With $270m Fund IV, Flagship’s Noubar Afeyan Is Still Bullish on Early Stage Healthcare

Common wisdom is that it’s an unusually tough time to raise capital for early-stage healthcare investing. But Cambridge, Mass.-based Flagship Ventures is demonstrating that it’s possible to buck the trend.

This week, the 11-year-old firm announced it has raised $270 million for a fourth fund that will be dedicated principally to early-stage investing and in-house startup incubation. Flagship raised its last fund, a $234 million vehicle, in 2007.

I caught up with Noubar Afeyan, Flagship’s managing partner, founder and CEO, at this week’s JP Morgan Healthcare Conference in San Francisco, where he seems to be a popular guy. During the course of our interview, probably half the people passing by stopped over to either congratulate him on the new fund or try to talk business.

Luckily, we did manage to get some time to chat, with Afeyan weighing in on the venture fundraising climate, strategies for the new fund, and thoughts on how to speed up the path to exit in early-stage healthcare investments. Following are excerpts from our conversation:

Q: How would you characterize the fundraising environment for healthcare venture capital?

A: We did exceed our target, which was $250 million… But a lot of people are shifting their business model to later-stage, asset-based deals and virtual companies. And while that is certainly responsive to what LPs are saying – which is don’t make us wait ten years to get our money back — I think that it is fraught with risk because these tend to be fundamentally concentrated bets.

I certainly don’t think there is a sustainable role for venture-backed asset development companies, instead of what venture capital has typically has done, which is to back breakthrough innovation and to create new markets and new sectors. That’s where you have substantial upside. There’s also accentuated risk, but it can be diversified risk.

Q: How do you plan to invest the new fund?

A: Probably we’ll back 20 to 22 companies. We typically start with $250,000 to $500,000 and over the life of the company we typically invest $10 million to $20 million, with $15 million being the median.

Most of what we do is early stage. About 40% is for our venture lab, which has eight full-time entrepreneurs who conceive and launch new companies. Another 40% will be other early statements, and we may also do some opportunistic later-stage investments… We’ll be focused on therapeutics and medical technologies with some focus also on sustainability.

Q: We’re seeing less capital going into early-stage healthcare. How is that impacting your investment strategy and outlook?

A: It’s obviously concerning. There are still people who are playing in the space, but we have to be much more careful as we build syndicates … But to be honest this is somewhat temporary. We’ve gone through these cycles of contraction and expansion many times.

Q: How do you deal with long exit horizons for early-stage healthcare investments?

A: On the way in, you look for characteristics that correlate with shorter times to exit. We tend to look very favorably at what we call product platform companies, such as Adnexus (a developer of engineered therapeutic programs that sold to Bristol-Myers Squibb in 2007). Another example is Agios (Pharmaceuticals). They started with a completely new mechanistic approach to cancer that focused on the aberrant metabolism of cancer cells. In a year-and-a-half, they got a large partnership with Celgene for $125 million. That’s not an exit yet, but it certainly has changed the balance and put the company on a very different track.

The other thing is to create flexibility of execution… They say the cousin of innovation is iteration. In a startup, if you don’t have constrained resources, you won’t iterate nearly as efficiently. We think there’s a middle level of resources that enables iteration but also gets things accomplished.