Third Rock Ventures, a well-known funder of biotech startups, announced the closure of a billion-dollar fund recently that would be used to create and grow new life sciences businesses.
The fund, Third Rock’s sixth, is introduced in the midst of a substantial drop in the biotech stock market, raising concerns about venture firms’ capacity to raise new funding and earn returns on their investments. Indeed, the two primary ways early biotech investors generate returns, through initial public offerings and acquisitions, have suffered reductions over the last year or so.
Despite the market downturn, some venture capital firms have raised record amounts for additional life sciences investments. In March this year, Atlas Ventures, which has backed companies such as Actelion and Alnylam Pharmaceuticals, announced the closing of its largest-ever biotech fund, totaling $450 million. Three months later, the Third Rock team has followed suit with a $1.1 billion fund that will support the formation of roughly ten startups.
The last few months have been a challenging time, said Jeffrey Tong, one of Third Rock’s partners. However, on the side of company formation, they simply have a very core following of limited partners who are investing over a long time horizon. Third Rock, which was founded in 2007, claims to have raised nearly $4 billion and invested in more than 60 companies. The company has a three-year fundraising cycle, having previously raised $770mn in 2019, $616mn in 2016, and $516mn in 2013. Each cycle’s goal has been to help around ten startups.
According to partner and chief operating officer at Third Rock, Kevin Gillis, the latest fund was raised between March and May after the company formally chose to continue it last fall. The biotech stock market had only recently begun to fall after reaching new highs when the COVID-19 pandemic drew attention to healthcare. However, in the months since, the decline has become much more pronounced. Since November, the XBI, a well-known biotech stock index, has lost more than half of its value. Fearing that new funding will be tough to come by, many smaller pharma companies are turning to cost-cutting measures.
Larger market patterns and concerns do come up in meetings with limited partners, according to Tong. Third Rock and its investors, on the other hand, are unconcerned, he added, because the firm’s investments are often held for a longer period of time.
For that purpose, Gillis observed that the sixth fund included nearly all of the firm’s core limited partners and some new ones. These cycles have happened previously, Tong added. Over the previous few years, they have had a really good cycle. But, as is typical of the biotech industry, there are multiyear booms followed by dry spells. And they develop businesses to withstand both scenarios.
Third Rock was created in 2008, just before another severe downturn in the biotech markets. The opportunity for nascent biotechs to go public, referred to as the IPO window, was nearly non-existent at the time. They entered the fall of 2008 in a really terrible financial situation, Gillis explained. However, there was a demand for the types of firms that they were establishing, he added. They believe the limited partners see today’s environment as an equally favourable moment to deploy additional capital.
Nonetheless, the tough funding climate is influencing Third Rock’s investment strategy to some extent. Tong explained that the firm is now looking to establish businesses that are a little bit more grown up at the time of launch. According to Tong, such businesses would be on schedule to get a lead medication programme into human testing in two years from launch, as opposed to some past Third Rock investments, which took four to five years.
Third Rock’s new fund will give the Series A funding that biotech businesses generally disclose when they launch, as well as follow-on funding to help them grow. Additionally, part of the new funds will be used to fund companies founded by the firm’s fifth fund. Third Rock, like Flagship Pioneering, which established Moderna and a slew of other biotechs, has shifted its focus to autonomously fostering businesses over the years.
Third Rock has been doing a bit more syndication with its fifth fund, and now into its sixth, allowing other venture companies to invest early in its enterprises. According to Tong, the move was made in the hopes that the market would eventually correct itself after the recent surge, and that recurrence would make certain companies a little more resilient. According to Tong, Third Rock has set aside a “little sleeve” of funds for “developing enterprises” outside the firm.
