Atlas Venture Raises $265M Fund, Touts Turnaround from Bloated Years

Xconomy Boston — 

[Updated 1:15 pm, see below] Atlas Venture, a Cambridge, MA-based venture capital firm that focuses on early stage tech and biotech companies, has raised a new $265 million fund after several years of reinventing itself into a leaner, more nimble operation.

The news comes on the heels of Boston-area VC firms closing new funds—$650 million for Battery Ventures, $516 million for Third Rock Ventures, and $450 million for Spark Capitaleven as the broader VC sector continues to contract around a smaller number of players.

Atlas partner Jeff Fagnan, in an interview with Fortune, says a major part of Atlas’ change in focus came from zeroing in on Boston-area startups (along with a few bets in the San Francisco Bay Area, of course). Fortune was the first to report the news.

But the changes go a lot deeper than that. Atlas Partner Fred Destin writes in great detail about the bid to remake Atlas, which was a sprawling, bloated firm concerned with raising big funds from its limited partner investors when Destin arrived some nine years ago.

“Atlas was a very successful firm built on a strict regimen of small funds and a maniacal focus on very early stage investing. Because of the quality of its results, it became one of the pre-eminent firms in the late `90s, and started ballooning out of control,” Destin writes. “Fundraising became more important than investing, and Atlas began to think of itself as an ‘institution.'”

Performance numbers from that era, listed by public pensions funds, bear that out.

Atlas’ fourth venture fund, from around 1999, has only returned $8.4 million of the nearly $24 million invested by the state of Pennsylvania’s retirement system, according to figures through Sept. 30. Atlas Venture Fund V, from 2000, did better—but still only paid back $39 million for the $37 million that Pennsylvania laid out.

Atlas’ fortunes dove again with its sixth fund, dating to 2001: Pennsylvania invested nearly $25 million but has only reaped $8.4 million so far. California’s pension fund invested $6.2 million in Atlas VI, but has only seen about $2 million of that money come back in more than 12 years.

Even in the decade or so of poor performance generally from VC funds around the country, those are not good results. And it showed in 2009, when Atlas cut the number of investment partners after its last fund closed at $283 million, much lower than the roughly $400 million it had been targeting.

Destin says the smaller fund size wound up being a kind of blessing in the remaining partners’ personal mission to remake Atlas into a firm “we would want to invest in and not one that was shaped by legacy.” Part of that has been keeping the VC firm more in line with the best interests of its investors, rather than reaping management fees from ballooning fund sizes.

“We also upped our commitment to the fund and I think will up it again over time. Some of the partners bought a secondary position in the last fund. We want to be in alongside our investors,” he writes.

Bruce Booth, a life sciences partner at Atlas, adds on his own blog that the firm’s diversified focus has helped it survive the transition to a leaner, more focused operation—even when some other firms have abandoned such a focus.

“Many have asked us why we stick together when many hybrid funds are splitting. First and foremost, we like each other. Second, it works: some vintages tech has outperformed, some vintages life sciences has outperformed,” Booth writes. [Updated to add Booth’s blog post]

Atlas Venture’s focus on seed-stage investments and the Boston area has shown—when the Boston Business Journal researched publicly known investments from local firms in 2011, it found Atlas the clear leader in number of deals done. Atlas’ current portfolio includes big, local technology bets such as digital security provider Veracode and online advertising information service DataXu.