Top Voice: Zach Lebovitz
Once again, we are excited to be bringing our audience the next interview in the Top Voices in Sustainability 2020 series. As part of the new interview series, we shall be speaking with some of the world's leading sustainability professionals for a hot take on recent progress and traction in the rewarding world of sustainable finance. Today, we will be speaking to Zach Lebovitz, a venture capitalist and futurist who is currently studying at London Business School towards a Masters in Business Administration (MBA).
With an MBA (in-view) from one of the world's leading educational institutions and with a range of career experience across the energy space, Zach's passion as a leader in clean tech and more broadly in renewables is quite vast, but also as a stand out character amongst his peers, he demonstrates a unique understanding of the challenges and nuances that investors have specific to renewables. We spent the day asking him a few questions about his thoughts on sustainable investing and the landscape for energy in the medium term.
Q: How've you been keeping during the lockdown period, what have you been up to?
Zach: The lockdown period has definitely had its ups and downs, but I've been keeping busy working with early-stage start-ups in the renewable energy space as well as finishing up coursework for my MBA. There have been a lot of positive developments from the COVID situation when it comes to the perceptions around renewable energy, which has been exciting. One of the positive things about the lockdown is that more people are spending time at home, which has made it easier to get in touch with start-ups, entrepreneurs, co-investors, and potential customers.
Q: Tell us a bit about yourself and your trajectory towards a high-impact career and what brought you to this specific sector. Where do you draw your inspiration from?
Zach: My career has always been focused on energy. I started my career working offshore in oil & gas in Scandinavia, but I've spent the last few years working with the companies and people that are trying to build the next generation of energy infrastructure. My education in engineering had been focused on scientific concepts and technologies. When I started working in the industry, I began to understand the commercial and political reasons for why our energy system looks the way it does. It's fine for an investor or an individual to say "I think we should be building fewer gas power plants and only investing in clean energy" but until you understand how complicated and interconnected our power grid is, it's hard to come up with solutions that will resonate with the companies that will make these visions a reality. The thing that inspires me is that the technologies we need to make a major transition to renewable energy are already out there, but many of them are stuck on a laboratory bench or in an R&D department. The only way to make real progress is to ask: How can we take these innovative technologies and package them in a way that will help them complement and interact with existing systems and stakeholders? Without customers there is no funding and without funding there is no change to the status quo.
Q: As a Clean Energy VC, what would you say drives deal flow in this current environment?
Zach: Clean Energy VC is a very interesting space in a lot of ways. The truth is that the venture capital model is not purpose-built to invest in clean energy. A typical venture capital firm follows a strategy of making multiple small investments in riskier ventures to overcome or mitigate the risks associated with start-ups (most fail). This model is great for SaaS companies and apps, where a relatively small investment can allow a company to quickly validate/invalidate their idea, generate revenue, and scale. But when it comes to the next generation of energy technology, you are talking about significant scientific breakthroughs which may take years and tens of millions of dollars in capital to develop. The only ones prepared to offer this kind of funding to relatively risky ventures are government organizations or large, cash-rich companies with a strategic interest in what the future of energy looks like. You see a lot of shell-shocked venture capital firms who will go pale at the mere idea of investing in cleantech because of how poorly these companies performed during the last VC-funded boom in the late 00's.
The main factors driving the current boom are:
- The widespread adoption and the rapidly falling cost of renewables
- Public pressure for companies and investors to improve sustainability
To finally answer your question, deal flow is a two-way street. On the deal origination side, the technologies and entrepreneurs are coming from the places they have always come from: universities, research institutions, government-funded organizations, etc. To transform an innovation or an entrepreneurial idea into a "deal" requires investment, and the investment is coming from the dominant players in the energy system who are afraid that they will disappear in a generation if they don't diversify into a greener version of themselves. So-called CVC, or corporate venture capital, is without question the driving force for the current boom in clean energy VC. Oil majors and large utilities are funding most of the clean energy start-ups because ordinary VCs simply don't have the enormous balance sheets to take a loss on more than a small handful of start-ups.
I'll finish this long answer by saying that most of the capital in renewable energy is flowing into large infrastructure projects such as wind farms and solar PV plants. These technologies have finally bridged the gap and have made the full transition from risky ventures into bankable infrastructure projects. They are so well-understood that they are not being undertaken by VCs, but rather by large conservative investors such as banks, infrastructure funds, and hedge funds.
About the Top Voices in Sustainability Series
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How does the interview series operate? Essentially, each and
every week, we will publish an interview with one of the world's most
influential professionals and place the interview in our Newsroom and weekly
newsletter. The theme of the interview series is "sustainability in the energy sector".
"These technologies have finally bridged the gap and have made the full transition from risky ventures into bankable infrastructure projects...they are so well-understood that they are not being undertaken by VCs, but rather by large conservative investors such as banks, infrastructure funds, and hedge funds" - Zach Lebovitz
Q: What do investors tend to look for in the perfect startup venture?
Zach: The holy grail for a start-up is still the same: a disruptive technology with a strong competitive advantage which is facing a big market, and which can be quickly, easily, and profitably scaled with minimal capital. This is tough in the hardware space, particularly with anything related to energy.
Investors will always look for proof of strong customer development and a strong, validated value proposition (preferably with valuable signed contracts in place) to confirm that customers are interested. And in the venture capital space, investors tend to flock to ideas which have been "de-risked" by other investors. The old trope that investors are only interested once other investors are interested will generally hold true, which is why it is such an advantage for a VC to have expertise in a particular area. If you can spot the good ideas before the hype builds, you can make an attractive return.
Q: What challenges would you say are being addressed with venture debt in emerging markets and to what degree is the return on impact attractive to investors?
Zach: I don't have a lot of experience in venture debt, especially not in emerging markets, but I can attempt to comment generally. Return on impact and other ESG metrics have emerged as ways for asset managers and fund managers to market themselves to potential investors. Like any other company, these funds want to meet the needs of their customers and attract new ones, but it is more difficult to assess ESG performance than it is to assess financial performance. Until there is a set of universally accepted standards for ESG like there is for accounting it will be confusing for potential investors to try to compare metrics across firms.
Q: How would you say the venture capital industry have coped with the adjustment to the broad scope of sustainability frameworks such as Environmental Social & Governance (ESG) investing?
Zach: That's a great question, and one that I haven't considered until now. In my opinion the term ESG is, at its core, a term that only applies to large corporations. When was the last time you heard a VC investor talk about ESG? They talk about innovation, about new green technologies, about the future, but not about how to make their investments more ESG-focused. ESG is mainly a symptom of large investment funds being pressured by their investors to improve returns and to be held accountable for their impact on the environment and on society. Because these funds are being pressured to improve ESG, the companies competing for their funding must also prove that they have strong ESG policies if they want to raise capital. It is proof that the public has the power to hold large organizations accountable, and I think it is a major reason for the resurgence in cleantech investing. I couldn't be more pleased with the current focus on ESG.
Q: In terms of climate finance, in your opinion, would you say your sector is gravitating towards or away from financing in greener initiatives and how sustainable are these approaches - and to what effect are their value?
Zach: Without question the venture capital industry and the energy industry in general are gravitating strongly towards a green future. The approaches are proven to be sustainable since we are seeing enormous green infrastructure investment being developed at an unprecedented rate, and this infrastructure is designed to last for 30 years or more. The most compelling thing is that these investments aren't being made purely for ESG purposes, but because the greener alternatives have actually become better financial investments. The change in the last five years is astounding, and this will only continue as more technologies are developed.
Q: How important a contribution would you say ESG is to the climate finance challenge in the US as a strategic interest to energy and infrastructure needs?
Zach: As I mentioned before, green energy is here to stay not because it is better for the environment, but because the actual levelized cost of energy has made it cheaper than building similar fossil fuel energy generation in many cases. Greener and cheaper? What's not to love?
In the US, the conversation around the state of shale gas
and shale oil is now taking center-stage. Just five months ago, it looked like
the US oil & gas machine was unstoppable. Now the industry is in turmoil,
with the lowest oil prices in a generation. This has without a doubt been
accelerated by the COVID situation and the OPEC crisis. At the same time, many
of the states which produce significant amounts of oil & gas, such as
Texas, are also experiencing a boom in solar and wind energy. Green energy
could and should play a major role in the US plan to recover from the COVID
downturn and emerge stronger and better positioned to build a cleaner energy
Q: What will the next 5 years hold in store for renewable energy?
Zach: There will be a lot more investment into green infrastructure, and I think one of the biggest opportunities will be upgrading our current power grid. Many non-investors will look at our current situation and say "wow, if wind and solar are greener and cheaper, why don't we shut down all of the fossil fuel generation?" The truth is that our current power grid was not set up to accommodate large intermittent power generation. Some of the most exciting areas in energy investing today are around upgrades to the grid such as energy storage, reactive power, and other services and technologies which will enable our grid to one day become 100% green.
Thank you to everyone who made this interview possible. For more interviews in this series, follow us on Twitter @hiringforimpact or connect with us on LinkedIn.