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Q&A With Bob Tepper on What’s Next for Third Rock Ventures

Xconomy Boston — 

Third Rock Ventures had the biotech industry buzzing yesterday. It raised its third fund, worth $516 million, to invest in early-stage biotech drug, device, and diagnostic companies.

While many biotech VCs are winding down operations or switching to late-stage investing strategies to show quick returns, Boston and San Francisco-based Third Rock has moved in the opposite direction. It has aggressively sought to build companies in disruptive areas of science like genomic-based drug discovery, gene therapy, and cancer immunotherapy.

I followed up on the news yesterday in a phone call with Robert Tepper, a Third Rock partner who co-founded the firm in 2007. He’s the former president of R&D at Millennium Pharmaceuticals, and has training as a biochemist and a physician. Tepper will also be one of the featured speakers at the sold-out event we’re organizing April 4, titled “Boston Biotech Seizes the Momentum.”

Here’s what he had to say about what to expect from Third Rock now that it has raised the new load of cash:

Xconomy: Big day for you guys. What does your inbox look like on a day like today?

Robert Tepper: A lot of congratulations. That’s about 80 percent of the additional e-mail. Then there’s about a 10 percent uptick in LinkedIn requests. I think that’s just because people know we might be hiring in the future. And then there’s another 10 percent random other folks who heard the news.

X: You mentioned in today’s press release you’ll be adding some people to the team. Looks like you have about 40 there now. Mark Goldsmith will become a partner. How many people are you looking to add, and in what kind of roles?

RT: I’d say we’re pretty close to steady-state right now. You won’t see us adding a dozen people or more. What we’ve done, what we continuously do, is just looking at competencies we’re missing. So much of what we do depends on us jumping into the companies and really managing the efforts. There’s a lot of activity on the science side, but also on the business side. Pharma is reaching out much more now than in the past. As we have built some of these relationships with the pharma companies, we’re finding there’s a lot of interest in continuing the dialogue. I think we may need a little more help on continuing what we call business development, or partner development with pharma and biotech. We’re always looking for new entrepreneurs who have great expertise in a particular area. A good example of that, a couple years ago, was when we added Steve Paul to the team as a venture partner. Steve has great expertise in the central nervous system area, which really helped us start companies in that area. I think you’ll see very selective hiring to round out the team.

X: What kinds of expertise would you say you are lacking at the moment?

RT: I don’t know if we’re lacking any one expertise completely, but we may try to branch out into another therapeutic area, that might be one. The business development area is one where we have great expertise with Neil Exter and Cary Pfeffer, and others, but we may want to add more capability. It’s about strengthening existing expertise rather than going into completely new areas.

X: Will there be any operational changes in how Third Rock starts up companies? Will you still have partners be very hands-on, and working as interim CEOs for the first 12-18 months of a startup’s life?

RT: It’s pretty much the same model we’ll be using. It’s worked well for us in the past. The interim CEO roles, we think are good for the companies, and we find it’s really great for us to understand the companies—the opportunities and the challenges and the strategic directions they have. So I think you’ll continue to see partners work as interim CEOs, interim CSOs. For example, Jounce, a company we recently launched in the cancer immunotherapy space, has Cary Pfeffer as interim CEO, and I’m interim CSO. We plan to do that over a 9-12 month period, sometimes a little longer, sometimes a little less, until we can get the right folks in there.

You’ll see the same model. We’ve gone through a lot of numbers on what it takes in terms of the number of people we need to continue with that model. I think we’re close. We will need just a few folks.

X: Any plans to expand geographically? I know you like to keep those companies close to home in Boston and San Francisco, close to where the Third Rock partners are, right?

RT: Exactly. I don’t think we have any specific plans to expand geographically. We’re still working on the San Francisco office. Mark (Goldsmith) was recently promoted there. We’re doing a few more companies out there than the first year we were operational out there. I think it will be Boston and San Francisco. Keeping it geographically tied to where we are is really what we think of as one of our key strengths. It really does allow us to play a much more significant role in the companies. Not only at the beginning when we take on the interim operating roles, but to help the companies a little bit more than we might otherwise if we were just coming in for board meetings. We spend a fair amount of time with companies working with them on strategy, and helping them with pharma partners. Introducing them to some of the experts we know, etc.

X: Third Rock has done some medical device investing as well. Do you plan to continue doing that?

RT: It is an area we plan to continue working on, and looking at. It’s a challenging area in some respects, in terms of the deals you can do early on versus later on. Also, there’s the expertise. We have some expertise in that area, but we really like to focus on areas where we have expertise. One area in particular, in cardiovascular medical devices, it’s one area where we’ve done a couple of companies. We have some good expertise there, and that’s an area we’ll continue to look at. There are a lot of opportunities there. We won’t exclude other opportunities in devices, but we’ll proceed in a focused way.

On the diagnostics side, companies like Foundation Medicine and Nine Point Medical, we’re excited about. On the device side, DC Devices was one cardiovascular device companies that we started early on, and we’re in the clinic there. We’re encouraged by that company as well. We’re going to continue to play to our strengths.

X: Any plans to invest in health IT or further branch out from your base in biopharma and devices?

RT: Healthcare IT is an area we’re looking at a lot. We’re intrigued by it. It’s a really important area, but I’d say to be fair, we still have to learn a bit more about the right strategies there, and how it’s going to evolve. The role of the government in the whole healthcare revamping will impact things significantly in that space. I’d say we’re going to do a little more homework in that area and get more expertise, but I certainly think it’s a possibility for the future.

X: I wrote a little something earlier today about syndication in venture capital, and how we’re seeing less of it. We’re seeing more venture firms who are going it alone in the early days, when companies are getting started. Third Rock is clearly one of the firms that has done this. Can you talk about your thoughts on venture syndication and when it makes sense to do it?

RT: It’s an important part of our strategy as well as other folks. You’re right, we have decided in a lot of cases to start a Series A with our own [money], if you will. But most of those Series A deals are tranched, and we certainly look at syndicating either later in the Series A, or obviously in later rounds. Syndicating is still important. It requires significant capital to really bring multiple products into the clinic. We do prefer companies with multiple product opportunities, and really a new product engine. We have enjoyed excellent syndication partners, for the most part, and we’ll continue to do that. But because of our model, in which we do so much of the heavy lifting early on, it does make sense for us to have high ownership in the Series A, because we’re doing a lot of the operational work as well as setting up the company. It’s a balance.

X: How has life changed there at Third Rock the past couple years? There are a couple of macro forces I see that I’d imagine have some effect on you. One, there’s a lack of people still doing early-stage biotech investing, so there are few places entrepreneurs can turn to that are like Third Rock. And also, Third Rock’s profile has been rising with so many portfolio companies hitting milestones and doing well. Are you getting a lot more inbound pitches, seeing higher quality ideas? How have these forces affected you?

RT: I think the answer to both of those points is yes. We’re certainly seeing a lot more pitches. The quality, I think, is really good. People have learned what we’re interested in investing in and how we operate. It becomes an iterative process. When people come to us, they usually know we’re interested in areas of science that could provide breakthroughs for medicine of the future. We don’t see a lot of plans. We tend to be pretty selective there, because we always want to bring together the best people in a field. Sometimes a plan will have brought those folks together, but we sometimes view plans as starting points, and not end points. Most of the ideas we fund are ones where we bring together the folks. It may not be reacting to an external plan. We discover efforts internally. We spend a lot of time bringing people in and brainstorming about exciting new areas of science and medicine. Sometimes we’ll do it for a year, or a year and a half or more, before we decide to launch something in an area.

But to your original question, we’re seeing lots of stuff come in and lots of great stuff, too. You have to be very selective.

X: What’s the biggest limitation or challenge facing the firm?

RT: If you think of an average fund, or this fund coming up that will support 14 to 16 companies, our goal is to make them all successful. We do a lot of thinking about what we want to invest in before we actually will trigger an investment. I’d say the most challenging thing is we just have very limited—even with a fund this size—we have a very limited amount of resources. You’ve got to be really selective. A lot of it is taking your time, spending your time to get to know the area, get to know the people, and get to understand whether the time is right to jump into an area, and then devoting the right amount of resources like that. You have to do your work.

X: You said in the release today you were oversubscribed for this fund. Why did you turn away some people who wanted to invest? Why cap it at $516 million?

RT: A lot of that has to do with discussions we had with our advisors, and our limited partners, and also, probably more importantly, our model. Unless we really want to grow the firm very significantly, our model, which involves jumping into interim operating roles and working closely with the companies, even after we’re out of those formal roles—it just takes a lot of work. We think that’s a key—probably the key attribute—for success. If the fund was much bigger, we’d really have to have significant additional people. We want to make sure our organization is quality, and that takes time. We’ll continue to grow, but it will be fairly well thought-out and deliberate. The $500 million figure came from Mark (Levin) and Kevin Starr and others on the team who did a lot of analysis. We track all our time, and effort, and did this very analytically. We felt that would be the right size for about the size of the firm we have now, and the type of work we do with the companies. It was a very deliberate number, based on those sorts of analyses.

X: I’ve talked with Kevin once before about his time budget. How do you like to allocate your time, as partners?

RT: Me personally?

X: Well, does every partner have their own time allocation strategy or is it pretty similar across the firm?

RT: We have one strategy, because we meet every week and review what we’re working on, and how we’re spending time. We match that up with the time the firm needs in a certain area. On a weekly basis, and very formally on a quarterly basis, we look at where people are spending their time and where the firm needs them to spend time. It’s because we’re developing these companies ideas internally before we decide to fund them. In other words, we know as they mature, they’re going to need a certain amount of science effort, a certain amount of business effort, a certain amount of effort from junior folks and more senior folks. We really try to match time and re-allocate people’s time—all of us in the firm—based on where the needs are. It’s not really up to the individual, per se. Obviously, there’s flexibility but we really try to match that to developing the company the way we want to develop them. Early ideas require relatively less effort, but as we get close to launching a company, we’ll have sometimes 4-5 full-time equivalent folks working on that. We need to plan for that if we’re going to continue to build these companies on a regular basis. It’s a very deliberate tracking system that meshes with the strategic and the steady-state numbers we sign up for each year in building companies.

X: So for you personally, how does it break down in terms of time spent on existing portfolio companies, new ideas being incubated, meeting new people, etc.?

RT: I’m more of a science/medicine geek. I deal with the science/medicine geeks in the group. For me, I’ll give you a Scenario 1 and Scenario 2, because I flip back and forth between them. Scenario 1 is where I’m not actively working as a chief scientific officer in one of our companies. In Scenario 1, I’ll spend half my time on new company ideas at various stages, before we actually fund them. This is also the discovery phase. So it’s new ideas, and new ideas that are maturing. Then the other 50 percent of my time is split between our partnership meetings and our firm meetings, which is probably about 10-15 percent, and the remaining 35 percent is working with existing companies, with boards, and also being a scientific advisor to companies we’ve already launched.

That’s Scenario 1, which is typically how it is. Now, when I jump into a CSO role, which I just did at Jounce [Therapeutics] a couple of months ago, you end up spending 30-40 percent of your time in that role, sometimes up to 50 percent of your time. The same is true for Mark (Levin) or Kevin (Starr) or Cary (Pfeffer) when they take on a CEO role at one of the companies. A couple of days per week gets spent in that role. What you ratchet back a bit are those early-company builds, the discovery effort. As people come in and out of those C-roles, then they are able to devote more time to early-company building roles.

It’s worked out well. It’s never perfect. Given that we track time pretty carefully, we’re usually able to predict when we’ll have a little bit of a shortfall in people effort. Lastly, I’d say that we have an active entrepreneur-in-residence program (EIR) where we bring in people who come in and help us with 1-2 companies, who are here for a year or couple years, and the goal is to have one of those folks join the company in a senior role. So we’re pretty selective about the people we bring in, but we bring in great people, and it’s been a fantastic way to get help on the discovery programs, but also to staff the companies once we launch them.

X: How much time do you and Mark (Levin) spend on LinkedIn?

RT: Mark spends a ton more time there than I do. Mark is a LinkedIn junkie. The reason why Mark is a LinkedIn junkie is simple—it’s because he’s a people junkie. It’s all about people in this business, as you know, great people with great experiences who really want to be part of a team that does incredible things. Mark epitomizes that, and he’s constantly looking for people like that. We actually joke with Mark a lot that LinkedIn is going to start surcharging him for the amount he uses it. I use it more selectively, usually when we’re trying to recruit people into our companies, or networking around areas where I don’t already have a network in mind. It’s a great tool. But Mark is, by far, the power user within Third Rock.

X: Are you doing anything to celebrate the new fund?

RT: We will celebrate. It’s just very exciting to see the progress you alluded to, which we’re seeing with some of the companies from fund I and fund II. We’ve got 21 ongoing clinical trials in 15 companies. We’re really starting to see results. That’s really exciting. I think everyone is pretty jazzed. It’s an exciting time. It took us a while to build a system, and gather some of the data we have internally about what it takes to build these companies, and the network that we have. And as you alluded to, our reputation is strengthening. It’s really a terrific time to be able to connect with lots of great people. A lot of people here feel the enthusiasm and are really passionate about what we’re doing.

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