Third Rock Ventures, a prolific backer of biotechnology startups, announced Wednesday the closing of a billion-dollar fund that will be used to launch and build new life sciences companies.
The fund, Third Rock’s sixth, comes amid a significant downturn in the biotech stock market, which has raised questions about the ability of venture firms to secure additional capital as well as returns on their investments. Indeed, the last year or so has seen declines in the two main ways early biotech investors earn returns: initial public offerings and acquisitions.
Yet, the market slump hasn’t stopped some venture firms from bringing in record hauls for further life sciences investing. Atlas Ventures, which backed companies like Actelion and Alnylam Pharmaceuticals, closed its largest-ever biotech fund of $450 million in March. Three months later, the Third Rock team has done the same with a $1.1 billion fund that it expects to support the creation of roughly 10 startups.
“It’s been a challenging environment in the last few months,” said Jeffrey Tong, one of Third Rock’s partners. “But on the company creation side … we just have a very loyal base of [limited partners] who are investing across a long-term time horizon.”
Founded in 2007, Third Rock says that, to date, it’s raised close to $4 billion and invested in 60 companies. The firm has maintained a three-year fundraising cycle, previously securing $770 million in 2019, $616 million in 2016 and $516 million in 2013. With each cycle, the aim has been to support around 10 startups.
Third Rock raised the latest fund between March and May, after officially deciding to pursue it last fall, according to Kevin Gillis, partner and chief operating officer at the firm. At that time, the biotech stock market was only just beginning to dip after having reached new heights when the COVID-19 pandemic put a spotlight on healthcare.
But in the months since, the downturn has become much more drastic. A well-known biotech stock index called the XBI has lost more than half its value since November. And many smaller drug developers, fearful that fresh funding will be harder to come by, are now turning to cost-saving measures.
Tong acknowledged that larger market trends and challenges do come up in conversations with limited partners. But Third Rock and its investors aren’t terribly concerned, he said, as they tend to take a longer-term view on the companies the firm backs.
To that end, Gillis noted how nearly all of the firm’s existing limited partners, as well as some new ones, participated in the sixth fund.
“We've been through these cycles before,” Tong said. “The last few years have been a very long run of a positive cycle. But this is the history of biotech — there are multiyear rallies, and then there are dry periods. And we build companies to weather both situations.”
Notably, Third Rock formed right before another major drop-off in the biotech markets in 2008. Then, the ability for young biotechs to go public, known as the “IPO window,” was almost nonexistent. “We went into the fall of ‘08 in a really difficult financial market,” Gillis said.
However, “the need for the types of companies that we were building was out there,” he added. “And I think our limited partners look at today's environment as an equally opportunistic time to put new capital to work.”
Still, the difficult financing environment is affecting to some degree how Third Rock invests. Tong described how the firm is currently interested in building companies with “a little bit more maturity at the time of launch.” Such companies would be on track to get a lead drug program into human testing within two years of debuting, Tong said, rather than some previous Third Rock investments, which were four to five years from that milestone.
Third Rock’s new fund will provide the early, Series A financing that biotech startups typically announce as they launch, plus follow-on financing to further support the companies. Additionally, some of the fresh capital will go toward companies established through the firm’s fifth fund.
Much like Flagship Pioneering, which founded Moderna along with a host of other biotechs, Third Rock has turned its focus over the years to independently incubating startups.
But with its fifth fund, and now continuing into its sixth, Third Rock has been doing a bit more syndication, inviting other venture firms to invest early in its startups. That move, according to Tong, was made with the anticipation that the market would eventually correct itself from the recent boom, and that syndication would allow certain companies to be “a bit more resilient.”
Third Rock has also earmarked a “small sleeve” of money for “emerging companies” outside of the firm, Tong said.