INTERVIEW: Why Medicxi Ventures Spun Itself Out Of Index
This article was originally published in Scrip
Index Ventures' life sciences spin off Medicxi Ventures has launched with a €210m fund that will focus on European asset-centric venture investments. General partners Francesco De Rubertis and Kevin Johnson describe the rationale behind the split and explain why the new fund was massively over-subscribed.
Scrip: What precipitated this spin out of Medicxi Ventures from Index Ventures?
Francesco De Rubertis: So, first of all, it was not done in a rush. We have been working on the asset-centric investing model for several years. It turned out to be really successful and we decided it's probably right to double down. To grow properly, we really need to grow independently, without any constraints. We knew that as soon as the asset-centric investing model was fully validated, as soon as we felt we had reached critical mass, as soon as we were doing it from a position of strength, then we would do a spin out.
In 2011 we took the biggest step, which was raising a separate life sciences fund, Index Life 6. (The previous fund, Index Venture 5, had been a mixed life sciences and technology fund). Then for the last two years the markets have done really well. The asset-centric investing approach has provided us with very nice returns, so we said okay, this is really the moment to confirm, strengthen, enhance the focus that we have on the life sciences and I told my partners that I think 2015/2016 will be the year to go live with this independent operational model. But actually we are rebranding something as Medicxi that was already in existence; it has already been around for a few years.
Francesco De Rubertis
Scrip: Why rebrand? Why not just stay as Index Life Sciences?
Kevin Johnson: The biggest argument for rebranding is that then it's very clear what each firm does. We always have to explain ad infinitum whenever we've been out, this is Index: we're part tech, we're part life sciences, so it just makes it a much cleaner thing. To my mind, that was the most important aspect. Now both entities can build their brands to their best advantage.
Scrip: Was raising an independent fund a difficult undertaking?
FDR: It was really very straightforward, and it was several times over-subscribed, which for an early stage European life sciences fund it is not a given. We started raising [the fund] in September; in October we had the whole thing closed.
Scrip: So you picked exactly the right time to go it alone. What business milestones gave you that confidence?
FDR: The key milestones in the last two or three years have been the number of exits, particularly XO1 to J&J. It's the added value that we get from involving pharma companies. Joining forces early on [with pharma companies] in terms of brainstorming ideas and designing experiments that are very relevant to pharma. As soon as the first mouse jumps, it does so in the way that pharma wants, [providing] the data that pharma wants. Then the transaction makes investing in early stage R&D absolutely [about] business. And it's not just XO1. Most of the asset-centric portfolio that we've been building since 2005 has been exited.
The other consideration is that to write off a company, it really takes only a half a million or one million, even a million and a half – that's very cheap because the experiments can be done before building any kind of infrastructure. So you have that combination of a cheap cost to writing off companies with the flipside that if companies do go through you end up owning on average 40%. The combination of those two is that 80% of the capital of the fund goes into successful events, because the unsuccessful events have been weeded out with less than 20% of the capital.
Scrip: So GSK and J&J have a significant stake in MV1?
FDR: They have a total of 50%, but they had underwritten for much more, which is different from when they invested in IL6.
IL6 made just over 30 bets, and the first exit returned the whole fund, so there are still 29 bets on the go and we own 40% or more in each of those companies. So when we started discussing IL7, or what is now called MV1, it was really a matter of managing investment space.
Scrip: So how does MV1 differ from its predecessor IL6?
FDR: It's just bigger, it's a €210m fund while IL6 was €160m. Same strategy, just more of the same, because it is paying off nicely for us. We got some new LPs (limited partners) but they came from [other] Index [funds]. They heard about the life sciences portfolio in internal meetings and it was easy for them to jump over. They oversubscribed the fund pretty quickly.
Scrip: So you've been doing asset-centric investing for a decade now. Has anything about the strategy changed? What worked and what didn't?
KJ: Yes, that's a great point. The first generation asset-centric companies that we did in 2005 and 2006 look different from the asset-centric companies that we are doing today. What's changed is syndication. In the beginning we were more open to syndication with other venture capitalists, and often times we had problems because we had a specific way that we wanted to develop a company and there was the classical way in which companies were developed, and back then those two [ways] were different.
Scrip: If MV1 was oversubscribed, why did you cap it at €210m?
FDR: It was capped at €210m before we went out. That was the pitch. Then if we had turned around and said: 'the fund is oversubscribed, we're changing the strategy,' financial LPs don't like it. Enlarging the fund size when you have over-demand after you have stated a strategy is a sign of weakness. This is what we have learnt over 20 years.
Scrip: What drives your Europe focus?
FDR: It is a Euro-centric fund, which means 80% Europe and 20% mostly North America. A really good chunk of the drugs that are approved by the FDA every year are European discovered, so that is what drives our focus on Europe. It's also an underserved market: five venture capitalists have the market share of Europe, so we have a role to play here. It translates in business terms to an over abundant deal flow versus the capital supply.
Scrip: What can politicians in Europe do to help VCs do their job better?
FDR: I don't want to say they should stay out of the way but they could give more strength to industry led initiatives. There is sustainability in industry led decision-making. Politicians can support this through relevant financial incentives, or by reducing constraints through legislation. But honestly I don't feel pain here in the UK.
KJ: In my experience governments do really well when they focus on the ecosystem and a lot less well when they try and create incentive structures to perturb the ecosystem. It's about allowing the strong to survive, because that's actually what should happen. Our job isn't about putting the weak on life support.
Scrip: What are your expectations for 2016? Will the market for successful exits continue to look strong?
KJ: Yes, we're very optimistic; we're seeing some great stuff coming in, and we're also seeing more demand. More of the big biotech companies are graduating and have a keen eye on what's being incubated by the VCs, so more buyers. In addition, most of the patent expirations are behind us, so looking ahead it is much better from a pharmaceutical company standpoint. Then the regulatory environment is better than it was before; the FDA breakthrough designation for example, it's a real incentive to developers.
Scrip: And finally, when can we expect the first investment out of MV1?
FDR: We are just closing up the last new investment from IL6. That doesn't mean the fund is fully invested, but that the portfolio will be complete. And we are already looking at the first investment from MV1. We will be able to close it within the next month or two.