Flagship Ventures Raises Sails for $537M Fund, Its Largest to Date

Xconomy Boston — 

Flagship Ventures of Cambridge, MA, a major early-stage biotech investor, said today it has closed a $537 million fund, the largest in the firm’s 15-year history.

Flagship initially set out to match the $269 million of its previous fund, Flagship senior managing partner and CEO Noubar Afeyan (pictured) said, but biotech momentum changed those plans.

In the current bull market, eight of Flagship’s biotech portfolio companies have gone public: Acceleron Pharma (NASDAQ: XLRN), Agios Pharmaceuticals (NASDAQ: AGIO), Bind Therapeutics (NASDAQ: BIND), Concert Pharmaceuticals (NASDAQ: CNCE), Eleven Biotherapeutics (NASDAQ: EBIO), Tetraphase Pharmaceuticals (NASDAQ: TTPH), Receptos (NASDAQ: RCPT), and T2 Biosystems (NASDAQ: TTOO).

Acceleron, Agios, Tetraphase, and Receptos are all currently worth more than $1 billion.

Convincing big pension funds and other limited partners to invest in biotech-focused venture funds was considered a difficult proposition in the years following the recession. Even with the current biotech boom, few new life science funds have sprouted. But Flagship and a few of its peers have had little problem refueling, thanks in part to the IPO boom.

For example, Arch Venture Partners announced a new fund last year, and Third Rock Ventures has been investing aggressively from its $516 million third fund.

Raising twice as much cash as the previous fund doesn’t mean twice as many investments, said Afeyan. He estimated the new portfolio will have only four or five more companies, a 15 to 20 percent increase.

He declined to name any of the investors in the new fund but said some are “similar” to previous investors, and some are new. Flagship’s fourth fund, which closed in 2012, was notable for an investment from Merck (NYSE: MRK). With their own research staffs cut and considerable cash to spend, big drug makers in recent years have used venture investments, either direct or indirect, to gain access to innovation.

Part of Flagship’s appeal is its in-house startup model, which it calls “VentureLabs.” VentureLabs companies might be based on an outside idea or piece of technology, but they emerge from Flagship more fully formed, often with significant Flagship cash behind them. One example is Seres Health, which is developing a mix of bacterial spores that, when ingested, would grow into beneficial bacteria and help patients fight off a potentially deadly Clostridium difficile infection. Flagship launched Seres in 2013 with a $10 million Series A round. Another example is Moderna Therapeutics, which Flagship developed for more than a year before its late 2012 debut.

Both firms have since raised more cash—Moderna in nearly absurd amounts—and have brought on board so-called “crossover” investors, often a signal that a company is gearing up to go public. Seres CEO Roger Pomerantz told Xconomy last summer an IPO was indeed on the company’s radar screen, but Moderna CFO Lorence Kim downplayed IPO expectations in January when the firm announced its record $450 million venture round. “A typical crossover is done with an expectation that an IPO is just around the corner,” Kim told Xconomy. “And we were very clear with [investors] that that’s not the case here.”

Flagship CEO Afeyan said the presence of crossover investors—public investors such as hedge funds and mutual funds that take stakes in late-stage private companies to get a jump on the IPO crowd—has been key to the sustained IPO run. Afeyan calls it “connectivity.” The crossovers are transferring returns reaped from the vaulting stock prices of big biotechs such as Celgene (NASDAQ: CELG), Regeneron Pharmaceuticals (NASDAQ: REGN), and Biogen (NASDAQ: BIIB), to new, riskier investments, namely pre-IPO biotechs with promising data.

Afeyan said up to half the startups in the new fund could come from VentureLabs projects, with four or five launches per year instead of one or two. Flagship will continue to invest about one third of its funds in what it calls the “sustainability” sector: clean energy and other technologies that solve problems caused by “resource constraints,” Afeyan said. Its most recent startup in this area is Symbiota, an agricultural company investigating plant microbiomes.

Flagship has begun investing from the new fund, but Afeyan declined to give details. Flagship has not publicly disclosed a new investment in a therapeutics company since its 2013 backing of Editas Medicine of Cambridge.