Formative years

Unlocking VCs' process of biotech company formation

VCs that spend a large chunk of their time and capital creating companies from scratch are planning to continue regardless of what happens with the financial markets. Althoughde novo company formation takes a lot of work and can take a lot of time, they say there is always a market for disruptive science, whether the buyers are public investors or pharma.

The VCs most active in company formation include Flagship Ventures, Arch Venture Partners, Third Rock Ventures, Avalon Ventures, Versant Ventures, Atlas Venture and Index Ventures, and each has its own approach to sourcing ideas and incubating and funding baby companies (see "Early to the Party," page 3).

All but Flagship ask their networks of trusted academics, pharma contacts and KOLs for ideas that could become companies. Flagship prefers to generate its own blue-sky ideas, and then subject them to a rigorous external critique.

Flagship, Arch and Third Rock gravitate toward forming companies to prosecute big ideas - either broad platforms or areas of novel biology - and are willing to take on the accompanying risk in hopes of creating companies that eventually see valuations north of $1 billion.

These firms want their companies unfettered, because they expect the market will set a price that creates more value than a pre-arranged deal.

In contrast, Avalon, Versant and Atlas want to have portfolios that include a mix of build-to-buy deals and unbetrothed companies, because having a portion of their portfolios set up with structured exits provides returns that are completely disaggregated - and thus insulated - from prevailing market conditions.

Avalon also has a heavy preference for asset-centric investing, an approach that one of the few company formers in Europe - Index - also favors.

Some are upping the number of companies they create. For example, Index said it is making more seed bets than before. In contrast, Arch said it wants to form fewer - but bigger - companies than in prior years.

Atlas sees total new company formations across the sector remaining in a steady state compared with historical rates.

"The steady state story is much more in line with the on-the-ground reality and is part of the venture formation dynamic in the industry right now," said Atlas' Bruce Booth. He noted translational mechanisms are limited or constrained and said there are a limited number of seasoned R&D veterans who are willing and able to dive into start-ups.

The common thread among all the firms is that they are only interested in funding science they believe will lead to breakthroughs. Robert Nelsen of Arch summed up the sentiment: "We're in the business of innovating and are supposed to do things that are hard and risky."

He added that there exists

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