Last week, Atlas Venture closed Fund IX at $265M, as reported this morning by Dan Primack. We set out to raise $250M, and closed above-target with great support from our existing LP’s and some great new ones. With this closing, I thought it would be a good time to articulate some of the key elements of our venture investing strategy.
But before doing that, a short history on Atlas: founded in 1980, our first four funds were very successful early stage vehicles – focused on building real connections with entrepreneurs in the local ecosystem. We invested in Europe and the US. In biotech, Atlas was an early backer of great companies like Exelixis, Morphosys, DeCode, Crucell, Actelion, etc… In the dot-com bubble, we like many venture firms strayed from our early stage focus. Atlas raised too much, too fast, and attempted to scale the venture business. We had six offices and a couple dozen partners, three layers of them in fact. It’s clear to us that early stage venture capital doesn’t scale. Not only because the math doesn’t work well (discussed here about biotech, here more generally), but culturally the organization loses its edge, its entrepreneurial roots, as it tries to scale. By the time I joined in 2005 we had four offices and 18 partners, and were closing on Fund VII. Shortly thereafter, the real generational change and firm transformation began. Fund VIII was closed in the fall of 2008, during the financial crisis and accelerated our evolution. Fast forward to today and we’ve got one office, seven partners, with a flat and equal partnership around Fund IX. Hallelujah! For more on the last five years of “reinvention” at Atlas, see my partner Fred Destin’s excellent blog post (here).
Today, we are a seed-led firm, committed to early stage venture formation, funding startups across both Life Sciences and Technology sectors. Although a hybrid sector model, we have a shared philosophy and strategy around getting involved early in a company’s life, helping with strategy and product development, and working closely with entrepreneurs to help build them into successful business. Many have asked us why we stick together when many hybrid funds are splitting. First and foremost, we like each other. Second, it works: some vintages Tech has outperformed, some vintages Life Sciences has outperformed. Lastly, as a Life Science investor, I think its great discipline to have a Tech counterpoint to keep us honest on things like capital efficiency (and data suggests as much – healthcare deals done by hybrid investors have outperformed, see here). I suspect the same is true for my Tech partners.
Geographically, we are focused on New England – Boston is the epicenter of Life Sciences today, and in Tech there’s a real renaissance in the entrepreneurial ecosystem in Boston. That said, we will invest opportunistically elsewhere if there’s a unique Atlas angle on the deal. For more about our Tech strategy specifically, follow Fred’s blog (here).
Life Science Investing at Atlas
To boil it down, there are six key elements of our Life Science strategy:
- Venture Creation. We like to encode the DNA of our new startups; we are co-founders of more than 75% of our deals today. shaping strategy early with a roll-up our sleeves approach to partnering with entrepreneurs. Like other early stage investors, we take acting operating roles in our new companies. My partner Peter Barrett was the acting CEO of Zafgen for its first 15 months, I did the same at Nimbus, etc… This is often critical in helping a fledgling company get off the ground successfully.
- Seed-led model. We have evolved from having a seed strategy in Fund VII to being a seed-led firm today. Our typical initial investment size is $500K – which we use to do early derisking, validating of academic findings, recruiting a team, securing IP, etc… But we can be full capital partners to our startups as well – reserving upwards of $15M+ into deals that are working well. We believe strongly that this seed-led “prove” approach will bend the traditional risk curve and lead to overall lower post-Series A loss ratios. This elimination of more “false positives” during seed rounds is critical; historically, the straight-to-Series A $10M round has consumed (and destroyed) lots of investor capital. Now we base our Series A investment decisions on real “signal”: data that we have generated in house, tangible “market” interest from Pharma, recruitment of great talent willing to commit the scarcest resource of all, their time. These signals around a technology, market, and team are key for our seed strategy (across LS and Tech).
- High bandwidth, high ownership. Because we take an active role in our new startups, we seek to achieve a commensurate high ownership stake in our deals. High ownerships help drive overall fund returns, especially with the math of biotech venture funds; as an early stage investor, our ownership will also never be higher than when we found a company and close a Series A round (ie., syndicating deals over time is dilutive).
- Capital efficiency. Lots of firms talk about this, but we focus on it explicitly. As a small fund, disciplined deployment of capital is critical to our model, as is finding partners with lower cost of capital to join us in helping build and grow our companies. Capital intensity is a related (but different) theme: some deals can be very efficient but still raise tons of equity dollars. We also avoid capital intensive deals because the margin for error on returns is much much smaller for early stage investors.
- Fund real innovation. We believe the only way to generate outsized returns today is to back “high innovation quotient” programs and platforms – medicines with the potential to unlock new areas of biology, transform clinical care, and improve patient outcomes. New biology, new modalities, new approaches – built with either asset-centric or platform based business models. This has always been our bread and butter at Atlas, but like others in the life science venture world, we flirted with a few deals in the spec pharma model during 2003-2006. Its low tech, low innovation model was believed to be lower risk. In fact, its not lower risk (see here), and certainly in our experience hasn’t generated outsized returns in general. In order to access lower cost of capital corporate funding early in the life cycle of a company (e.g., partnerships, structured sales, exits), the products need to be real innovations.
- Creative structuring. We have been pioneering new approaches that break out of orthodox models of biotech (“go big, go bust” strategies, capital intensive product “portfolio” roll-ups, etc…). Our Atlas Venture Development Corp initiative around structured asset-centric investing has closed two deals, Arteaus and Annovation, both of which have structured paths to top 5-10% venture return outcomes. We’ve broken out of the dogmatic C-corp structures, with Nimbus’ 2009 launch leading the charge for asset-centric LLC-holding company models for platforms that seem to becoming popular. We have creative partnership with Shire and with Monsanto, and anticipate announcing additional partnerships in the future. These new models are critical to success in an ecosystem that is becoming tighter and more networked.
To deliver on this strategy, there are “about a dozen” of us on the Atlas life science team. I say “about” because the Entrepreneur-in-Residence team-based model around starting new companies is very fluid. While our dedicated investing team consists of three partners (Jean-Francois Formela, Peter Barrett and myself) and an associate (Michael Gladstone), we have 6-10 EIRs or venture partners working with us at any moment. Dave Grayzel runs two startups and leads up our Atlas Venture Development Corp initiative. Ankit Mahadevia is a Principal and EIR working in two new seed-stage deals right now. Nessan Bermingham, Katrine Bosley, Adam Friedman, Marty Jefson, Kevin Pojasek, Josh Resnick, and Tom Schuetz are all working with us in some entrepreneurial capacity – either in new seed-stage projects or helping us evaluate them. There’s a very permeable boundary between who is an entrepreneur or executive in our startups and who is actively on our investing team. We also leverage our portfolio executives extensively. Take Tom Hughes, for example – he’s CEO of Zafgen, but also on the Board of Miragen, and the SAB of both Nimbus and Calorics. This type of cross-pollination in the portfolio is invaluable. Fundamentally, early stage venture is a team sport (and a ‘contact sport’ at that), all of us are involved in more than just “our thing” or “our deals”, and that spirit is what helps us start and build great companies. The same team-based approach holds true for our Tech franchise.
As we begin deploying Fund IX, we’ve assembled a set of life science seed projects that we’ll be launching into new companies spanning a broad range of therapeutic categories: oncology, neurology, metabolism, muscle regeneration, cell therapy, antibiotics, in silico chemistry, novel angles on epigenetics, metabolism, unique antibody approaches, immuno-oncology, inherited ataxias, etc… All of these are “high innovation quotient” startups. A good number of them won’t graduate out of the seed phase – which is part of the model – but we expect more than a dozen new Life Science startups to grow into our full lifecycle portfolio.
It’s an exciting time to be in the early stage biotech venture capital business. The ability to have potentially huge impact on patients while also generating attractive returns for our LPs is a real win-win opportunity. Onward and upward.