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Flagship Ventures, After A String Of IPOs, Gets $537M To Build More Biotech Startups

This article is more than 9 years old.

File this one under the header of “predictable no-brainer biotech headline of the week.”

Cambridge, Mass.-based Flagship Ventures is announcing today it has pulled together $537 million for a new fund, its fifth. The fund is twice as big as the firm’s last pot of investment money from 2010.

Flagship, which started in 2000, plans to use the new cash to do the same stuff it has always done—build new biotech companies from scratch, invest in existing companies at the early stage, and bet on some of the more risky and potentially disruptive technologies it can find. That includes things like messenger RNA therapies, and drugs that work to alter the microbiome.

Flagship was in prime position to rake in the big bucks because of its track record as one of few successful early-stage biotech investors in recent years. Three of its four previous funds have performed in the upper quartile when compared with all venture funds from comparable years, said managing partner Noubar Afeyan.

The firm has seen eight of its early-stage bets hit the NASDAQ in the last two years, and those companies are collectively worth more than $10 billion. And that series of returns doesn’t even count the best-known investment the firm made in the past five years. Flagship’s biggest claim to fame is that it created Moderna Therapeutics, a messenger RNA drug developer. That company alone has pulled in a mind-boggling $1 billion from investors and partners—including AstraZeneca , Alexion Pharmaceuticals , and Merck. Flagship remains the only venture capital firm invested in Moderna, and is the company’s biggest shareholder by far. Flagship is clearly in line for a massive payday unless Moderna were to implode.

That bet, especially when it was made during the lean years, represented an unusually daring approach to biotech venture investing since biologists almost universally thought messenger RNA molecules couldn't be drugs at the time.

Given its track record in this high-risk/high-reward game, Flagship could have raised much more than $537 million for another investment fund. It chose not to, Afeyan said. To put more money to work effectively, it would have had to start investing more at the late stages of development, and would have had to significantly expand its team of partners and venture partners. That would have represented a significant change in strategy, and potentially in the culture of the firm.

“All we do is life sciences, and all we do is early stage,” Afeyan said. “We are doing what we said, when we started the firm back in 2000. Maybe we’re too simplistic and naïve. But this is what we know how to do, so we’ll do it…We operate at modest levels, because a lot of what we do is put our effort in, not just our money.”

Bob Nelsen, a managing director with Arch Venture Partners and a regular investment syndicate partner with Flagship, said the new fund was no surprise. Limited partners, the giant pensions and foundations and endowments that invest in VC funds, soured on venture capital for a few years, but they are generally more willing to keep betting on firms that have shown consistent performance. “There’s definitely money available if you can show returns,” he said.

Flagship announced a couple of promotions in connection with the new fund. Doug Cole is now a managing partner, and David Berry has been promoted to general partner.

The firm doesn’t plan any major structural shifts in how it invests, Afeyan said. It will continue to create companies in its in-house VentureLabs company creation shop, which often starts with whiteboard ideas where its partners see a big opportunity. Instead of doing 25 little companies there, it will be able to do 30 companies, and provide more money to each of them to help them create more value before the next round of investment, Afeyan said. Presumably, that will also allow Flagship to hold onto larger equity ownership stakes during dilutive rounds of financing that come later.

The IPOs in the Flagship portfolio of the past few years reflect a diverse taste. Acceleron Pharma discovers and develops biologic drugs; Receptos has deep structural biology expertise that it brings to the treatment of multiple sclerosis; Tetraphase Pharmaceuticals is an antibiotic developer; Bind Therapeutics is focused on drug delivery technology; Agios Pharmaceuticals is developing drugs based on emerging science in cancer metabolism; T2 Biosystems is a diagnostics company; Concert Therapeutics modifies drugs with deuterium isotopes to give them more attractive drug-like properties; and Eleven Biotherapeutics develops optimized protein drugs, with a lead candidate aimed at diseases of the eyes.

For the next fund, Flagship plans to keep an eye on agricultural biotech applications that often go overlooked. If there’s one area where the firm plans to proceed with caution, it’s in diagnostics, Afeyan said, because it’s one area where it’s difficult to get rewarded for innovation.

Afeyan said he’s not too concerned about a stock market bubble, because Flagship aims to build its companies to be acquired by Big Pharma companies, and they have plenty of money, and plenty of appetite for innovative new products. This line of reasoning is consistent with what Afeyan told me a couple years ago, before the biotech IPO market took off, and at a time of much hand-wringing in the industry about how to create ways to reward early-stage innovation. He talked about creating a more collaborative partnership between VCs and pharma companies, in which the VCs would provide innovative products on a regular basis, through what he called “an innovation supply chain.”

“Right now, the demand for biotech innovation is largely coming from pharma, not from Wall Street,” Afeyan said. “It is backed by huge coffers in pharma, and only available in small amounts relative to the deals they are doing. So long as that’s happening, and large biotechs like Biogen and Celgene are having clinical success, those two factors create a need for public successors. People want to invest in younger companies and get multiples of return on their investments. It’s not easy to do.”

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