VC industry safe but small investors ‘playing for fun’ will exit, says Galileo boss

Not all new funds will crash Galileo Ventures co-founder James Alexander who reckons the current downturn will just flush out family offices merely playing for fun.

Galileo founders James Alexander and Hugh Stephens.

Family offices and others investors “just playing for fun” will exit the venture capital industry – not necessarily new funds.

That’s the view of James Alexander, co-founder of Galileo Ventures, which was established in 2018 and last year invested $5m into 16 seed-stage companies.

Mr Alexander’s comments followed predictions from Telstra Ventures, one of the largest funds in the industry, suggesting half of all firms that have been launched in the past five years could fold as raising capital becomes tougher and valuations crumble.

“Do I think in Australia we’ll see some sort of mass collapse of new funds that have started since 2017? Not at all and that’s because the results have all been generally quite positive across the board for VC funds,” Mr Alexander said.

“I think what we will see is the flushing out of people that are just playing for fun.”

On Monday, Telstra Ventures managing director Matthew Koertge told The Australian that parallels were emerging with the dotcom crash of 2000 and the Global Financial Crisis, adding that many funds that have been launched since 2015 will not survive.

“A lot of people have come in, invested really aggressively … threw money around like drunken sailors and now it’s going to be very hard for those firms to raise more capital,” Mr Koertge said.

“Looking back at history, going back to even the dotcom crash, there were lots of investors who came in as the market was starting to peak and then a lot of these groups were not able to maintain and sustain their business.”

Telstra Ventures managing director Matthew Koertge.

The first two years of the pandemic fuelled record spending in the sector. By the end of 2021, 160 companies per quarter were achieving unicorn status – or $US1bn ($1.5bn) – valuations versus 25-30 a quarter from 2016 to 2020. The amount of capital VC firms raised soared from less than $US150bn in 2015 to almost $US250bn in 2021, before diving to less than $US100m last year, according to Pitchbook.

Mr Alexander said Galileo and other smaller funds like it had a vastly different approach to some of the giants of the sector.

“We will naturally go and invest earlier before larger funds are willing to go in and deploy a large cheque,” he said.

“The other thing that I think is really important is if you’re a very good seed fund, you spend a lot of time with the portfolio on matters that you just simply would not do if you’re a massive fund, because that is not your priority.”

Mr Alexander said despite their claims, many older funds only sought to invest already established start-ups.

“For a lot of the larger funds, investing in pre-seed is an exception, not the rule,” he said. “They don’t actually want to invest in pre-seed if they can avoid it and the types of pre-seed deals they’d want to invest in are typically things where there’s a lot more money in the round, and there’s a lot more progress already made.”

Galileo Ventures was founded by Mr Alexander and Hugh Stephens. The firm, which has made 17 investments to date, is set to open its second fund in 2023 but a date has not yet been announced.

Galileo has a number of investments, including Tasmanian construction management software developer Varicon, which raised $2.25m last year in a round led by Black Nova and supported by Andrew Sypkes, Galileo Ventures. Slattery Construction chairman Josh Slattery, Tidal Ventures co-founder Murray Bleach and Aconex co-founder Leigh Jasper.

In October, fitness app Steppen, also backed by Galileo Ventures, raised $1.65m with support from the Flying Fox fund. Afterpay’s Anthony Eisen also put money in, having initially backed it in a pre-seed round in 2021.

Mr Koertge’s colleague at Telstra Ventures, Saad Siddiqui, separately said that overall, start-ups would need to grow by 2.5 times in 2023 just to get to the same valuation as they did in 2021.

Amid the bear market, Telstra Ventures raised $500m in September to invest in tech start-ups aimed at tackling climate change and greenwashing. The first company that has caught its attention is OpenSolar, which has been providing its software platform free of charge to solar panel installers.

In the past 10 years, Telstra Ventures has invested in 90 companies and generated more than $US440m ($647m) in revenue.

Originally published as VC industry safe but small investors ‘playing for fun’ will exit, says Galileo boss