Two San Francisco Startups Sharing In Third Rock’s Rich Third Fund

Xconomy San Francisco — 

Third Rock Ventures, an investment firm known for founding life sciences companies from scratch, made a big splash last year by raising $516 million for its third fund while many of its fellow venture capital firms were struggling. Since then, it’s been putting that new money to work. Over the past three months, Third Rock’s original Boston office formed two Cambridge, MA-based companies, Voyager Therapeutics and Editas Medicine.

And now, the firm’s newer San Francisco office, launched in 2010, is about to unveil financing deals for two San Francisco-based startups, cardiac device company Element Science and cancer drug discovery company Nurix—adding to the eight companies already nurtured by Third Rock’s West Coast branch.

Unlike many biotech VCs, which have moved to late-stage investing strategies in an attempt to grab quick returns, Third Rock has aggressively sought to build companies in potentially disruptive areas of science, like genomic-based drug discovery, gene therapy, and innovative cancer therapies. “We prioritize cutting edge areas of science for which opportunities still exist to create breakthrough therapies,” explains Mark Goldsmith, a partner at Third Rock’s San Francisco office, who shared details of the upcoming Bay area deals with Xconomy.

The firm’s current 33-company portfolio includes Agios Pharmaceuticals (NASDAQ: AGIO), which aims to starve cancer cells of essential nutrients; Bluebird Bio (NASDAQ: BLUE), which is working to insert corrective copies of the defective genes in inherited diseases like beta-thalassemia and sickle cell disease; and Foundation Medicine, (NASDAQ: FMI), which charts the mutated genes in individual patients’ cancer cells. All three of those Cambridge, MA-based companies were hot IPO issues in 2013, demonstrating Third Rock’s success at taking companies public.

The new companies in Third Rock’s portfolio continue the firm’s investing themes. Voyager is trying to harness gene therapy to tackle central nervous system disorders such as Lou Gehrig’s Disease and Parkinson’s disease. Editas, which Third Rock formed with co-investors Polaris Partners and Flagship Ventures, has developed methods to edit out defects in existing genes that cause disease.

The two startups now being incubated in San Francisco, Nurix and Element, are aiming for breakthroughs in cancer therapy and cardiac care. Goldsmith says Nurix is developing cancer drugs that target a pathway called the ubiquitin proteasome system, which helps break down unneeded proteins inside a cell structure called the proteasome. The proteasome is a small membrane-bound bag that serves as a sort of trash processing unit, and the discoverers of ubiquitin’s role in protein degradation won the 2004 Nobel Prize in chemistry. Researchers say the ubiquitin proteasome system’s role in protein breakdown is crucial in cell division—an important factor for fast-growing cancer cells. So drugs that alter the protein breakdown pathway could conceivably fight cancer.

A bit more can be gleaned about Nurix from financial filings. Third Rock participated in one of Nurix’s early seed rounds with The Column Group, Venture Deal reported in 2012. The Column Group is a venture firm neighbor of Third Rock, located across the Mission Bay campus at 1700 Owens Street in San Francisco. The Column Group’s office suite was the address given by Nurix when it filed documents with the Securities and Exchange Commission in February for an equity offering of as much as $25 million.

The Nurix company directors named in the SEC filing include Third Rock’s Goldsmith and Column Group managing partner David Goeddel, a noted Bay area biotechnology pioneer. The Column Group has also invested in Constellation and Burlingame, CA-based Igenica Biotherapeutics, which are both Third Rock portfolio companies.

Third Rock’s second new San Francisco startup, Element Science, is a cardiac device company founded by Uday Kumar. Kumar became an Entrepreneur-in-Residence at Third Rock’s San Francisco office in 2012, and has also directed global design programs for Stanford Biodesign, a medical technology innovation program at Stanford University. Element was originally named Revive Defibrillation Systems, and its focus was to develop an “innovative device for the treatment of sudden cardiac death,” according to Kumar’s page on the Biodesign website. Details about Element’s device have yet to be announced.

In March, Element filed notice with the SEC for an equity offering of as much as $40 million. Neil Exter, one of Third Rock’s partners in Boston, is named as one of the company directors, and Element lists its address as Third Rock’s San Francisco office. Goldsmith says Element will soon announce a Series A round of funding.

More investments will be coming. Third Rock has said it plans to invest in as many as 16 companies from its $516 million third fund.

Some of those companies, though possibly not the majority, are expected to be in the Bay Area. Although the region’s biomedical industry is much more spread out than the cozy Boston community centered around Cambridge, the area has a similar trove of top research universities, pharmaceutical and biotechnology companies, and experienced executives to recruit into portfolio companies, Goldsmith says. “I think it’s a terrific environment for building companies,” he says.

The environment is particularly good in the growing biotechnology cluster around UCSF’s campus at Mission Bay, where Third Rock’s San Francisco office is located. Goldsmith sees Mission Bay as the closest thing in the Bay area to the Cambridge, MA, life sciences community. These densely packed clusters strongly support Third Rock’s hands-on approach to investing, which thrives on proximity. The venture firm is deluged with startup pitches, Goldsmith explains, but it often tweaks the founders’ business plans, or assembles its own teams of executives to found companies based on its own “ideation,” he says. Third Rock partners frequently serve as interim CEOs or in other executive positions at startups it backs. “It requires a deep investment as individuals in each of our companies,” Goldsmith says.

This labor-intensive model limits the number of startups its executives can support. And because the San Francisco office is smaller, with about five professionals to Boston’s complement of about 34, the number of companies it can fund may also be smaller: “Each of us can only be sliced in a finite number of ways,” Goldsmith says.

With the addition of Nurix and Element, the San Francisco office has 10 companies in its portfolio. The existing eight, financed from earlier Third Rock funds, include Igenica, which is developing antibody-drug conjugates to treat cancer, and South San Francisco, CA-based MyoKardia, which works on genetically targeted drugs to treat cardiovascular disease. Another South San Francisco company, Global Blood Therapeutics, is exploring the root causes of chronic blood diseases. And Los Altos, CA-based Topica Pharmaceuticals, is a clinical-stage company testing a remedy for fungal infections of the human nail and nail bed.

How do Goldsmith and his colleagues in the San Francisco office pick and choose among the many innovative ideas clamoring for VC dollars? Goldsmith, who was first introduced to Third Rock when he was CEO of one of the firm’s portfolio companies, Cambridge, MA-based Constellation Pharmaceuticals (a drug discovery company based on the emerging field of epigenetics), and who joined the VC firm’s San Francisco office in mid-2012, says that they look for “product engine companies.” These are organizations with product candidates as well as a scientific discovery platform that can continue to refresh the product pipeline. The VC firm evaluates prospective portfolio companies through its “core competency teams” that have expertise in areas including oncology, rare genetic disorders, and diseases of the central nervous system.

Goldsmith says Third Rock will often study a biomedical field for one to three years, meeting leaders and evaluating business plans, before making a commitment to invest in a company. The VC firm has been building a core competency team in host-biome interactions, but has not yet funded a company in that area, he says.

Once it finds promising ventures, Third Rock makes relatively large investments in each company, in contrast to VC firms that spread smaller amounts of money and staff time over larger numbers of portfolio companies, Goldsmith says. Third Rock’s intense involvement with its startups also may dictate the geographic range of the early-stage companies it’s likely to back. When Goldsmith has an executive role in a company, his ideal range can’t reach much beyond the boundaries of San Francisco and South San Francisco.

“I would literally spend all my time driving,” Goldsmith says.

Although Third Rock sometimes invests in companies focused on specific products of compelling interest—like the nail fungus drug being developed by Topica—the VC firm’s sweet spot is a platform company with the potential for a self-renewing pipeline, such as Agios, Bluebird, and Global Blood of South San Francisco.

“These are really big ideas that just took a great deal of scientific insight and creativity to get started,” Goldsmith says.