Here are the top states and cities for startups in the South

The American South may not be the first region that comes to mind when you hear the phrase “hotbed of tech entrepreneurship,” but, slightly misguided perceptions aside, it’s home to a diverse and growing collection of startups.

Here, we’re going to take a deep dive into the startup funding data for the region.

What is “the South?”

Just like it’s a common pastime for many city dwellers to argue about the precise boundaries of neighborhoods, there’s often some disagreement about the exact contours of the U.S.’s various regions. To quash rabble-rousing from the get-go, we’re using the U.S. Census Bureau’s definition of “the South” on its official map of the United States. Below, we display a map of the states we’re going to look at today.

Much like barbecue, the South is not a monolithic concept. So to incorporate some regional flavor into the following analysis, we’re also going to use the same regional divisions that the U.S. Census Bureau uses.

By doing this, we’ll be able to get a better idea of the relative contribution states from each sub-region make to startup activity in the South overall.

The ebb and flow of deal and dollar volume

As is the case with most of the country, the South appears to be experiencing a shift in startup funding as we move toward the latter half of a bull run in entrepreneurial activity. The chart below shows a divergence in overall deal and dollar volume over time.

Much like in the rest of the U.S., reported deal and dollar volume are heading in different directions. Part of this may be due to reporting delays — it can sometimes take a few years for seed and early-stage rounds to get added to databases like Crunchbase’s . Nonetheless, there is a slow and generally upward creep in round sizes at most stages of funding. And that’s not just a Southern thing; it’s a country-wide trend.

Let’s disaggregate these figures a bit. We’ll start with deal counts and move on to dollar volume from there.

A closer look at southern venture deal and dollar volume

In the chart below, you’ll see venture deal volume broken out by sub-region.

Over the past several years, reported venture deal volume has been on the downswing. From a local maximum in 2014 through the end of 2017, it’s down almost 35 percent overall. But that’s not the whole picture. The relative share of deal volume has changed, as well.

Although it’s not immediately clear just by looking at the chart above, startups in the South Atlantic sub-region have accounted for an increasingly large share of the funding rounds. For example, in 2012, South Atlantic startups attracted 54 percent of the deal volume. In 2017, that grows to 64 percent. Startups in the West South Central sub-region have pretty consistently pulled in between 28 and 30 percent of the deals, so where’s the loss coming from? Startups headquartered in Kentucky, Tennessee, Mississippi and Alabama pulled in just 8 percent of deals in 2017, compared to 18 percent in 2012.

It’s a similar story with dollar volume.

In general, dollar volume follows the same pattern, albeit with a bit more variability. Regardless, startups in the South Atlantic sub-region are hoovering up an ever-larger share of venture dollars, and there’s little to indicate that trend will reverse itself any time soon.

Where are the regional hotspots for deal-making in the south?

Let’s see which states accounted for most of the deal volume. The chart below shows the geographic distribution of deal-making activity by startups in each Southern state from the beginning of 2017 through time of writing. It should come as no surprise that much of the activity is concentrated in states with higher populations.

And here’s the distribution of dollar volume among southern states.

Despite some variation in which states are at the top of the ranks, the share of deal and dollar volume raised by startups in the top three states is remarkably similar, coming in at between 52 and 53 percent for both metrics.

The top startup cities in the south

We started by looking at the South as a whole and then drilled into its sub regions and states. But there’s one layer deeper we can go here, and that’s to rank the top startup cities in the South.

In the interest of keeping our rankings fresh and timely, we’re covering activity from the past 15 months or so, from the start of 2017 through mid-March 2018. But before highlighting some of the more notable hubs, let’s take a look at the numbers.

In the chart below, you’ll find the top 10 metropolitan areas where Southern startups closed the most funding rounds.

The chart below shows reported dollar volume over the same period of time.

Much like we saw at the state level, the top five startup cities — ranked by both deal and dollar volume — are the same, although there’s some variation between where each one ranks. In order, the D.C., Austin and Atlanta metro areas rank in the top three for each metric, while Dallas and Raleigh, NC switch off between fourth and fifth place.

Startups capitalize on the nation’s capital

To be frank, Washington, D.C.’s top-shelf ranking was a bit of a surprise. It may be the fact that Austin, TX plays host to South By Southwest, a somewhat more relaxed culture and/or a preponderance of excellent breakfast taco and barbecue joints, but to many — ourselves included — the city feels like it would have a more active startup scene than the nation’s capital. But that’s not exactly the case. The D.C. metro area had more venture deal and dollar volume than Austin for seven out of the last 10 years, and startups based in the nation’s capital have raised more than twice as much money so far in 2018.

D.C.-area startups have recently raised some notable rounds. Just a couple of weeks prior to the time of writing, Viela Bio raised $250 million in a Series A round (in late February 2018) to continue funding research and testing of its treatments for severe inflammation and autoimmune diseases. And on the later-stage end of things, education technology company Everfi raised $190 million in a Series D round that had participation from Amazon founder and CEO Jeff Bezos, former Alphabet executive Eric Schmidt and Medium CEO Ev Williams. Other D.C. companies, including Mapbox,, Afiniti and ThreatQuotient, have all raised late-stage rounds within the past 15 months.

Startup ecosystems in Southern cities may pale in comparison to places like New York and San Francisco, but it wouldn’t be wise to discount the region entirely. A large number of interesting companies call the lower half of the Lower 48 home, and as the cost of living continues to rise on the east and west coasts, don’t be surprised if many current and would-be founders opt to stay down home in the South.

Late-blooming startups can still thrive

It seems like startup news is full of overnight success stories and sudden failures, like the scooter rental company that went from zero to a $300 million valuation in months or the blood-testing unicorn that went from billions to nearly naught.

But what about those other companies that mature more gradually? Is there such a thing as slow and successful in startup-land?

To contemplate that question, Crunchbase News set out to assemble a data set of top late-blooming startups. We looked at companies that were founded in or before 2010 that raised large amounts of capital after 2015, and we also looked at companies founded a least five years ago that raised large early-stage funds in the last year. (For more details on the rules we used to select the companies, check “Data Methods” at the end of the post.)

The exercise was a counterpoint to a data set we did a couple of weeks ago, looking at characteristics of the fastest growing startups by capital raised. For that list, we found plenty of similarities between members, including a preponderance of companies in a few hot sectors, many famous founders and a lot of cancer drug developers.

For the late bloomers, however, patterns were harder to pinpoint. The breakdown wasn’t too different from venture-backed companies overall. Slower-growing companies could come from major venture hubs as well as cities with smaller startup ecosystems. They could be in biotech, medical devices, mobile gaming or even meditation.

What we did find, however, was an interesting and inspiring collection of stories for those of us who’ve been toiling away at something for a long time, with hopes still of striking it big.

Pivots and patience

Even youthful startups have been known to make a major pivot or two. So it’s not surprising to see a lot of pivots among late bloomers that have had more time to tinker with their business models.

One that fits this mold is Headspace, provider of a popular meditation app. The company, founded in 2010 by a British-born Buddhist monk with a degree in circus arts, started as a meditation-focused events startup. But it turned out people wanted to build on their learning on their own time, so Headspace put together some online lessons. Today, Santa Monica-based Headspace has millions of users and has raised $75 million in venture funding.

For late bloomers, the pivot can mean going from a model with limited scalability to one that can attract a much wider audience. That’s the case with Headspace, which would have been limited in its events business to those who could physically show up. Its online model, with instant, global reach, turns the business into something venture investors can line up behind.

Sometimes your sector becomes hip

They say if you wait long enough, everything comes back in style. That mantra usually works as an excuse for hoarding ’80s clothes in the attic. But it also can apply to entrepreneurial companies, which may have launched years before their industry evolved into something venture investors were competing to back.

Take Vacasa, the vacation rental management provider. The company has been around since 2009, but it began raising VC just a couple of years ago amid a broad expansion of its staff and property portfolio. The Portland-based company has raised more than $140 million to date, all of it after 2016, and most in a $103 million October round led by technology growth investor Riverwood Capital.

CloudCraze, which was acquired by Salesforce earlier this week, also took a long time to take venture funding. The Chicago-based provider of business-to-business e-commerce software launched in 2009, but closed its first VC round in 2015, according to Crunchbase records. Prior to the acquisition, the company raised about $30 million, with most of that coming in just a year ago.

Meanwhile, some late bloomers have always been fashionable, just not necessarily as VC-funded companies. Untuckit, a clothing retailer that specializes in button-down shirts that look good untucked, had been building up its business since 2011, but closed its first venture round, a Series A led by VC firm Kleiner Perkins, last June.

Slow-growing venture-backed startups are still not that common

So yes, there is still capital available for those who wait. However, the truth of the matter is most companies that raise substantial sums of venture capital secure their initial seed rounds within a couple years of founding. Companies that chug along for five-plus years without a round and then scale up are comparatively rare.

That said, our data set, which looks at venture and seed funding, does not come close to capturing the full ecosystem of slow-growing startups. For one, many successful bootstrapped companies could raise venture funding but choose not to. And those who do eventually decide to take investment may look at other sources, like private equity, bank financing or even an IPO.

Additionally, the landscape is full of slow-growing startups that do make it, just not in a venture home run exit kind of way. Many stay local, thriving in the places they know best.

On the flip side, companies that wait a long time to take VC funding have also produced some really big exits.

Take Atlassian, the provider of workplace collaboration tools. Founded in 2002, the Australian company waited eight years to take its first VC financing, despite plentiful offers. It went public two years ago, and currently has a market valuation of nearly $14 billion.

The moral: Those who take it slow can still finish ahead.

Data methods

We primarily looked at companies founded in 2010 or earlier in the U.S. and Canada that raised a seed, Series A or Series B round sometime after the beginning of last year, and included some that first raised rounds in 2015 or later and went on to substantial fundraises. We also looked at companies founded in 2012 or earlier that raised a seed or Series A round after the beginning of last year and have raised $30 million or more to date. The list was culled further from there.

Tinder owner Match is suing Bumble over patents

Drama is heating up between the dating apps.

Tinder, which is owned by Match Group, is suing rival Bumble, alleging patent infringement and misuse of intellectual property.

The suit alleges that Bumble “copied Tinder’s world-changing, card-swipe-based, mutual opt-in premise.”

It’s complicated because Bumble was founded by CEO Whitney Wolfe, who was also a co-founder at Tinder. She wound up suing Tinder for sexual harassment. 

Yet Match hasn’t let the history stop it from trying to buy hotter-than-hot Bumble anyway. As Axios’s Dan Primack pointed out, this lawsuit may actually try to force the hand for a deal. Bumble is majority-owned by Badoo, a dating company based in London and Moscow.

(It wouldn’t be the first time a dating site sued another and then bought it. JDate did this with JSwipe.)

Match provided the following statement:

Match Group has invested significant resources and creative expertise in the development of our industry-leading suite of products. We are committed to protecting the intellectual property and proprietary data that defines our business. Accordingly, we are prepared when necessary to enforce our patents and other intellectual property rights against any operator in the dating space who infringes upon those rights.

I have, um, tested out both Tinder and Bumble and they are similar. Both let you swipe on nearby users with limited information like photos, age, school and employer. And users can only chat if both opt-in.

However, Tinder has developed more of the reputation as a “hookup” app and Bumble doesn’t seem to have quite the same image, largely because it requires women to initiate the conversation, thus setting the tone.

According to Forbes, as of last December Bumble had 22 million users and Tinder had 46 million. Bumble was growing much faster than Tinder.

We’ve reached out to Bumble for comment.

Enterprise subscription services provider Zuora has filed for an IPO

Zuora, which helps businesses handle subscription billing and forecasting, filed for an initial public offering this afternoon following on the heels of Dropbox’s filing earlier this month.

Zuora’s IPO may signal that Dropbox going public, and seeing a price range that while under its previous valuation seems relatively reasonable, may open the door for coming enterprise initial public offerings. Cloud security company Zscaler also made its debut earlier this week, with the stock doubling once it began trading on the Nasdaq. Zuora will list on the New York Stock Exchange under the ticker “ZUO.” Zuora CEO Tien Tzuo told The Information in October last year that it expected to go public this year.

Zuora’s numbers show some revenue growth, with its subscriptions services continue to grow. But its losses are a bit all over the place. While the costs for its subscription revenues is trending up, the costs for its professional services are also increasing dramatically, going from $6.2 million in Q4 2016 to $15.6 million in Q4 2017. The company had nearly $50 million in overall revenue in the fourth quarter last year, up from $30 million in Q4 2016.

But, as we can see, Zuora’s “professional services” revenue is an increasing share of the pie. In Q1 2016, professional services only amounted to 22% of Zuora’s revenue, and it’s up to 31% in the fourth quarter last year. It also accounts for a bigger share of Zuora’s costs of revenue, but it’s an area that it appears to be investing more.

Zuora’s core business revolves around helping companies with subscription businesses — like, say, Dropbox — better track their metrics like recurring revenue and retention rates. Zuora is riding a wave of enterprise companies finding traction within smaller teams as a free product and then graduating them into a subscription product as more and more people get on board. Eventually those companies hope to have a formal relationship with the company at a CIO level, and Zuora would hopefully grow up along with them.

Snap effectively opened the so-called “IPO window” in March last year, but both high-profile consumer IPOs — Blue Apron and Snap — have had significant issues since going public. While both consumer companies, it did spark a wave of enterprise IPOs looking to get out the door like Okta, Cardlytics, SailPoint and Aquantia. There have been other consumer IPOs like Stitch Fix, but for many firms, enterprise IPOs serve as the kinds of consistent returns with predictable revenue growth as they eventually march toward an IPO.

The filing says it will raise up to $100 million, but you can usually ignore that as it’s a placeholder. Zuora last raised $115 million in 2015, and was PitchBook data pegged the valuation at around $740 million, according to the Silicon Valley Business Journal. Benchmark Capital and Shasta Ventures are two big investors in the company, with Benchmark still owning around 11.1% of the company and Shasta Ventures owning 6.5%. CEO Tien Tzuo owns 10.2% of the company.

GrokStyle’s visual search tech makes it into IKEA’s Place AR app

GrokStyle’s simple concept of “point your camera at a chair (or lamp, or table…) and find others like it for sale” attracted $2 million in funding last year, and the company has been putting that cash to work. And remarkably for a company trying to break into the home furnishing market, it landed furniture goliath IKEA as its first real customer; GrokStyle’s point-and-search functionality is being added to the IKEA Place AR app.

What GrokStyle does, in case you don’t remember, is identify any piece of furniture your camera can see — in your house, at a store, in a catalog — and immediately return similar pieces or even the exact one, with links to buy them.

I remember being skeptical last year that the product could possibly work as well as they said it did. But a demo shut my mouth real quick. The growing team is led by Sean Bell and Kavita Bala, who spun GrokStyle out of their work on computer vision at Cornell University — and it’s clear they know what they’re doing.

GrokStyle’s tech in action grabbing an image from a catalog.

IKEA thought so as well. In December, Bell and Bala got a chance to present it to Michael Valdsgaard, IKEA’s “Leader of Digital Transformation.” He loved it.

“He just said, ‘OK, this needs to be in the next release,’” recalled Bell, “and in 3 months we were able to turn it around for them.”

It seemed as clear to Valdsgaard as it is to GrokStyle that the advent of mixed reality in all its forms necessitates a fundamentally different kind of search. If information is to be presented and mixed visually, why shouldn’t you be able to find and browse things the same way?

“To make AR work, that’s where you really need tech like visual search,” said Bala. “It lets you find things, cool designs and furniture, all in situ and visualize it in place.”

What’s more, she noted, images and video are just how people communicate and record things now. “People take pictures of absolutely everything. If you want to remember someone’s phone number, sometimes you just take a picture of it. That’s the world we’re living in now.”

Being able to search among a visual record is a powerful tool, and one few companies have unlocked in any kind of powerful way. GrokStyle could very easily have overshot to begin with and tried to offer consumers an app that categorizes and searches among your photos and others, but that way lies great cost and questionable utility.

I originally thought that furniture was a rather prosaic and narrow field in which to deploy their obviously effective tech, but in fact it was a very wise choice. IKEA is a big get, but in the long term it’s the narrow end of a wedge.

“We’re also building recommendation systems and business intelligence tools,” Bala said. “Once you see what people are searching for, there are tons of opportunities.”

Imagine, for example, someone using GrokStyle’s tech while shopping at Crate and Barrel. They scan an item, see how it would look in their living room, then see a similar but slightly cheaper one available from a competitor. This is a critical moment in retail: the moment when Crate and Barrel and this other retailer compete for the consumer’s attention and money. Being at the center of that is a propitious position.

For now the plan is to execute on IKEA and get the knowledge out there that this exists and works well enough to be adopted by a major retailer. “We’re inviting retailers to come talk to us, and as part of working with them we’re setting up pilots and things,” said Bell. APIs are also in the offing.

As a sort of cherry on top of all this, the company also recently secured another $750K in grants from the National Science Foundations. GrokStyle had received $225K as part of the Small Business Innovation Research program, and successfully competed for the other three-quarters of a million up for grabs in Phase II. That ought to keep the lights on for a while.

Village Global raises $100M seed scout fund from Zuck, Bezos…

It takes a village to grow a startup, so Village Global is offering access to a deep network of top tech execs to lure founders to its seed fund. Today, Village Global announced it’s raised $100 million for that fund that was first unveiled in September.

In exchange for equity, portfolio companies get investment plus mentorship from Facebook’s Mark Zuckerberg, Amazon’s Jeff Bezos, Microsoft’s BIll Gates, Google’s Eric Schmidt, LinkedIn’s Reid Hoffman, Disney’s Bob Iger, VMWare’s Diane Green, NYC mayor Mike Bloomberg, and more.

Village Global also announced its 90-day intensive Network Catalyst program that sees the fund get more involved in developing a startup’s product and connections. It takes 7 percent for an $120,000 investment plus admission to the program. Erik Torenberg, Product Hunt’s first employee and a founding partner of Village Global tells me that with the program “Founders get a ‘brain trust’ assembled to fit their needs and to introduce talent, customers and investors.”

“I really think of Village Global as a co-founder at Keyo” says actual Keyo co-founder Kiran Bellubbi whose real estate startup we wrote about last week. “We’ve ideated, strategized and built this business from the ground up together in under 3 months. Couldn’t have done it without this team. The pace of play is astonishing.”

Newly announced LPs and mentors for Village Global include Fidelity’s Abby Johnson, Activision’s Bobby Kotick, 23andme’s Anne Wojcicki, and Cleveland Cavaliers owner Dan Gilbert. The question is how much these mentors will actually engage with the portfolio companies instead of just being figureheads. The program reminds me of Jay-Z’s Tidal, which signed artists like Daft Punk and Jack White as owners, but only a few like Kanye have actually done much for the company. Reid Hoffman did recently sit down with Village Global companies, though, as seen above. Village Global’s other partners like LinkedIn’s Ben Casnocha, 500 Startups’ Adam Corey, Chegg’s Anne Dwane, and SuccessFactors’ Ross Fubini will have to keep the big-wigs present.

Most venture funds today have a slew of general partners searching for and leading deals. A few have expansive service arms like Andreessen Horowitz’s recruiting program or GV’s design assistance. But Village Global’s approach is to have just a few partners but a ton of scouts that earn a portion of the returns if they bring in a great startup. These “network leaders” include Quora vice president Sarah Smith and YouTube’s VR lead Erin Teague. Rather than connect them to more tangible services, portfolio companies get access to Village Global’s deep mentor bench.

Other big funds have their own scout programs too that Village Global will have to compete with. The Wall Street Journal reported that Accel Partners, Founders Fund, Index Ventures, Lightspeed Venture Partners, Social Capital and Sequoia are among the top tier funds that use scouts to sniff out early stage deals. Others like First Round’s Dorm Room Fund and General Catalyst’s Rough Draft Ventures use student ambassadors on university campuses to identify high potential college startups.

It’s unclear whether letting younger, less experienced scouts write check is good for their funds or their own track records, and whether these scouts are shirking responsibilities from their own companies. But for founders, it means there are more people with their ears to the street who aren’t already famous finance big-shots. That could promote more meritocracy in an industry known for talking a lot about it despite tons of privilege given to founders of certain complexions or pedigrees.

With increased competition in the seed stage, funds can’t wait for founders to come to them any more.

NexGenT wants to rethink bootcamps with programs for network engineering certifications

Developer bootcamps — several-month training programs that are designed to help people get up to speed with the technical skills they need to become a developer — exploded in popularity in the early part of the decade, but there’s been a bit of a shakedown on the space recently.

And that could be a product of a lot of things, but for Jacob Hess and Terry Kim, it’s just not enough time to become a fully-fledged developer. With training in the Air Force, where both had to work on these kinds of compressed programs for entry-level technicians, both decided to try their own approach. The end result is NexGenT, which is own kind of bootcamp — but it’s for getting a certificate in network management, and not a one-size-fits-all sticker as a developer. That approach, which includes a 16-week class, is considerably more reasonable and helps get people industry-ready with a skill that’s teachable in that compressed period of time, Hess says. The company is launching out of Y Combinator’s winter class this year.

“There are 500,000 open IT jobs, but when you look at that number, what’s more interesting is so many of them are IT operation roles, and the remaining is software development,” Hess said. “The bigger pie in IT is non-software programming jobs. Cyber security is also huge because of the automation and AI. We want to create the stepping stone. Network engineering becomes a foundation for a lot of these jobs, whether you want to be a cloud architect and work for Amazon, it all starts with understanding and building a foundation around networking.”

The end result is a 16-week program where a batch of applicants gets a review, and a percentage of them are accepted into a cohort of students. They go through an engineering module, which teaches them the basics and mechanics of network engineering and learn about the IT industry. Students can go faster if they want — it’s primarily online — and then start working on labs where they are building their own lab, either physical or virtual. The process culminates in a project where the students have to roll out an HQ facility in two branch offices from design to technically implementing it.

The next phase is about getting them certifications for various technologies, which help them basically show that they are ready to start entering the workforce. Think of it as something similar to having a Github account where prospective employers can review the work, except the process is a lot more formalized and you end up with something concrete on the resume. The final phase is around career coaching and helping them get a job, which can last up to 6 months. Throughout this process, students have access to a mentor and live coaching where students can ask whatever questions they wish.

So, the process is not so dissimilar from the notion of a developer bootcamp. But at the same time, there’s a small-ish graveyard of developer bootcamps and some with issues. Galvanize in August said it would lay off around 11% of its staff, while Dev Bootcamp and Iron Yard shut down altogether. The knock on these camps is it’s hard to get developers ready to start shipping code in such a small period of time — but Kim argues that getting them certified and ready to be a network engineer is definitely something that’s doable in around 16 weeks.

“It’s more realistic,” Kim said. “For coding bootcamps, you have to go by off the portfolios and check their Github, and they have to pass that technical interview. In our world of IT operations, it’s not about the bachelor’s degree, it’s about the person having the knowledge. But the industry certifications come from third parties, and when they come out of our program and have two or three certifications. It’s enough to get into that entry-level job.”

It remains to be seen if this kind of an approach is going to work. NexGenT charges a tuition — around $12,000, which with maximum discounts hits around $6,500. The company offers a 36-month payment plan as well that comes with an enrollment fee, which stretches out that very steep ticket price. In reality, these zero-to-60 programs are designed to be for-profit, though there are some different models that take in a percentage of salary among other approaches. With that in mind, though, there’s always an opportunity to build a strong pipeline with certain companies, and if they can identify high-performing students they can offer more of a proof point and potentially use that as an opportunity to offer some variation of scholarship.

While this is more of a bootcamp-ish style program, there are already some IT certification programs through tools like Coursera. Google, in one instance, is offering financial aid for a batch of those students, and companies with deep pockets might be able to build out these kinds of pipeline programs on their own. Hess and Kim hope to offer some kind of high-touch approach, instead of just a class on a platform of many, that will give them an edge to be a preferred option.

Reverie Labs uses new machine learning algorithms to fix drug development bottlenecks

Developing new medicines can take years of research and cost millions of dollars before they are even ready for clinical trials. Several biotech startups are using machine learning to revolutionize the process and get drugs into pharmacies more quickly. One of the newest is called Reverie Labs, which is part of Y Combinator’s latest batch. The Boston-based company wants to fix a critical bottleneck in the drug development process by speeding up the process of identifying promising molecules using recently published machine learning algorithms.

Reverie Labs’ founders Connor Duffy, Ankit Gupta and Jonah Kallenbach, who named their company after a pivotal detail in the HBO series “Westworld,” explain that its tech analyzes early ideas for molecules from pharmaceutical scientists and suggests possible improvements to shorten the amount of time it takes to reach clinical trials. Duffy says Reverie Labs’ ambition is to “become a full service molecule-as-a-service company.” It’s already partnered with several biotech companies and academic institutes working on treatments for diseases including influenza and cancer.

Reverie Labs specializes in the lead development stage, which is when researchers focus on prioritizing and optimizing molecules so they can go to animal and human clinical trials more quickly. Pharmaceutical scientists need to first identify the proteins that cause a disease and then find molecular compounds that can bind to those proteins. Then it becomes a process of elimination as they narrow down those molecules to ones that not only create the results they want, but are also suitable for animal and human studies.

Before clinical trials can start, however, they need to evaluate molecules very carefully in order to understand things like how they are metabolized by the body and their potential toxicity.

“I’ve heard it compared to juggling eight balls at once or playing whack-a-mole,” says Duffy. “You want your compound to be very safe before you put it in people, you want to be efficacious and go where you want it to go in your body and you don’t want side effects. There are a lot of problems drug companies need to think about before putting a molecule in a human, and when you fix one problem, you often come up with another problem. We want to alleviate that by looking at all problems at the same time.”

Lead development is very labor intensive and requires the work of many medicinal chemists. Reverie Labs’ founders say it often takes more than $100 million and two years per drug before a final selection of molecules are ready for clinical trials. Reverie Labs wants to set itself apart from other startups focused on solving the same problem by taking recently-discovered machine learning techniques, and applying them to drug development.

“The machine learning algorithms we implemented are some of the most promising advances that have been published in the past couple of years,” says Kallenbach.

First, molecules are “featurized,” or turned into representations that work with machine learning algorithms. Reverie Labs’s tech creates proprietary featurizations based on quantum chemical calculations, then uses them to analyze the molecules’ properties and how they may act in the body. Afterwards, it selects molecules that have the potential to do well in clinical trials or suggests new molecules based on what properties scientists need.

In addition to the machine learning algorithms it uses, Reverie Labs founders say one of the startup’s key differentiators is that it trains its models on customers’ proprietary in-house datasets, which means the tech can integrate more smoothly into existing drug development workflows. Reverie Labs’ software also runs on customers’ virtual private clouds, giving them more security.

While using artificial intelligence to develop new drugs seemed almost like science fiction just a few years ago, the space is developing quickly. Last month, BenevolentAI, one of the first companies to apply deep learning to drug discovery, bought biotech company Promixagen’s operations in the United Kingdom, which it says will make it the first artificial intelligence company to cover the entire drug research and development process. Atomwise, another AI-based drug discovery startup, announced at the beginning of this month that it has raised a $45 million Series A. Other notable startups include Nimbus Therapeutics and Recursion Pharmaceuticals.

The process of creating new drugs is currently very complicated, slow and extremely expensive. With so much room for improvement, the work done by various AI-based startups to improve the process don’t necessarily overlap.

“The space doesn’t seem like a zero sum game at all,” says Gupta. “Many players can be involved and the fact that other startups are interested shows that there is legitimacy to the technology.”

“The end result is trying to delivery life-saving cures faster and more cheaply,” adds Duffy. “We don’t really feel any competitiveness. We want everyone to succeed.”