Analysis: After a Boom-and-Bust Era, More Modest Growth at Polaris

Polaris Partners’ latest venture fund, announced last week at $450 million, looks like a solid reward from its investors after a string of initial public offerings for its portfolio companies.

But that reward is noticeably smaller than it might have been a generation ago, when Polaris had early success and was supplied with a huge injection of cash from its limited partners.

Today, Polaris appears to be growing more modestly—a trait that has been tied to better returns for investors in venture funds, and is perhaps a sign of a more competitive VC industry.

Whether the firm continues to have good returns, and how quickly it grows the amount of money it invests, will be items to watch in the next few years.

The tale of Polaris’s ups and downs in the venture world can be seen in both the size of its funds and their performance for limited partners—the pension funds and other large investors who supply VCs with their capital.

We dug into Polaris’s performance with the help of Bison, a private investment-data software company based in Boston that tracks VC performance by aggregating far-flung and sometimes hard-to-find public sector investment reports. We also checked the University of California Regents’ investment reports, which include four different Polaris funds.

The takeaway? Polaris grew enormously in the dot-com bubble years, and even continued growing in the run-up to the Great Recession. It had some rocky returns, but a good performance in its last mega-fund appears to have helped the firm survive a post-recession downsizing among some VCs.

Polaris debuted in 1996 with a fund of about $80 million, and more than tripled the money its investors had pledged, according to Bison’s review of public records. That’s the kind of venture-style returns LPs are looking for when they select riskier investments, and Polaris was rewarded with more than double its money for the next fund, a $177 million investment pool that dates to 1998.

That second fund didn’t explode like the first, but it still did well: Fund II for Polaris returned 1.6 times the money invested, Bison’s figures show. And in those heady times, with the first Internet wave sweeping all sense out of the financial world, money followed.

Polaris’s next two funds, raised back-to-back in 2000 and 2001, were monsters. The firm collected about $800 million for Fund III, and $900 million for Fund IV. But investors got burned, losing money in Fund III and only getting 1.26 times their investment back in Fund IV.

This was in a historically bad time for many kinds of risky tech investments, of course. But Polaris didn’t do well when compared to other private equity and venture investment funds, scoring in the 17th percentile for fund III and the 30th percentile for fund IV, according to Bison’s comparisons.

Polaris plugged along, and didn’t raise another fund until 2006. The dot-com hangover had worn off, social media and the “Web 2.0” era were on the rise, and Polaris was able to find enough interest to raise a $1 billion fifth fund.

Although limited partners have only seen their investment grow by 1.5 times to date—and that’s when you include the paper value of company stock that hasn’t been sold—Polaris’s fifth fund performed in the top 25 percent of all private equity and VC funds of its era, according to Bison’s scoring.

Four years later, with ambitions downsized following the Great Recession, Polaris was still able to raise a $375 million venture fund. That’s an enormous drop-off from the billion-dollar territory of the previous three funds, but in an era when companies are getting ever cheaper to start and underperforming VC firms are disappearing, it amounted to a nice survival.

After that 2010 fund was raised, Polaris was able to see its current run of IPO success take flight. In the decade between 2000-2010, according to its website, Polaris saw seven portfolio companies reach the public stock markets.

Since 2011, it’s had 11 companies complete an IPO, including six in 2014 alone: T2 Biosystems, Ocular Therapeutix, Imprivata, Cerulean Pharma, Genocea Biosciences, and Trevana. With the exception of IT security company Imprivata, all of those IPO companies are in the life sciences and healthcare industries.

Polaris’s reward for all of that success was a larger fund—but not that much larger, growing from $375 million to $450 million. In an era of public pressure from some prominent limited partners like the Kauffman Foundation, it’s worth asking whether Polaris’s current fund size represents a kind of new normal, or whether another few years of big wins will lead to larger fund sizes once again. Entrepreneurs, and the deep-pocketed investors who count on their success, are watching closely.

Alex Lash contributed to this report.

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