One Teddy Lost takes place in a retro-futurist world that has met its end through a combination of war and accelerated climate change. War is waged with weird science; humans have mastered bioengineering to create monsters and nuclear radiation causes monstrous mutations.

In the world of One Teddy Lost, the cold war didn't stay cold. Escalating tensions between the United States and the Soviet Union led to proxy wars fought with ever more destructive bioweapons. When a peace deal collapsed, both sides launched their nuclear weapons. Now little remains of humanity. Cities that survived the nukes were likely destroyed by climate change or roaming bio-engineered monsters.

Climate disaster caused by accelerated greenhouse emissions and nuclear war has led to ever-increasing natural disasters and rising tides. In the flooded city the game takes place in, Survivors live on the highest floors of buildings breathing through gas masks to avoid toxic gas.

Just Add Water is a military contractor that also peddles their biotech to consumers. They created bioengineered monsters that could be transported as small capsules and then rehydrated into killing machines that faithfully carried out the will of their creators. These monsters fought in many proxy wars between the US and the Soviet Union. The largest model designed by their Japanese branch towered five stories tall and could breathe rays of pure energy.

To stay relevant amid talks of a peace deal, Just Add Water decided to create smaller and cuter versions of their weapons and sell them to the public as pets. Their intelligence, loyalty, and special powers made them a hit with the whole family.