The Three Futures Test
Exploring future forecasting scenarios as a means to enhance our due diligence process
This is a continuation of a series of posts that began with “Why Being Late Can Still Mean Capturing 90% of the Upside”. The series aims to share some of the future forecasting methodologies being applied as a new stage-gate of our Due Diligence framework.
Listen to our AI Narrated commentary overview of the post (it’s not exactly a summary that covers all the details, but adds a colorful discussion around the concepts).
In the first article of this series, I introduced the idea that much of the value in transformative companies lies in the future, a concept that has guided my early investments in companies like Nvidia, Tesla, and SpaceX. Each of these companies offered multiple potential futures, and their success hinged on at least one of those futures coming to fruition—making the investment worthwhile.
At Cool Climate Collective, we’re now exploring how to formalize this futurist scenario forecasting method via the Three Futures Test. This AI-driven tool I’ve been developing will become a key part of our early due diligence process, helping us evaluate whether we can envision at least three distinct futures in which a company could succeed.
This framework helps us make strategic, forward-looking investments, positioning us to navigate the uncertainty of what lies ahead, especially as climate change reshapes industries. Climate impacts will bring resource shortages, supply chain disruptions, and geopolitical tensions, but also opportunities like the falling costs of solar PV, which can shift entire energy markets. These ripple effects influence adjacent technologies, from energy storage to new materials, adjusting the investment outlook.
By incorporating the Three Futures Test into our due diligence, we can prepare for both the challenges and opportunities that arise from these uncertainties, ensuring that our investments are resilient and adaptable to multiple possible futures.
Existing Due Diligence Framework
To recap for those who are new to our existing Due Diligence process, we go through a stage gate approach when evaluating a deal to not only evaluate the business prospectus but as well as our own ability to best leverage our network and knowledge to further de-risk the company in the journey ahead.
At our core, the Cool Climate Collective employs a rigorous, stage-gated due diligence process to evaluate climate tech investments:
Stage 1: Preliminary Due Diligence
We assess the business and technology fundamentals, engage management, and utilize our Cool Climate LLM workflows for pattern matching and comparison across our knowledge base. The LLM workflows help identify trends and synergies, though we remain cautious about "hallucinations" or speculative outputs when expectations fall outside established data or patterns.
The Three Futures Test falls under the LLM Workflows of Stage 1.
Stage 2: In-Depth Due Diligence
This stage includes founder/site visits, subject matter expert validation, and an analysis of key factors, leading to an initial approval from the Investment Committee (IC).Stage 3: Final DD & Network Assessment
We refine our valuation assessment and leverage our extensive network to gauge how well the startup integrates into our ecosystem, resulting in final scoring.Stage 4: Investment Decision
The IC makes its recommendations based on the materials gathered and final scoring, determining the investment size and formalizing the deal through legal documentation. (Investment size decisions are not applicable in SPV scenarios as its determined by individual contributing LPs but we aim for a target allocation).
By combining this structured approach with the cautious use of LLM technology for knowledge base-driven analysis, we aim to ensure our investments in impactful climate solutions are grounded in the fundamentals of the technology, existing market conditions and the possible futures if the boxes check out.
Applying the Three Futures Test: A Past Investment
When Cool Climate Collective wrote the first $100k+ check into Alga Bio during their Pre-Seed, prior to YC, they just had a small ‘kitchen lab’ sample and shared with me their vision for if they had funding to validate their lab results, they could deliver low-cost, enteric methane reducing feed additive for ruminants.
After consulting with some of the early members of Cool Climate Collective and gaining their scientific insights, it became clear that the concept they presented was scientifically and technologically feasible. However, beyond just evaluating their production and feedstock cost structures, the bigger challenge was understanding the economics of the venture.
At this point, the focus shifted to conducting a Techno-Economic Analysis (TEA) through a systems-driven lens, which is central to my approach (you can read more about it here). This method goes beyond surface-level economics by considering the entire system’s dynamics, including supply chains, externalities, and potential scale.
Once we validated the broader systems impact and confirmed the potential for real-world impact, the next critical question was how the project’s financial and environmental outcomes would play out. Ultimately, these outcomes depend on which future pathways unfold, and it is this multidimensional view—integrating science, economics, and potential scenarios—that drives our investment decisions at Cool Climate Collective.
To test our custom LLM, I fed some of the original notes into the system and the following was the output, which mimicked much of my original ‘pre-seed / founder belief’ investment thesis.
The possible futures, outlined then were still true as they are today. So the future potential upside exists and indicates we are still in the early stages of this journey.
Applying the Three Futures Test: A New Prospect
To illustrate how we’re implementing this framework, let’s consider a (redacted) live use case.
Context: We’re currently evaluating an energy storage company that is pioneering a breakthrough technology for renewable energy. Here’s how the Three Futures Test plays out when fed into our custom LLM with our knowledge base.
Since the custom LLM is prompted and fed our knowledge base of thesis & research notes, it also has a bias for those optimistic futures, to play devil’s advocate, I asked for a forth scenario where it counters some of the climate oriented assumptions we will need to do, etc.
Bonus Scenario 4: In a more pessimistic future, even if clean energy faces slower-than-expected adoption or market forces remain stagnant, the company’s energy storage technology could still thrive as a niche solution in high-value, emerging markets.
By identifying multiple potential futures where the company can succeed, we gain confidence that even in a changing landscape, there’s a strong likelihood the company will find its footing.
De-Risking Early-Stage Investments with the Three Futures Test
In a world of uncertainty, no investment is without risk. But by applying the Three Futures Test, we ensure that our early-stage investments are built on strong, diverse foundations. This framework allows us to:
• Identify flexibility in companies, ensuring they can adapt to evolving market conditions.
• Pinpoint critical pathways to success that are often overlooked when focusing solely on short-term metrics.
• De-risk our investment portfolio by backing companies that have multiple viable futures, not just one narrow outcome.
• New adjacent opportunities as part of our portfolio structuring, we seek out technologies that complement or de-risk other investments. For example, our investment in Alga Bio informed subsequent decisions in companies like Pioneer and Perl Street, both of which operate in alternative financing pathways and serve as strategic complements to our existing (& future) portfolio of companies.
Why the Three Futures Test Works for Climate Tech
The climate tech sector is particularly suited to this type of thinking. Many of the companies we back are developing pioneering technologies in areas where markets, regulations, and technologies are constantly evolving. These companies must be able to thrive in a range of potential future scenarios—whether through regulatory-driven growth, market shifts, or groundbreaking technological advances.
By adopting the Three Futures Test, we ensure that our portfolio companies are positioned for success no matter how the future unfolds. It’s not about betting on one specific outcome but about creating resilience and adaptability. In a world that can shift in unexpected ways, these companies must not only survive but also lead the way toward solutions that can endure.
We need these companies to be more than just resilient. They are the ones pushing for the future we want to build—where energy is abundant, food and water are accessible to all, and our planet thrives for both people and biodiversity. At the heart of it all, our mission is simple: to leave behind a better world, one where future generations inherit a planet of abundance, not scarcity.
A Futurist Approach to Investing
In my own investments, I’ve always looked for multiple paths to success, rather than putting all my chips on one perfect scenario. The Three Futures Test formalizes that approach within Cool Climate Collective, ensuring that we are making strategic, forward-looking investments that can succeed across a variety of futures.
As we continue exploring the Three Futures Test and its role in de-risking early-stage investments, the next blog will dive deeper into how we utilize advanced futurist methodologies to inform our decision-making.
Beyond foundational ideas like scenario planning and systems thinking, we’ll explore how concepts such as weak signal detection, S-curve mapping, and cross-impact analysis feed into our LLM-powered analysis. These tools allow us to identify emerging trends before they scale, map out the trajectory of new technologies, and understand how multiple drivers of change intersect.
In the next post, I’ll share how we’re integrating these futurist mental models & methodologies into our LLM workflows, helping us not only forecast possible futures but also spot opportunities and risks with greater precision.
Stay tuned for an inside look at how this combination of futurism and AI is shaping our investment strategies and giving us an edge in the rapidly evolving climate tech landscape.
Other parts of this series:
Part 1: Why Being Late Can Still Mean Capturing 90% of the Upside
Updated to include AI Audio narrative and bonus perspectives
Part 3: Applying Futurist Methodologies to Empower AI-Enhanced Due Diligence