MPM Isn't Blinking

Sarah Lacy

Three years ago eyebrows were raised when MPM Capital raised its $900 million BioVentures III—-the largest venture fund ever to be focused solely on lifesciences. Today, many lifesciences VCs are despondent. As we’ve noted here before, coming up with a winning business model is tough in an environment where startups need $90 million to get to become a thinly-traded $200 million public company. IPOs haven’t done nearly as well as industry boosters expected back in the beginning of the year and last quarter venture capitalists invested 31% less in lifesciences deals.

Indeed, MPM made its own headlines earlier this month when it leaked out that five general partners wouldn’t go forward with the next fund, thanks to a disagreement over investing philosophy.

Does all this mean MPM is pulling a Sequoia Capital? (In other words, being the first to publicly admit, “Ok $1 billion was too big. Can we have our $300 million fund size back?”) Hardly, say the partners who are staying.

The group is still investing that $900 million fund and won’t comment on plans for the next fund, likely to be raised in 2006. But you can bet it won’t be smaller.

This was the focus of a story in trade publication, BioCentury, today, and Deal Flow caught up with MPM founding partner Ansbert Gadicke to chat about how this firm is approaching a biotech landscape that has many VCs throwing up their hands in frustration.

In short, Gadicke & Co. believe biotech venture capital as we knew it is done. Well, maybe not done, but it’s not where they’re betting their money. Instead they’re taking a page from the Warburg Pincus-es of the world and placing bigger bets with companies that have more than one shot at revenues. It’s obviously a model you need some financial heft to do, and will add more fuel to the debate over whether or not lifescience-focused mega-funds work.

Here’s Gadicke’s rationale: In the 1990s, he could invest $20 million in a company that had discovered a novel new potential drug. You’d help fund the early development of that one drug then take that company public with some promising, pre-clinical trial results. No longer. In recent years the average amount of capital it took a company to make it to an IPO was $90 million. That’s because public markets are demanding more proof it will work and clinical trials are costly. To get there, many startups are partnering with big pharmaceutical companies. In exchange for funding trials, the pharmaceutical company gets rights to sell the drug, limiting the startup’s revenue. The reward is an IPO well under $500 million. There's a sayng in the venture world: Just doubling your money is like kissing your sister. That math won’t work for long.

The only way the new MPM would fund such a company today would be to put a lot of money into it (think $50 million-$75 million at a time), and use that cash to acquire drugs that are further along, giving more potential for quick revenues. Or the firm might encourage the company to roll that science into an existing portfolio company. “Early technology is not necessarily a company,” Gadicke says.

While it used to fund companies with good early science, MPM now plans on funding companies knee-deep in trials and even getting close to commercialization. That’ll require a whole new set of expertise, so expect the firm to make several key hires in coming months. It’ll be a dramatically different way to run a lifesciences firm. I doubt many will follow suit, but then again, no one else raised a $900 million lifesciences fund three years ago. It doesn’t mean it won’t generate some good returns for MPM’s investors.

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