Atlas X: Accelerating Biotech Venture Creation

Earlier this week Atlas Venture closed Fund X at $280M, completing our transition to a biotech-only venture firm.

After announcing the split of our life science and technology franchises in October 2014 (here), we embarked on the hard work of reframing our firm across three new elements:

• New Fund. This $280M fund was significantly oversubscribed, and we closed at our “hard cap”. We had great existing LP support, with 75% of the committed capital coming from prior fund investors, and added a number of important new ones to our LP roster.
• New Office. We moved into 400 Technology Square last week; it’s a fantastic location in Kendall Square, the epicenter of biotech. We are just steps away from great academic institutions like the Broad, Whitehead, Picowar, and Koch, as well as the MIT and Harvard campuses. We’re also surrounded by large biopharma companies, such as Novartis, Amgen, Biogen, Takeda, Pfizer, Merck, and Sanofi, and hundreds of emerging biotechs. And we’re a stones throw up Main Street from startup shops like LabCentral and the CIC.
• New CFO. We’re also very pleased to announce that Ommer Chohan has joined us from up north; he was formerly CFO at Summerhill Ventures in Toronto, and started with us last week – bringing a strong experience set in venture finance and operations.

With the closing of Fund X, as the final step in our firm’s transition, it’s worth pausing to reflect on the venture business, Atlas’ own evolution, and my own observations on how we got here over the last decade.

Five themes come to mind.

Stick to simplicity. Organizational complexity can wreak havoc in any type of firm, but it’s particularly challenging in venture partnerships. When I joined ten years ago, we had plenty of complexity: four offices in the US and Europe; multiple “franchises” across LS, IT, and Communications; three layers of Partner with nearly twenty “check-writers”; and, a legacy of huge bubble-vintage funds to manage. This organizational complexity often comes as firms attempt to scale – yet, in many aspects, the hands-on business of early stage venture capital just doesn’t scale well. Increasing fund size also adds to the venture capital math problem (here, here). At Atlas, to try to manage the complexity a decade ago, we devolved governance for deal-making to the geographic/franchise level, which while more efficient in many ways, also created unwieldy and disconnected sector dynamics. Over the last three fund cycles, we’ve steadily stripped out the complexity of the model and re-scaled the business (here). Today, we’ve completed that quest for simplicity: we’re a flat and equal five-person partnership, totally focused on a single sector, and are right-sized for driving returns from early stage biotech investing.

Coherently evolve the strategy. Atlas has always been predominantly early stage in its focus. But underneath that, we’ve explored a range of strategies and investment types over time within our life science franchise; beyond investing in biotech, we’ve also invested in specialty pharma (e.g., reformulations, repurposing), diagnostics, medical devices, and research tools. After taking a deep data-driven look at twenty years of investing at Atlas, complemented by our analysis of broader industry data, it became very clear to us that we consistently generate our best returns in early stage biotech investing, meaningfully outperforming the other LS sub-sectors. The obvious conclusion was to do more of the former, and stop doing the latter. And so we’ve left them – the last new spec pharma and device deals were done in 2006, and the last new diagnostics bets were in 2009 (here). Further, the major value-drivers in our 2006 vintage Fund VII were seed-led, Atlas-incubated companies like Zafgen and Stromedix.

Applying these “lessons learned” regarding our investment focus has pushed us to stick-to-our-knitting around early stage therapeutics, where we have demonstrated our ability to identify high quality deals and to add value as board members along the way. At our core, we’re biotech therapeutics startup folks, and that’s where we’re going to focus. To do this, we’ve honed our capabilities and EIR-based investing model to drive seed-led venture creation and execute on a portfolio strategy that mixes drug discovery platforms, asset-centric plays, and built-to-buy structured vehicles.

Take a long view. Investing in innovative startup biotech companies requires patient capital to span multiple market cycles. IPO windows and fund flows come and go, bubbles form and contractions happen – generating predictable returns across these cycles requires real discipline. In biotech, the contractions following 2001 and 2008 shrank the pool of early stage investors (here), and this number has largely not rebounded. Couple this constraint of limited funding, and therefore a limited supply of new startups, to an increased demand-side premium for innovative new medicines, driven by both secular industry dynamics (like Pharma’s shrinking research footprint and increased external sourcing) and the favorable capital markets (best exemplified by biotech’s outperformance over the past five years) – and this has created a great opportunity for those of us focused on new company creation. This structural supply/demand disconnect bodes well for early stage returns (here).

As noted above, our investment approach and focus on capital efficiency has generated value in favorable capital market environments like the current one, but also through structured M&A in a more uncorrelated manner, which certainly paid off during the IPO drought of 2008-2012. No one can accurately predict where the capital markets will be in 3-5 years, so being disciplined and creative with investment models, deal structures, and portfolio construction over the long run is a key to venture success.

Embrace the ecosystem. Over the past decade, larger biopharma companies and startup biotechs have become positive symbionts – dependent on each other for mutual success. The capital, capabilities, and global footprint of the former, coupled with the Darwinian selection and advancement of innovative biomedical science in the latter, has led to more convergence within our ecosystem over time. Successful early stage biotech investing therefore requires tight linkages with downstream biopharmaceutical players. In addition to a broad range of relationships across the industry, we also have two Corporate Strategic Partners (CSPs), Amgen and Novartis, that have recommitted to Fund X, and we will continue to build on the depth of those relationships. As discussed at the outset of Fund IX (this post describes the CSP model), these close working relationships are “open market” ones that derive value through strategic proximity, and do not constrain our portfolio companies or investment strategy. We also serve in advisory or board roles at UCB, Shire, Pfizer, Perkin Elmer, various academic medical centers, and elsewhere in the biomedical ecosystem, all of which helps our ability to generate valuable insights and interactions over time. At the end of the day, relationships matter and the network effects from connectivity are major value drivers over time.

Passionately engage your mission. Helping our biotech companies discover and develop drugs that matter is incredibly rewarding, and quite humbling. It’s a high risk, long-term endeavor. But the rewards are meaningful: eight Atlas-backed therapeutics have been approved by the FDA over the past decade, and today we’re helping advance first-in-class, high-impact therapies in areas like immuno-oncology, epigenetics, neurodegeneration, metabolic disease, and others. Venture often gets criticized for focusing on a quick buck, or for advancing vanity sexting apps and the like; the great part about biotech venture is the dual mission of generating substantial value for patients and shareholders. This is what gets us all out of bed in the morning.

After a decade of strategic and sometimes chaotic evolution, we’ve reached a great place – a singular commitment to seed-led venture creation around high impact therapeutics. This strategy has four important elements – to discover, derisk, shape, and strengthen our investments (described here) – and we’ll continue to refine the nuances around these over time. The consistency and clarity of what we do is a motivating force for all of us.

We are very proud of Atlas’ long history, and we’re also incredibly excited to be unshackled from the constraints of a hybrid fund and its complexity. Our former tech partners share this sentiment, and we’re excited for them as they embark on their new firm and fund (here). We’ve made it to a Galt’s Gulch of sorts, and we are now able to focus our energies entirely on advancing novel therapeutics – and the mission of doing well by doing good for patients.