Seed-led venture creation is our focus at Atlas, and, with the closing of our new fund, 2013 has been a very active year for us. As part of a year-end reflection, it’s a good opportunity to present a quick sketch of the ‘class’ of new startups we’ve created and share more specifics about our over-arching early stage strategy.
Our seed strategy takes nascent substrate around new drug discovery platforms or therapeutic assets and incrementally but materially derisks them before committing significant capital and reserves. This derisking process is a “search for signal” – what can we glean about the underlying science/technology/asset, the founding team, and the market’s responsiveness to the concept that gives us the confidence to press forward. That search can involve conducting confirmatory experiments around reproducibility, completing early screens to judge the quality of the starting chemical matter, recruiting a great group of founders/entrepreneurs, or identifying a corporate partner (e.g., build-to-buy models).
On a practical level seed-led investing for us involves a few things. First, the initial check sizes are small, typically less than $1M from Atlas and usually less than $2.5M overall. Second, they almost always involve co-founding a new startup that works closely with us during an incubation phase in our offices – the venture creation process. Third, we set out specific milestones for these seed-stage projects to hit that will catalyze their graduation from the “seed pool” into the broader Atlas portfolio. Graduates in the past include companies like Zafgen, Stromedix, Nimbus, and RaNA, among many others.
Much like prior seed investments, our 2013 class represents a broad range of startups: they span single asset-centric projects through drug discovery engines, diverse therapeutic areas, and various “stages” of the research-end of the R&D spectrum from target identification through early clinical translation. Many of these already have co-investors (often corporate VCs) or risk-sharing CRO equity partners. Here’s the list, several of which the details as yet remain stealth:
- Rodin Therapeutics, focused on behavioral epigenetics, is working to discover and develop highly selective, brain-penetrant drugs to treat cognitive disorders
- Spero Therapeutics, our new antibiotic startup, is working on novel mechanisms of addressing Gram negative infections
- Ataxion, in collaboration with Aniona, is focused on developing specific channel modulators for treatment of hereditary ataxias
- Thew is an early stage project to discovery pathways and therapeutics around satellite cell regeneration in muscle
- Project C is focused on discovery and development of novel anticancer agents by targeting key biosynthetic pathways associated with transformation
- Lucena is evaluating the use of a novel mechanism in regulating immune function, including differentiation and maintenance of T-cell subsets
- Numerate is an existing startup focused on ligand-based computation design methods where our seed aims to test its drug discovery engine and pivot them into proprietary drug discovery (vs a service model)
- Ascelegen is a new startup working on novel growth factor signaling in cardiac diseases like heart failure
- Quartet Medicine is discovering and developing drugs that modulate a novel analgesia pathway for treating neuropathic and inflammatory pain
- kDAC is a spinout of the Broad Institute’s Stanley Center focused on isoform-selective HDAC inhibition for diabetes, metabolic, and CV diseases
- Padlock Therapeutics is focused on autoimmune diseases, specifically the role of modified auto-antigens in triggering and maintaining these pathologies
The latter four are expected to formally close on their seed round by year-end or shortly thereafter.
Most of the startups on this list are drug discovery or preclinical stage, upwards of a decade away from FDA approval. However, while going from discovery to approval in drug R&D may take 12 years and a few billion dollars, our thesis is that if we successfully move these programs and portfolios forward to an early but convincing clinical signal we will be able to “exit” at that point by either M&A (the default plan), or via IPO, if there is a receptive market in 3-5 years. Avila and Stromedix are good examples of the former, taking $50M or less in equity and exactly five years from their first financings to their acquisitions.
Sharing this list publicly carries some risk for us. We expect only 50% or fewer of these new projects to “graduate” into our life science portfolio at Atlas. If we don’t see the right “signal” to support advancing them, we fully expect to be disciplined about following the fail-fast/fail-early mantra. Several on the list above are already trending negative, and one seed didn’t make the list as it’s already departed into the early stage biotech graveyard.
Importantly, failure in the seed pool is a key part of this strategy’s success: the false positives in biotech, those deals that consume tons of capital before revealing they were bad ideas, are the bane of returns in this sector. In the same vein as David Grainger’s DrugBaron post, having a stringent filter that attempts to weed out false positives early is key. In venture, its very hard to “pick the winners” from the outset, and this seed strategy should help us terminate the projects/startups that less likely to be successful. We firmly believe this stringent seed-led strategy will bend the post-Series A risk curve in our favor, reduce our rate of failure when we have significant capital at work, and improve the overall returns of our portfolio.
Another key observation is that this is a big list of new startups, especially since we take a “roll your sleeves up” approach to execution, often serving as interim CEO or active chairman during the seed phase. We work closely with a large group of venture partners and EIRs to execute on these seed-stage deals, and to raise the IQ of the Atlas offices. The current roster is an impressive one and includes former R&D leaders from pharma, biotech executives, and serial entrepreneurs – in alphabetical order: Nessan Bermingham, Adam Friedman, Shomir Ghosh, Mike Gilman, Marty Jefson, Ankit Mahadevia, Kevin Pojasek, Josh Resnick, Eddine Saiah, Vipin Suri, and George Vlasuk (who recently left to become CSO of another Atlas portfolio company). We’re always on the lookout for great drug hunters and startup entrepreneurs willing to work with us.
Lastly, we don’t focus on only Atlas-led seed stage deals; we also opportunistically back emerging biotechs that arise outside of the firm, often in concert with other venture firms. This year we did three of those deals as Series A investments: immuno-oncology play CoStim Pharmaceuticals (with MPM and J&J), neuroscience-focused Mnemosyne Pharmaceuticals, and antibody platform Harbour Antibodies BV.
Despite the buzz of activity, we are a modest-sized fund – having just raised $265M for Fund IX in the spring for our Life Science (LS) and Technology franchises. We fully subscribe to the “small is beautiful” thesis in early stage venture capital (explored here). On the LS side of the story, we expect we’ll start or fund close to ~20 new biotechs during the investment period of this fund, with only half becoming “graduates” into the fund’s broader portfolio. This early stage portfolio construction requires us to focus religiously on deals where equity capital efficiency (driving down the future cost-of-capital) is paramount; you won’t find us jumping into $100M+ Series A rounds with our model. Even though the latter may be great investments, we’re going to stick to our knitting at Atlas: early stage, seed-led venture creation aimed at bringing great medicines to patients and stellar returns to our LPs.
