This article is adapted from STAT’s latest report, “2023 Update: ranking biotech’s top venture capital firms.”
Right now, venture capital firms are struggling with the impact of a persistently anemic biotech market. But if past downturns are any indication, some VCs will steer out of the slump into brighter times.
The story of one fund overseen by The Column Group, a firm profiled in the 2023 edition of “Ranking biotech’s top venture capital firms,” STAT’s annual report on VC performance, shows how that might happen.
For the rankings, STAT gathers financial information on VC fund performance — data that firms are notoriously guarded about — through public records requests. The 2023 report assessed 18 firms, roughly a dozen of which reported poorer returns than in the prior year as the lack of IPOs and middling mergers and acquisitions made financial exits more of a rarity.
There has been a steady stream of new biotech VC funds, but many outside investors aren’t getting much money back yet from previous investments, and so have little to put into new funds. “Everyone is pausing” new fundraising as a result, said Angela Lee, who teaches finance and venture capital at Columbia University.
Yet such moments are often pivotal, said Don Nelson, managing director for Harken Capital Securities, a placement agent that helps match groups that have large pools of money with investors (Nelson also previously worked at SV Health Investors, one of the firms on STAT’s list).
“Now is when the returns are made,” he said, adding, “Like Warren Buffet said: You see who’s swimming without their bathing suit when the tide goes out.”
This pressure can yield diamonds, as it did for The Column Group: In the aftermath of the last major financial downturn, the 2008 Great Recession, the firm raised a mid-sized fund that would not only deliver some of the best financial returns in the biotech space, but some of the best among all of its peers in VC. (The firm holds the 7th place spot in this year’s STAT report). It’s a lesson in how to drive outsized returns.
Small investments, quick profits
The Column Group was founded in 2007 by Peter Svennilson. It and many other firms ran into trouble in the aftermath of the 2008 recession. By 2011, the firm had stopped investing in new startups and put plans to raise a second fund on the back burner. “The partnership has decided we want to have a couple spectacular exits from our first fund before we raise the second fund,” Svennilson told Xconomy at the time. (The Column Group did not respond to STAT’s inquiries for this article.)
The firm eventually raised $320 million for its second fund, Column Group II, in 2013 and 2014.
Though startup investors were still dealing with the ripple effects of the Great Recession, Lee said the funds that were raised around 2013 yielded excellent financial returns for investors.
STAT’s VC rankings are based on data obtained through public records requests, and detail two different measures of investing success, including the internal rate of return, or IRR. That figure is a calculation that accounts for when an investment begins and when money is returned. When outside investors hand over money to groups like venture capitalists, they’re generally hoping for an IRR of 20% or more. A fund that Canaan raised in 2012 boasted a 20% IRR, while OrbiMed’s fifth fund, which was raised in 2013, had a 40% IRR, according to the report.
The Column Group II fund far exceeded that — investors have reported a 778% return from that fund alone.
Outsiders credit small investments that quickly gave significant profits for the fund’s performance.
In 2014, Seragon Pharmaceuticals was acquired for $1.7 billion just a year after closing a $30 million Series A round. Another Column Group portfolio company, Flexus Biosciences, was acquired the following year for $1.3 billion. It had raised less than $40 million from investors at that time. And in 2019, Exonics Therapeutics, which had raised a $40 million Series A round two years prior, was acquired by Vertex Pharmaceuticals for up to $1 billion.
All three of these companies received money from The Column Group II fund, according to PitchBook.
While funds that are being raised and invested in this down market may find benefits, many firms will likely spend the next year contending with its impact on historical funds.
There’s a certain math that goes into VC investing: Venture capital funds usually have a 10-year life span. The funds will be invested over the first three years, and will hopefully churn out profits from a stock market launch or acquisition between years five and 10.
“The funds that are going to be in the most trouble were funds that were started in 2015 or 2016,” Lee said. “Their companies should be exiting this year and next year. But M&A is down, IPO is down, deal volume is down.”