The AI Factor: Why Cash Still Flows To European Biotech Startups

Putting the Tech In Bio: Why Cash Still Flows To European Biotech Startups

Amid ongoing concerns about declining VC funding in the United Kingdom, Biotech startups have been doing rather well. According to the U.K. Bio Association, businesses working in the sector raised £563 million in venture capital and public funding in the three months to September. Following a sluggish start to the year, the Association predicts the industry is on course to exceed the levels of funding seen in 2022. Meanwhile, KPMG’s latest U.K. Venture Pulse report notes that Biotech – along with AI and climate tech – is set to dominate the investment agenda.

So what is going on? Why are Biotech startups enjoying a moment in the sun?

James Field is CEO and founder of LabGenius, a London-based Biotech company focused on discovering the “next generation” of therapeutic antibodies. As he sees it, the growing importance of the U.K. Biotech sector is partly due to the coming together of two previously distinct disciplines – namely biology and machine learning.

The combination has the potential to accelerate the development of treatments that would previously have either eluded researchers or taken many years to develop. Referencing his own company’s work, he says: “The human brain has zero intuition about the design of these molecules,” he says.

To augment the work of human researchers, Lab Genius has created a robotic platform that designs experiments, analyzes the results and also learns from previous experiments.

Accelerated Development

What will this combination of AI and biology mean in practice? Umza Choudry has worked as a research scientist in the fields of photochemistry and synthetic biology and today she leads on Tech Bio strategy at VC fund Octopus Ventures.

In Choudry’s view, researchers have often struggled to understand the sheer amount of biological information at their disposal. “There is an enormous amount of material but it is hard to visualize,” she says.

That is changing. The power of AI to automate workflow and analyze data is paving the way for new treatments. Hence the upturn of VC interest in the Tech Bio sector.

Choudry cites a number of areas where the combination of AI and biology is set to make breakthroughs. She expects new and more targeted therapies and also – crucially – lower costs. Whether healthcare is funded by tax – as in the UK – or private insurance, the cost of treatment is a crucial factor. One potential benefit of the Tech Bio revolution is its potential to “democratize” access to cutting-edge medical technologies by making it easier to develop and scale new solutions.

To some extent, we’re already seeing that democratisation in action. As Choudry points out, reading human genes is now simple. Editing them is nother matter. However Crispr editing tools are not only paving the way for new treatments, they are also making the process of manipulating genes a lot less costly.

So naturally enough VCs are taking notice. Sajith Wickramasekar is the founder of Benchling, a California-based company that provides a cloud-based data management and collaboration platform for companies working in the biology, and Biotech fields. He cites the breakthroughs that are creating new business opportunities. “RNA, Gene Therapies, Antibodies. That is what investors see.”

Risk Factors

But as Choudry acknowledges, Tech Bio is risky. The timelines are long, the development of new technologies tends to be capital-intensive and there are no guarantees of success. However, it is a risk that increasing numbers of VCs are willing to take. “Around 2021, investors were starting to get interested in riskier areas, Choudry says. “We are also seeing European VCs wanting exposure to more specialized areas, although in Europe we don’t have many specialist fund managers.”

One potential limiting factor for traditional VCs is the time it takes to bring Tech Bio-originated products to the market. “The timelines are slightly longer,” Choudry says. “The hold time could be about 10 to 12 years.” That won’t suit many VCs. Octopus, however, is an evergreen fund, making it easier to commit capital for longer.

Despite a robust investment environment in 2023, there are some concerns about the immediate future. “A lot of money went into Tech Bio in 2021 and that was helpful. The big challenge now is that the markets have turned, we’re in a non-zero interest rate environment and a lot of Biotech companies on the public market are trading below cash,” says Field.

On the plus side, here in the U.K., the life sciences are a priority area for policymakers – not least because there is an opportunity to support a well-established science base that could yield huge commercial returns. There is a considerable amount of grant funding and also tax incentives to underpin R&D.

The Talent Challenge

Arguably one of the biggest challenges in the Tech Bio field is access to quality data. That raises the question of where the information required to build AI models actually comes from.

In the case of Labgenius, biology provides data for the AI operation. “We have a sophisticated wet lab that generates data,” says Field.

That double-sided operation points to a further challenge. As Wickramasekara points out, Tech Bio companies are recruiting from two highly competitive pools.

“Another challenge is talent,” says James’ company has a wet lab and also a data side. That’s not unusual in this sector. But now you have to walk and chew gum,” says Wickramasekar.

Not only must Tech Bio founders recruit people with the necessary skills, they also have to create an environment and culture where people can work effectively together. Sometimes the collaboration is remote. For instance, Labgenius has its biologists working in Oxford while the AI operation is in London. However, Wickramasekara is keen to stress that cross-fertilisation should be celebrated. “‘I’ve seen people moving over from tech to biology,” he says. That is very exciting.”

Umza Choudry agrees. “When you bring together different disciplines you are also bringing together different mental models. That’s not necessarily a bad thing. You have people approaching the problem from different angles.”

It’s still early days for Tech Bio, but the potential to accelerate the development of new treatments suggests it will continue to suck in investor cash.