Aaron Fyke is a Canadian-born engineer and venture capitalist, based in Melbourne. He has dedicated his career to the success of clean technology (’Cleantech’) companies, and joined Starfish Ventures in 2007 to focus on their cleantech investments.

Prior to joining Starfish, Aaron led the redesign for manufacturability of a solar concentrator for an early stage start-up, Practical Instruments. Previous to that, he managed the start-up of a new factory, led the formation and growth of a logistics, training, and customer support division, and developed the business plan to develop and commercialize a new ocean power technology for AeroVironment, a leading clean technology and aerospace company. Aaron provided consulting services to Visteon, a large automotive supplier, to respond to new business conditions, and was a key engineer in the development of direct methanol fuel cell technology for Ballard Power Systems.

Aaron blogs about Cleantech Venture Capital in Australia at AaronFyke.com, and recently spoke at The Hive in Melbourne.

What is a Venture Capitalist? Where do you fit into the startup process?

Private Equity investors, ventures capitalists, and angel investors all, arguably, invest private funds into companies and work to improve the company’s value such that a profitable exit is reached. What that means for each of these investors is that they will invest money into a company in exchange for shares of the company. If the company becomes successful, that equity position in the company can be sold for a profitable return. We are all, therefore, in the business of building companies and supporting entrepreneurs. The difference, however, is the stage of the company and the scale of an investment. The Starfish Technology Fund II, which I invest from, is an early-stage fund. Starfish also currently manages a Pre-Seed fund, which makes very early stage investments that are spin-outs from government research institutions.

The first stage of investment in a startup might be pre-seed/seed/startup stage, where the investment amount is usually a few hundred thousand dollars. This is the realm of pre-seed funds, angel investors, and seed-stage VCs. The purpose of this round is usually to develop the technology, build out the core team, and start acquiring early-stage customers. The next investment stage would be the Series A round, which is where a venture capitalist would come in. This round would be much larger than typical angel funding, and is typically several million dollars. Expanding companies can also have Series B and Series C (or more) rounds as well, as the company grows. Starfish takes a very active role in our investments, and we take a position to back our companies all the way to success and so after our initial investment, we keep funding in reserve so that we can make subsequent investments into the company as is warranted.

What types of companies or technologies are you most excited about at the moment?

Starfish is a general technology investor, but within that we have targeted three broad technology classes which we think are particularly compelling. These include IT, Biotech, and Cleantech companies. We think that there is tremendous opportunity, within Australia as well as globally, in these three sectors. My primary investment focus is within Cleantech and other partners are Starfish focus more on the other sectors. Cleantech is a pretty broad field, both in terms of technology as well as scale of the business. There are a number of high-growth areas which are very capital intensive, and difficult for a VC to participate in, such as wind farm development, biodiesel refineries, and solar manufacturing, there can be really good opportunities for companies to develop technologies which support these activities. It’s the “picks and shovels” opportunity in a gold rush, and I am very excited about any opportunities I see like that.

What’s more important, the business plan or the person?

Interesting question, and the answer isn’t as clear-cut as you’d think. Short answer is that the person is more important than the business plan because an attractive business plan with an unattractive person/team won’t likely proceed, whereas a plan with some problems and an A-class team is more likely to (the reason being that the A-class team will better be able to learn and adapt the business to steer it to success). However, the longer answer takes into account a number of other factors - we really evaluate the business opportunity that we are being presented. If a supposed A-class person presents us with a plan that isn’t attractive, that’s going to influence our opinion of the person pitching it, which may make us wonder if they are A-class after all. Likewise, if a business plan is fantastic, and we feel that the person running the business won’t be suitable to take the business all the way to success, then that’s ok too. Very, very few technology companies have the founding CEO still in the CEO position as the company grows. There are different skill sets at different stages of the company’s life and most good entrepreneurs recognize that their role will change over time. So, the cheating answer is to say that both the plan and the person are important, and if there are major flaws in either then the funding likely won’t proceed, and if there are major strengths in both, then investors will be very excited to proceed.

What is the minimum equity position you have ever taken?

I’m not sure the answer to that, historically. However, I can tell you that our investment philosophy is to be active, not passive, investors. This means that we take a board seat and work closely with management, as business partners, to help the business succeed. We have been looking at some co-investments with other investors where we take a less-active role, but we haven’t really pursued this strategy seriously at this point.

Venture Capitalists are often criticised for leading entrepreneurs on without giving any feedback - why is that?

I assume that this comment can’t be referring to the period post-investment. Once we are involved with a company we are participating in every board meeting, working with the CEO to help set strategy, trying to make introductions key to the company, and trying to help in other ways to make the company a success. I would be surprised if any of our portfolio companies think we don’t give feedback.

If this comment is referring to the period between approaching a VC and getting an investment decision (either yes or no) then it’s helpful to understand the typical VC workflow. Understanding an investment isn’t just understanding the company, it’s also understanding the technology, the marketplace, the competitive landscape, and a host of external issues, all of which require the VC performing research. So, if you pitch to a VC, and you don’t immediately hear back, one way or the other, then it could be because the VC is digging into those aspects to form a view. This means making reference calls, performing research, and other investigative tasks. As well, the VC may need to discuss aspects of the deal with his other partners to get their opinion, which can take time. It’s also good to understand the typical VC workload. Right now I’m reviewing, in one stage or another, sixteen deals. This is particularly high, but I have been in discussions with several entrepreneurs who were putting together their investment documents, and several showed up at the same time. As well, some of those deals are on a “slow-burn” and I’m waiting for information from the entrepreneur. Simply working through them in a serial fashion is unacceptable, because it would be a month before people would hear back from me - and, at Starfish, we try to be pretty responsive to entrepreneurs because we understand the pressures that they’re facing.

So, you find yourself hopping between different deals as you are evaluating the opportunity and determining for yourself whether it is appropriate to proceed or not. If you do choose not to progress a deal, it is important to avoid getting drawn into a defensive argument with a passionate entrepreneur. While I’m usually happy to give broad feedback (I think the IP is tough to defend, I think the market will be difficult to develop, I think the team needs more depth, etc.), it is often difficult to go into specifics. An excellent entrepreneur wants to take the feedback and improve; however, I’ve also had a sizeable proportion of entrepreneurs who can be upset with rejection (and remember, we invest in 0.3% of the deals that we see, so rejection happens a lot). It is also important to understand that a VC is not judging whether a business will be successful or not; a VC is simply judging whether this investment fits their fund’s criteria. At Starfish we’ve seen lots of businesses that can be very successful in their own right, but for one reason or another aren’t a good fit for our particular fund.

What is your most common exit strategy?

There are really only two exit strategies that are pursued by VCs - trade sale or IPO. Angel investors who are investing their own money, as opposed to a closed fund, may be open to an annuity revenue stream, but VCs are obligated to return funds to their investors (LPs or limited partners). Which one is pursued for a given investment is quite dependent on the company itself - some companies fit naturally into larger companies through strategic means or by providing complementary assets, and are therefore good acquisition targets. Other companies will realize value independently and can be highly attractive to a public listing. In our first technology fund, our exits, and near term potential exits, are relatively evenly split between acquisitions and listings.

You have mentioned that Australia has a very small investment community relative to other countries. Recently there has been some talk (it was also mentioned in Randal Leeb Du-Toit’s interview here) of an Australian version of Paul Graham’s Y Combinator program starting - do you think Australia needs a similar program?

I think a program like this would be fantastic. There is a very strong positive feedback loop in the entrepreneurial community. The more support for entrepreneurs, the better the dealflow; the better the dealflow, the better returns VCs will get; the better returns for VCs, the more institutional investors will support the sector; the more support in the sector, more funding becomes available for entrepreneurs. Success breeds success, so anything that helps entrepreneurs, helps the sector overall. One thing that I have noticed is that, while many people say that there aren’t enough investment dollars in the community, it is my experience that many VCs are also having difficulty finding entrepreneurial opportunities suitable for backing. Therefore, the Y Combinator program, which has been very successful overseas could be a great opportunity to better harness and focus the entrepreneurial energy within Australia.

Interviewed by Ross Hill, an Australian entrepreneur with a strong interest in the social web - his current projects include Yabble, Rentoid, CoverHunt and The Hive.

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Posted on June 20th, 2008 by Ross