(Bloomberg) — Magnetar Capital, the $17.5 billion money manager known for alternative credit and hedge fund investing, is pushing into newer territory: venture capital.
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Magnetar has launched its first-ever dedicated fund for backing startups, with a focus on generative artificial intelligence technology. It’s the first step in a broader move to build out a venture business.
“We are going through a generational technology revolution that’s going to require possibly trillions of dollars of investments,” said Jim Prusko, Magnetar’s senior portfolio manager who is helping oversee the fund. “So there are going to be many opportunities given the scale and rapidly changing nature of AI and machine learning technology.”
The shift comes as Silicon Valley has embraced AI startups, ramping up investments and sending valuations soaring. Generative AI in particular has dazzled audiences, with tools that generate coherent poems, images and videos based on a few words of prompting. But at the same time, some investors have started to question whether the increased spending on AI tools is justified.
“We are focusing on companies with differentiated technology, traction with products, unique features, and who have proprietary data,” Prusko said. “We like infrastructure startups, AI models, or companies who sit in the mezzanine layer between model and application.”
The firm raised $235 million for the Magnetar AI Ventures Fund, which will mostly back Series A to Series C rounds, he said. It expects to make about 10 investments.
Chicken and Egg
In addition to traditionally structured investments, Magnetar’s fund will also get equity in exchange for providing startups with compute power, which has become a highly coveted resource for AI companies. It will purchase the compute from CoreWeave Inc., in which Magnetar is already an investor.
Early-stage AI companies often run into a “chicken-and-egg problem” as they raise cash to fund the purchase of compute power, Prusko said. Investors are reluctant to fund companies that don’t have compute contracts secured, and compute providers don’t want to sign contracts unless the portfolio company can prove it has secured funding. This model hopes to reconcile that gap, he said.
In 2021, Magnetar was the first institutional investor to back CoreWeave, which has grown to be valued by investors at $19 billion. The company, which runs data centers that rely on Nvidia Corp. chips and rents computing capacity, is preparing to go public next year, according to reports.
The new fund is a significant move for Magnetar, but it’s not their first time dabbling in less liquid wagers. The firm has been making private investments for nearly two decades, mostly focused on alternative credit bets like corporate debt, mortgage-backed investing and specialty credit. On occasion, its various funds have backed the debt and equity of venture companies. In 2021, the firm began focusing on AI startups, investing in companies like CoreWeave. This year, it backed Cohere Inc.
Magnetar is the latest in a string of alternative asset managers and hedge funds to push into venture capital investing, though they are a bit later than their peers. Many others furiously ramped up their bets during the peak of the market — and were burned when it turned in 2022. Since then, valuations have generally declined, providing more attractive buying points in recent months. Still, many AI startups remain highly priced as hype over the sector continues.
–With assistance from Katie Roof.
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