London VC Firm Backed by Spotify CEO Raises $121 Million to Invest in AI Startups

London’s Air Street Capital has seen early wins with startups focused on AI-powered drug discovery, not ChatGPT knockoffs.

(Bloomberg) — Air Street Capital, a venture firm focused on early-stage artificial intelligence startups, has raised a second fund worth $121 million with backing from Spotify Technology SA’s Chief Executive Officer Daniel Ek, in another sign of endless appetite for the trendy tech. 

The London-based fund, which also includes capital from Jeff Dean, a top AI exec at Alphabet Inc.’s Google, has already placed bets on startups in the US and Europe working on data analytics and semiconductors. But it’s seen the most success in drug discovery, an area of growing interest for investors looking for AI opportunities.

The heightened attention on all things AI this year has sparked an investment frenzy among large venture firms and corporations. Air Street Capital, a solo-investor VC firm, says it bets on “AI-first companies,” a catchall phrase now thrown around in several industries. Nathan Benaich, the investor behind the firm, said his working definition for such companies is clear: “If you rip out the AI component of the product, it doesn’t work,” he said. “And the customer doesn’t buy it.”

The field of drug discovery is seeing renewed interest from investors and large companies. In August, venture firm Andreessen Horowitz led a $200 million investment into Genesis Therapeutics, a California startup applying AI to uncover new medicines. BlackRock Inc. and Nvidia Corp. joined the investment. In July, Nvidia invested $50 million into Recursion Pharmaceuticals. Morgan Stanley has estimated that using AI to find promising drug candidates could lead to $50 billion in new sales, though prior efforts in this field have yielded mixed results. 

Supporters of this approach cite rapid advances in artificial intelligence, including Google’s DeepMind using an AI system to predict the structures of proteins and “generative chemistry,” a method to predict molecular properties with computers. Within the last two years, these techniques have leaped from theoretical possibilities to valuable lab tools, according to Regina Barzilay, an engineering professor at Massachusetts Institute of Technology who advises pharmaceutical firms. “It’s not a hyped technology,” she said. “It’s a working-horse technology. It just works.”

Two of the 19 investments in Benaich’s first fund, worth $26 million and started in 2019, sold to biotech firms — Exscientia Plc, a British drug designer, and Utah-based Recursion Pharmaceuticals Inc. These acquired startups focused on applying AI software to uncover new medicines and therapies. 

Benaich has already financed another biotech company with his second fund: Profluent, a startup using generative AI to design proteins. He plans to make more investments in this sector, convinced by the progress AI methods have shown in biology. “These problems that were previously intractable are now solvable,” he said.

Recursion Pharmaceuticals paid $47.5 million in May for Valence Discovery, a drug discovery startup backed by Air Street Capital. (Filings show that Air Street Capital owned roughly 9% of the startup before the acquisition; Benaich declined to comment on the financial terms.) In a blog post, Valence Discovery declared its intent after the acquisition to build an AI organization on par with DeepMind and OpenAI, leaders in the field. 

Recursion Pharmaceuticals received a bump after its Nvidia investment, but its share price is still down more than 70% since its public debut in 2021. Exscientia, which acquired the Air Street Capital investment Allcyte in 2021, has also fallen more than 70% since its stock listing in 2021.

Alex Devereson, a McKinsey & Co. partner who advises biotech companies, said there’s “significant potential” for new businesses in the field, although he believes they will face weak capital markets and increased competition from traditional pharmaceutical firms. He expects to see an uptick in mergers and acquisitions “in the next few years.” 

For now, investor interest in AI businesses, including some in Benaich’s portfolio, remains high. Venture firms are planning to invest in Intenseye, a startup Air Street Capital backed that tracks workplace activity, at a $300 million valuation, according to Forbes.

In addition to Profluent, Benaich’s second fund has also invested in a German robotics operation and an undisclosed European defense tech company. However, Benaich has no immediate plans to back startups building AI models to rival ChatGPT. Even with soaring valuations, these firms require boatloads of capital to train and expand these AI systems. “You have to bet on these companies going to the moon,” Benaich said. 

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