5AM Ventures, an Early Stage Biotech VC Still Standing, Raises $250M

Xconomy San Francisco — 

Like its name suggests, 5AM Venture Management likes to place its bets early in the life of a company. Now it has reloaded with another $250 million to put to work in more early-stage biotech companies.

Menlo Park, CA-based 5AM Ventures said this week it has closed on 5AM Ventures IV, its fourth fund since it got going in 2002. The venture firm now has $685 million of total cash under management, including its most recent $200 million fund that closed almost exactly three years ago in December 2009, during some of the darker days for early-stage biotech venture capital.

The fundraising for 5AM wouldn’t normally be very newsworthy, but it is unusual in today’s world, where so many biotech VC firms have folded up their tents or scaled back because of their inability to raise new funds from skeptical pensions, endowments, and other institutions. The shrinkage of biotech venture capital, a long-term story, has left a small group of firms like 5AM with the money, people, and appetite to invest big in the boldest biotech startup ideas.

In a little more than a decade of operation, 5AM says it has invested in 40 early-stage companies, and while it doesn’t publicly advertise its internal rate of return or actual cash returns for its limited partners, the firm has some winners it can point to. The firm said in a statement it has achieved liquid returns on 12 of its 40 investments (30 percent). This year it has had two portfolio companies go public, South San Francisco-based KaloBios (NASDAQ: KBIO) and Redwood City, CA-based Relypsa (NASDAQ: RLYP). AstraZeneca also agreed to pay $560 million upfront, plus milestones that could exceed $1 billion, to acquire Redwood City, CA-based Pearl Therapeutics.

Andy Schwab, managing partner, 5AM Ventures

Andy Schwab, managing partner, 5AM Ventures

So why exactly was 5AM able to raise its new fund?

“I think the key reason is that our historical funds have performed very well – especially our 2009 fund which already has 4 strong exits,” said Andy Schwab, a 5AM managing partner. “In addition, some LPs view biotech VC as contrarian since returns haven’t been good for the past decade and there is a lot less private $$ in the sector.”

Schwab, 42, said 5AM’s funds from 2002, 2006 and 2009 all “have been right at the top of all VC funds (not just healthcare)” when compared with other funds that closed during those years.

Here’s the rest of a short Q&A I did with Schwab over email this morning:

Xconomy: Was there a reason you kept this fund small at $250m, about in line with the previous fund?

Andy Schwab: We want to stay focused on a portfolio of ~15 companies, so $250M is the right size (15 companies at $15-20M per company). We had demand for a much larger fund but don’t want to get too big.

X: Any changes in investment strategy to look for in the new fund?

AS: No. We are staying focused on Series A deals for either innovative technology platforms, corporate spin-outs or shorter-term products such as research tools & instruments.

X: What do you consider some of the more promising areas of investment today in biotech?

AS: Sort of like pornography…you know it when you see it. We like being diverse and open-minded.

X: Who’s left standing that you consider viable syndication partners for the kind of early-stage big-idea things you like to back?

AS: Our most recent deals have been with Canaan, Frazier, NEA, NOVO, OrbiMed, USVP and Versant, so I think that is a good list. Also the corporate VCs have been very good partners especially Astellas, Roche, Pfizer, SR One and Takeda.

X: Who are the investment partners for this new 5AM fund?

AS: Same as the past 3 funds – John Diekman, Scott Rocklage and myself are the Managing Partners. We also have a very strong team of 3 Principals and 3 Venture Partners who have all worked together over a number of funds.