It has been almost exactly a year since Third Rock Ventures burst onto the local innovation scene with a $378 million life sciences fund, and now its strategy is becoming clear. Third Rock has backed Agios Pharmaceuticals, a company that starves cancer cells of essential nutrients. Zafgen, another in the Third Rock portfolio, is developing drugs to block the growth of new blood vessels in fat tissue as a new way to battle obesity. And Constellation Pharmaceuticals is working on ways to control epigenetics, a a biological system for turning genes on and off.
What do the three investments have in common? They are all tackling unconventional approaches to diseases. They all raised a lot of cash. They are all based in Cambridge, MA.
I stopped by Third Rock’s offices on Newbury Street in Boston to learn more from partner Kevin Starr, a former chief operating officer of Millennium Pharmaceuticals. Last September, he and several former colleagues from Millennium, including Mark Levin, the former CEO, announced they had raised their initial fund. Raising the cash took just 10 weeks of making their pitch to institutions on a road show. At a grim moment in history for the financial markets, Starr’s confidence didn’t sound the least bit diminished.
“We’re going back to the basics,” Starr says. “In 20 to 30 years from now, we think we’ll be the fund you think of when you think of great life sciences venture funds. We think about pursuing big ideas and new frontiers.”
What does he mean by getting back to the basics? It means Third Rock doesn’t just put money in and get briefed once a month at a board meeting, Starr says. The firm’s partners get directly involved in their portfolio companies, taking on critical roles of CEO, chief scientist, or chief operating officer for the early months when company culture is being formed, Starr says. It provides its companies with ready lab facilities, human resources services, legal templates, and other support that enable founders to spend less time on administrative tasks and more on driving the science. And Third Rock insists on doing it all in the Boston area, so they don’t waste too much time on planes to the West Coast, Starr says.
“Some venture guys are on as many as a dozen boards. If you’re on 13 boards and you spend 10 days a year on each company, that’s 130 days a year you spend on board meetings,” Starr says. “That’s less time you can spend to get companies going.” Starr and Levin will take on a maximum of two CEO roles per year at their portfolio companies, others at the firm will take on a maximum of two operating roles, and they’ll dig deep, he says.
The firm also looks away from the pack for technology ideas. It aims to build “disruptive” technologies that differ from more conventional lines of research. Take Zafgen’s approach, which is to cut off blood flow to fat tissue, rather than tring to hit molecular targets in the brain that control whether you feel full. Third Rock is also cutting against the common VC strategy of raising giant funds, joining large syndicates, and betting on less-risky “late-stage” drug candidates that many firms have favored since they were burned when the biotech bubble burst in 2000 and 2001, he says.
Third Rock likes to keep its syndicates small, with just one or two other venture firms joining its funding rounds, because larger groups can get “unwieldy,” Starr says. The fund’s goal is to finance four companies per year, for three years until all of its first fund is deployed, Starr says. About one-fourth of the capital will be put to work in companies where Third Rock has a less active role in running the business, he says.
On the more active side of the portfolio, each company has a milestone in mind that should take 12 to 24 months to achieve, which should lead to a pharmaceutical industry partnership that generates enough cash to replace the conventional Series B round of funding, Starr says. The plan is to continue raising future funds, and start the cycle over again.
Third Rock gets its ideas from having brainstorming sessions with key scientific leaders, who think about ways to push the boundaries of fields or combine cutting-edge technologies in new ways, Starr says. The process of forming a company generally takes three to six months. Right now, Third Rock has three new companies in that early stage of development, and isn’t ready to talk publicly about them, Starr says. All he’d say is that one concentrates on rare genetic diseases, another is working on proteins, and a third is in medical devices.
I couldn’t resist asking how Third Rock generate returns for its partners when markets have turned so bleak. The answer, Starr says, is that it intends to sell the fruits of the innovation to large pharmaceutical companies that need to fill up their pipelines, rather than depend on trying to go public.
But what if the large drugmakers aren’t really sustainable themselves in the future, either because of the financial turbulence, or some other trend, like medicine becoming personalized in a way that kills off blockbusters that currently sustain their bottom lines? Either way, he insisted, health care is a $2 trillion industry in the U.S., about one-seventh of gross domestic product, and it is always going to be in demand.
“We believe that if you build great companies that make a difference for patients, then the value equation will take care of itself,” Starr says.
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