ARCH Venture Exploits IPO Window To Raise $400M Fund, Its Eighth

Xconomy Seattle — 

Amid a boom in life science venture funding, ARCH Venture Partners has closed its eighth fund with more than $400 million in commitments, the firm announced Wednesday, and at least half of it is earmarked for one of the trickiest areas of innovation: emerging biomedical technology and therapeutics.

The fund matches ARCH’s previous vehicle of $400 million and could end up at $425 million, well beyond the firm’s earlier goal. It filed regulatory paperwork in April that indicated a goal of $250 million.

“You always want to be conservative these days, in terms of figuring out what the market’s like,” says ARCH co-founder and managing director Bob Nelsen (pictured, above and right, with fellow co-founder and managing director Keith Crandell, left, at the J.P. Morgan conference in 2011).

The market has been good to ARCH the past two years, which until recently had been investing from its previous fund that closed all the way back in 2007. Potential limited partners in the new eighth fund “wanted to see more exits and IPOs, and we did that in spades from fund six and fund seven,” says Nelsen.

With managing directors in Seattle, San Francisco, Austin, Dublin, and Chicago, where it was founded in the late 1980s, ARCH invests in both life sciences and physical sciences. (Its name is a portmanteau of the Argonne National Laboratory and the University of Chicago, because its predecessor handled tech transfer for both entities.) Its most recent fund tilted in favor of more dollars for biotech, says Nelsen, and the new fund should skew the same way. ARCH’s biotech portfolio has been a big part of the unprecedented wave of initial public offerings the past two years, with some companies moving quickly from initial funding to the public markets. In five years, Agios Pharmaceuticals (NASDAQ: AGIO) went from a Series A round to an IPO, which was a big hit despite Agios not yet having a drug in clinical trials. In 2013, ARCH joined the Series B round for Sage Therapeutics (NASDAQ: SAGE), which was founded three years earlier by Third Rock Ventures. Sage went public in July.

ARCH’s other recent exits and IPOs—which aren’t necessarily exits yet, depending how long the firm decides to hold shares—include Bluebird Bio (NASDAQ: BLUE), which went public in June 2013; Receptos (NASDAQ: RCPT), which went public in May 2013; Ikaria, sold to private equity firm Madison Dearborn in December 2013 for $1.6 billion after it failed to go public in 2010; and deCode Genetics, which ARCH and Polaris Partners sold to Amgen in December 2012 for $415 million after buying it out of bankruptcy for a few million dollars.

In all the firm counts eight IPOs, one reverse merger, and six acquisitions from its portfolio in the past 24 months.

Second-quarter venture data from the MoneyTree survey show $1.8 billion flowed into biotech companies, the highest second quarter since 1995 and likely the highest ever. Even with the two largest deals excluded, dollars invested in biotech rose nearly 40 percent compared to the first quarter.

Much of that activity comes from investors supporting their portfolio companies as the IPO window beckons. First-time financings—that is, money going into brand-new companies—actually decreased in the second quarter, down 20 percent to $267 million (or in deal flow terms, down 18 percent to 32 deals) compared to the second quarter of 2013.

The highest-profile deal from ARCH’s previous fund is the formation of cancer immunotherapy developer Juno Therapeutics, which has raised more than $300 million over two rounds in less than a year. Despite the huge sums involved, ARCH remains a major investor. Nelsen wouldn’t disclose the size of his firm’s ownership stake, but he says ARCH is prepared to do “one, two, or three” Juno-like deals from Fund VIII as well, and that ARCH’s limited partners have signed on. “Whenever you go above 10 percent of your fund [for a single investment] you don’t do it casually,” he says. “We’ve talked to our LPs, and they understand that’s part of our philosophy.”

For those built-from-scratch megadeals, Nelsen says ARCH can turn to a roster of “friends” to co-invest, what he calls “providers of large capital who haven’t normally [invested] that early.” The Juno investment lineup is one example: Alaska’s state oil-revenue fund, Jeff Bezos’s family investment fund, and undisclosed public mutual funds are all on board. (The only other traditional venture group is Venrock.)

In general, he says, Arch wants to “turn up our percentage of ownership, not down,” and will look to start companies with fewer VC partners.

The firm has already made three investments from the new fund, all undisclosed.