are all the biochar producers in North America? What are their capacities? Quality standards? Pricing? Certifications? This information often doesn’t exist in a centralized, accessible way. Someone needs to aggregate it, maintain relationships, and actually know the market.
Finally, supply chain resilience. Going back to our kelp example, if you’re running a kelp-based packaging you can’t afford for your kelp supplier to just not deliver one month. You need backup suppliers, inventory management, and someone who’s core competency is thinking about supply security. A middleman company that’s aggregating supply from 30 producers can guarantee delivery even if 5 of them have problems. A direct relationship with 5 producers? You’re just a couple bad harvests away from shutting down your production line.
The VC and Founder Perspective
If you’re a VC reading this, you might still be skeptical. Middleman businesses have traditionally been seen as low margin, capital intensive, hard to scale operations. So, why should you fund one?
Climate tech markets are growing. The total addressable market for sustainable materials, carbon credits, renewable fuels, and other climate tech inputs is expanding at insane rates. Being the primary aggregator in a market that’s growing from $100M to $10B+ is a very good position.
Network effects. The more suppliers you have, the more attractive you are to buyers. Conversely, the more buyers you have, the more attractive you are to suppliers. There is a natural winner takes most dynamic in aggregation businesses.
Take rates can be higher in emerging markets with high information asymmetry. When nobody knows what fair pricing is and you’re providing genuine value through aggregation and quality assurance, you may be able to command above average margins.
They can build serious moats. Relationships with suppliers, quality verification processes, logistics infrastructure, market intelligence are all hard to replicate. A well run climate tech middleman can become genuinely defensible.
They can capture more of the value chain over time. Start as an aggregator, move into processing, then maybe production. Or vice versa. The middleman position provides optionality.
Now, if you’re building in climate tech and thinking about the middleman model, here are a few things to consider;
Start with a real pain point. Don’t create a middleman business just because it sounds good in theory. Find a sector with massively distributed production, a need for consistent supply and quality, and customers who want simplicity. Also, make sure to actually talk to potential customers and ask what they would pay for this.
Capital requirements. Holding inventory and building logistics is expensive. You’ll need more runway than a pure software play and investors who understand the model.
Be prepared for operational complexity. Managing relationships with dozens of suppliers is genuinely hard.
Think about your moat from the beginning. Pure aggregation is hard to defend, so you need to find your advantage. This could be exclusive supplier relationships, proprietary quality verification, better logistics infrastructure, etc … you just need something.
Related, think about regulation. Climate tech is increasingly regulated. Being the middleman who helps customers navigate compliance can be a huge value add.
Software wanted disintermediation because consistency and scalability were givens. However, climate tech needs intermediation because consistency and scalability are the hard parts. We’re going to see a broader return of middlemen companies across industries as supply chains get more complex, more distributed, and more dependent on verification and trust. Climate tech isn’t SaaS. That means we need to build different types of companies, with different models, optimized for different constraints. Middlemen are going to be crucial infrastructure in climate tech and we need to fund these companies.
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This is a really good shout and planted a seed of an idea for me. One thing I was ruminating on is that similar to your other examples in tech software, these middle businesses may not be needed forever as the system matures, these efforts consolidate and eventually could just become ubiquitous. So, an interesting aspect is planning for a business with an exit strategy when it becomes obsolete.