Atlas Venture Splits: A Sharp Change in Less Than 18 Months

Xconomy Boston — 

Since closing its ninth fund in mid-2013, Boston-area venture capital firm Atlas Venture has seen big changes in its personnel roster and scored some notable returns on its investments.

Today, the firm announced even bigger news: It’s splitting its life sciences and IT business, sending the tech investors off to form a new, still-unnamed fund sometime next year. The biotech side will keep the Atlas Venture brand name.

Atlas tech partner Jeff Fagnan declined an interview request on the shakeup, saying only that “it’s really business as usual for us and we don’t want to be distracted.” But in a blog post explaining the change, Atlas life science partner Bruce Booth indicated that the combined setup had become too bureaucratic, and might have been confusing for entrepreneurs and investors.

The split also reflects the vast differences between the biotech and tech industries themselves—an e-commerce company and a startup that develops memory-improving drugs don’t have much in common.

But, probably most importantly, there’s the money. Atlas seems to think its two halves will be able to raise more money from investors by splitting from each other. Fortune, which broke the news, reports that the new, biotech-only Atlas plans to raise another fund next year that is around the same size as its $265 million ninth fund from 2013. The new five-person ex-Atlas tech firm, meanwhile, will seek to raise about $125 million for their new fund.

Or, as Booth put it, “focused pools of capital with greater critical mass and scale in each franchise.”

That’s significant for a couple of reasons—the venture capitalist’s equivalent of a salary typically comes from the management fees they take off the top of any money they’re managing, often around 2 percent. The serious pay comes from the 20 percent or so share of the returns on big successes, like an acquisition or IPO.

Larger funds don’t necessarily do better than small ones, but having a bigger pool of money from which to write checks, especially if you’re focused on early stage investments of relatively small size, gives a VC more chances to find the few homeruns that can make a fund.

In an interview, Booth implied the split wasn’t being driven by disproportionate success from one side of the firm, saying that the two branches have seen similar returns over recent funds. Fortune reports that the combined group also plans to continue jointly managing the existing funds.

Atlas’s notable exits include Isilon Systems and Phase Forward on the tech side, and Zafgen, Avila Therapeutics, and CoStim Pharmaceuticals in life sciences.

The strategic turnaround is pretty remarkable when you consider Atlas’s previous dedication to the combined model. Last May, shortly after Atlas closed its newest fund, Booth explained the reasons for sticking to the combination approach when lots of other firms had begun to specialize:

“First and foremost, we like each other. Second, it works: some vintages tech has outperformed, some vintages life sciences has outperformed. Lastly, as a life science investor, I think it’s great discipline to have a tech counterpoint to keep us honest on things like capital efficiency … I suspect the same is true for my tech partners.”

As it turns out, today’s big changes were set in motion shortly after he wrote that. Booth says the “elephant in the room” was brought up by the tech partners last summer, at the firm’s annual strategy retreat. A year and change later, they’re headed in separate directions for good.

Greg Huang contributed to this report.