Q&A with Clear Sky's Krishnan Narayanan

This article was originally published in Ishka Global. To view the version on the Ishka website, please click here.

Ishka SAVi speaks with Krishnan Narayanan, a co-founder of sustainable aviation investment company Clear Sky, on what sets the new firm apart from other climate technology investment catalysts and his initial market impressions after nine months on the road building a team, devising the right strategy and fundraising. Clear Sky is a multi-asset class investment company dedicated to aviation sustainability with expertise across the aviation value chain. The firm will be making its first investment announcements at next week’s Farnborough Airshow.

Clear Sky's first nine months

Ishka: In addition to being a founding partner of Clear Sky and chair of the business, you also co-lead the firm’s investment strategy, including leading the firm’s relationships with sovereign investors. Can you give us a recap of where this role has taken you in the past few months and your initial impressions?

Narayanan: We started this effort probably about nine months ago. Our analysis showed sustainable aviation was highly underpenetrated when it came to capital, particularly alternative investment capital. The first task was to bring together the team which consists of aviation veterans, sustainability experts, and people who have been in finance for a long time. To get that level of talent speaks a great deal for the proposition. Those people then embarked on a couple of months of thinking about the ‘whats and hows’ of our investment plan: Whether Clear Sky should invest in SAF, how it should invest in SAF, should it invest in alternative propulsion, should it invest in e-VTOLs, carbon removals…? These are all important questions to answer from two perspectives: One, is there a capacity to attract good high-quality financial returns from investing in those spaces? And secondly, can we actually make a difference as far as decarbonisation is concerned with those investments?

We answered those two questions. We decided on what we were going to do, and then we went out to the market. And I think anyone who has fundraised knows that can be a pretty torturous exercise full of ups and downs, more downs than ups. But this has been a far more enjoyable fundraise than I can remember. I think it's partly because the team has a series of very high-quality relationships within and outside the industry, but also because the topic is clearly highly zeitgeisty. Even in the nine months or so that we've been at it, the amount of exposure given to these topics has, I think, almost exponentially increased.

Ishka: Can you give us an update on your fundraising efforts and when we may be able to learn more about the fund’s initial investments?

There'll be a set of announcements next week at Farnborough, so I don't want to give those away. What hopefully we'll be able to announce is a set of different bits of progress that we are very excited about. A number of different investment partnerships, a number of early investments. The business is up and running. I think the question of when we close our fundraising is still open and, actually, that's almost a question like how long's a piece of string because you can fundraise forever if you want to.

What 'catalytic capital' means for Clear Sky

Ishka: Perhaps the most distinct feature of Clear Sky is its ambition to become a catalyst for financing sustainable aviation technologies and solutions. That catalytic aspiration instantly brings to mind the Bill Gates-founded Breakthrough Energy, which in addition to having a venture capital fund also has a ‘Catalyst’ platform aimed at large demonstrator projects and first-of-a-kind commercial projects for climate technologies across several sectors, including SAF. To ensure the success of promising climate technologies for aviation, does the market need catalytic investment to become more abundant, more specialised, or both?

Narayanan: First of all, it's obviously very flattering to be compared to Breakthrough Energy. I think that we're a little bit different in a couple of different ways. Number one, we are, at this point, entirely focused on aviation and aviation sustainability, whereas our friends at Breakthrough do a whole set of other things. Secondly, while I do foresee that we will provide capital at the early stages of companies which is how the words ‘catalytic capital’ are generally used, we won't do as much of that versus larger investments. What we hope to do by shining a light on aviation sustainability, specifically, is to be able to invest well and draw lots of other capital into different situations. So, as an example, if you have a SAF technology that is well progressed, it's at its Series A or Series B investment round, then we can provide capital for that. But also because of who we are and what we represent, hopefully, we can act as a catalyst for lots more capital to come in, be that in that round itself or be that in follow-on rounds where, say, infrastructure financing is required. And the hope is that by fundraising from industry participants and also sovereigns and others that have a real vested interest in sustainability, that they'll be then exposed to those projects and be able to co-invest.

We've already seen the capacity for our fundraising efforts on a specific deal or more generally to then attract more capital into situations. And that's how we think about catalytic capital. Does it need to be bigger, more specialised or both? It's clearly both. By various estimates, up to $5 trillion of capital will be required over the next three decades for aviation to get to net zero. So there's clearly more capital required, but it needs to be invested in the right things in the right way by the right experts. And I think generalist funds generally struggle to do that. No criticism intended.  Hopefully, by having a bunch of aviation experts act as a catalyst, we can achieve both of those things.

Making the right bets

Ishka: In recent months we have seen some negative headlines for aviation climate technologies and energy projects, ranging from the recent collapse of hydrogen-electric retrofit firm Universal Hydrogen, SAF producer Fulcrum BioEnergy’s apparent failure, as well as biofuel plant project delays or cancellations by Shell and BP. While all of these are largely unrelated events, and other firms are continuing to thrive, do these developments give potential investors pause for thought?

Narayanan: Of course. I think it would be odd to respond in any other way. All of those efforts were highly admirable and valiant, and they failed, I guess, for a whole series of different reasons. No one can always make the right bets, but having the capacity to make those bets in a more sophisticated way is clearly very helpful. I think you do need this combination of aviation, sustainability, energy, chemicals, engineering, and financial expertise. I haven't seen too many instances of that talent concertedly coming together.

Secondly, if you take a general view of the lifecycle for innovative technology projects, not specifically the ones that you've mentioned, a lot of them fail because while they're able to get to a certain point – demonstration plant, maybe a pilot plant - then the scale up from there is generally very hard if the investors in your early rounds don't have the capacity to then build a business with very significant capital. The aim with some of our investments is that we're able to bring together the right consortium of capital and strategic providers in order to help those companies make that step.

Ishka: And is that need to guide the financial strategy more relevant to smaller, earlier-stage investments or does it apply across the board?

Narayanan: I think it applies to any business that is moving from a technology solution – one which can generate SAF or carbon removals or a new aircraft – at a small scale, to a larger scale. I think it's probably underestimated, even if you reach technological readiness level (TRL) 6, 7, 8, how much support that company requires to be then successful commercially.

Ishka: Let’s turn now to the famed ‘valley of death’ – the inhospitable stage for climate aviation start-ups moving from venture capital to larger and more stable sources of funding. This is where the catalytic investment of a fund like Clear Sky is meant to make a difference. How do you bring on board large investors into this brand-new space and are there any positive precedents they can take comfort in, such as catalytic investment into solar or EVs in the past decade or two?

Narayanan: I think you've answered your own question to an extent: the renewables industry is a fascinating example where some of the entrenched power and energy players couldn't really make the economics of renewable energy work early on, and a bunch of agile, nimble, smaller companies were essentially able to take over the space. So clearly, it is possible. FinTech is another great example of that. The other point to make is: this isn't entirely new. Sustainable investing in aviation is not something that we dreamt up. Over the course of the last 10, or 15 years there have been many good examples of corporates, take IAG-backed Hangar 51, which we're very familiar with because of some of our people, or United Airlines Ventures or others taking significant steps to try and make something happen. I think what we are providing is just more of that, with a multi-layered team and differentiated investment strategy. Our aim is that we are not competing with any of these other sources of capital, but actually bringing them all together.

Targeted investors

Ishka: Where do you think the largest potential for investment into sustainable aviation technologies lies among large investors? Which types of firms are best positioned to take the first step?

Narayanan: We have targeted a very specific set of investors over the course of the last few months. We really did want to set this up as an industry fund: a fund that brought people together to collaborate. We have spoken to the major aerospace companies, the major airlines, the major airports, the big aviation technology providers and we think they're very important because they have a vested interest in making this happen. There is also a real advantage in those players coming together in a third-party fund which makes investment decisions on the basis of financial return.  We've also targeted sovereigns and financial institutions who have large pockets of money and who also have, in the case of the former, a significant vested interest also in reaching net zero, and aviation is an important part of that. And on financial institutions, if you can get them in at the right point, then they can be part of a company’s journey and then be very well placed to provide the large volumes of project finance and infrastructure funding that are required over time. The only other place I would mention is energy and chemicals firms. They have a big role to play here, or at least we'd hope they'd have a big role to play. And they've also been enthusiastic about joining forces with some of the other players that I've talked about. So that will in the end be our investor set in some combination or another.

Ishka: Many large investors, including sovereign investors, already invest in aviation via airlines, aircraft leasing platforms or established OEMs. Do these ongoing investments influence how they perceive sustainable aviation technologies and their willingness to invest in them?

Narayanan: The idea of investing in sustainable aviation alongside the growth of aviation is incredibly complementary. In fact, really important. If you're going to buy a hundred planes, or if you're going to build a new airport, then doing that alongside saying, and actually acting, on having SAF or being able to, let's say, conduct regional flights with an electric or hybrid-electric aircraft or being able to do either with a set of significant amounts of carbon removals, that is just a better story. It's not just a better story, it's a better reality.

Ishka: Any final thoughts?

Narayanan: We're very excited about what we're doing. We think we've made some good progress over a short space of time. We feel that the industry is excited about what we are doing, which is really important to us. And we've seen enough opportunities in what is a pretty well-developed pipeline now of investments to say that there are opportunities that can enhance decarbonisation where there is a financial return to be made. And in the end, the reality of it is that both of those things need to go together.