Third Rock Ventures, a prolific supporter of biotech startups, announced Wednesday the closing of a $1 billion fund that will be used to launch and build new life sciences businesses.
The fund, Sixth Roukoz, comes amid a major downturn in the biotech stock market, which has raised questions about the ability of investment firms to secure additional capital in addition to the returns on their investments. In fact, the past year or so has seen a decline in the two main ways early-stage biotech investors generate returns: initial public offerings and acquisitions.
However, the market stagnation has not stopped some venture firms from generating record returns for further investment in the life sciences. Atlas Ventures, which has backed companies like Actelion and Alnylam Pharmaceuticals, closed its largest-ever biotech fund at $450 million in March. Three months later, Third Rock did the same with a $1.1 billion fund expected to support the creation of nearly 10 startups.
“It has been a challenging environment in the past few months,” said Jeffrey Tong, a partner at Third Rock. “But in the aspect of establishing the company…we have a very loyal base of [limited partners] who invest over a long-term time horizon.”
Third Rock, founded in 2007, says it has so far raised nearly $4 billion and has invested in 60 companies. The company maintained a three-year fundraising cycle, having previously raised $770 million in 2019, $616 million in 2016 and $516 million in 2013. With each cycle, the goal was to support about 10 startups.
Third Rock raised the latest funding between March and May, after it officially decided to pursue it last fall, according to Kevin Gillis, partner and chief operating officer of the company. At the time, the biotech stock market was just beginning to plummet after hitting new highs when the COVID-19 pandemic put healthcare in the spotlight.
But in the months that followed, the downturn became more severe. The biotech stock index known as XBI has lost more than half its value since November. And many small drug developers, fearful of the difficulty of obtaining new funding, are now turning to cost-saving measures.
Tong acknowledged that larger market trends and challenges emerge in conversations with limited partners. But Third Rock and its investors aren’t too concerned, he said, because they tend to take a long-term view of the companies the company supports.
To that end, Gillis noted how nearly all of the company’s existing limited partners, as well as some new ones, are involved in Fund VI.
“We’ve been through these cycles before,” Tong said. “The past few years have been too long of a positive cycle. But this is the history of biotechnology — there are multi-year rallies, and then there are droughts. And we build companies to address both conditions.”
Notably, Third Rock was formed before another big drop in the biotech markets occurred in 2008. Then, the ability of young biotech companies to go public, known as the “IPO window,” was virtually non-existent. “We got into the fall of 2008 in a really tough financial market,” Gillis said.
However, he added, “the need for the kinds of companies we build was there.” “And I think our limited partners view today’s environment as a similar opportunistic time to recruit new capital.”
However, the challenging funding environment somewhat affects how Third Rock invests. Tung described how the company is currently interested in building companies “with more maturity at launch.” Such companies would be on track to introduce a pioneering drug program in human trials within two years of debut, Tong said, rather than some of Third Rock’s previous investments, which were four to five years from that achievement.
The new Third Rock Fund will provide early-stage Series A funding that biotech startups typically announce at launch, as well as ex-post funding to further support the companies. In addition, some of the new capital will go to the companies established through the company’s fifth fund.
Just like Flagship Pioneering, which founded Moderna along with a host of other biotech, Third Rock has shifted its focus over the years to independently incubating startups.
But with its fifth fund, which now continues into its sixth, Third Rock has done more cross-borrowing, inviting other venture firms to invest early in its startups. According to Tong, the move was made with the expectation that the market would eventually correct itself from the recent boom, and that this crowdfunding would allow certain companies to be “a little bit more resilient.”
Tong said Third Rock also allocated a “small amount” of money to “startups” outside the company.