Versant's Big Bets on Small Companies

For a firm with a large amount of capital under management, Versant Ventures may be somewhat unusual. Although it typically invests between $8-$12 million per company, it will also invest as little as $50,000 in a seed stage operation.

Versant Ventures, with its single-minded focus on health care, doesn't shy away from investing in early-stage technologies in emerging markets. The venture capital firm has invested in such nascent markets as biomarkers for personalized medicine, devices for age-related macular degeneration, interventional pulmonology devices, drugs and devices for the aesthetic market, and device alternatives to categories currently dominated by drugs--such as glaucoma, gastroesophageal reflux disease, and pain. Indeed, being an early mover gives the firm a low-cost stake in enormous, untapped categories, which suits its goal of "swinging for the fences." "We invest in innovative, early-stage companies that are transforming healthcare, and this is the best way to achieve significant returns for our limited partners," says Kevin Wasserstein, a managing director who focuses on medical devices.

In November, Versant raised $400 million in its third fund, Versant Venture Capital III, and it now manages more than $1 billion in capital (including its first fund of $250 million, and a $400 million second fund), a hefty sum earmarked for creating new opportunities in health care.

Versant's focus on innovation is perhaps as much cultural as it is a strategy to maximize returns; most of its eleven managing directors all have either clinical or operating experience in the areas in which they invest. Wasserstein, for example, joined Versant after multiple operating roles at Guidant Corp. Biotech investor Brian Atwood was the founder and CEO of biotech company Glycomed Inc., which he came to after co-founding and serving as director of Perkin Elmer/Cetus Instruments, the group responsible for commercializing the polymerase chain reaction (PCR) technology that was seminal in the field of genomics. Barbara Lubash, who works on health care service and health care IT deals, was formerly an executive at PacificCare Health Systems as well as Private Healthcare Systems, a national PPO. Bill Link, PhD, who's vetted Versant's eight investments in the ophthalmic sector, was the founder, former CEO and chairman of Chiron Corp. The remaining managing directors bring a similar wealth of clinical and industry expertise. Wasserstein says that extensive operating experience goes hand-in-hand with early-stage investing. "We have developed expertise over the years in terms of how to manage, develop and execute on shepherding companies through product development, clinical studies and regulatory pathways, and generating reimbursement and market adoption." These are requisites to improving the probability of success of companies, especially in new markets, he believes.

Versant was founded in 1999 by the coming together of three health-care focused venture groups: the health care teams formerly with Institutional Venture Partners, which leaned towards device investing; Brentwood Venture Capital, with a particular slant on biotech, and the health care team from Crosspoint Venture Partners, which brought expertise in health care services and health care IT. Among VCs, that breadth of health care coverage is somewhat rare, and the diversity helps offset some of the risks of early-stage investing. Says managing director Lubash: "There are cycles for biotech, devices, and services, and they are often countercyclical. Over the lifetime of the fund—ten years—the chances are good that we will have good markets at some point in all of the sectors, and being in all of them will help our returns." Versant syndicates its deals with other like-minded VCs, which also mitigates some of the financing risk.

The majority of Versant's previous funds have been equally split between biopharma and devices, with a smaller portion allocated to health care services and IT, for a total of more than 65 companies in the firm's portfolio. The newest fund is likely to have a similar sector allocation, although the company doesn't proactively manage the weighting according to any predefined criteria, says Wasserstein.

For a firm with such a large amount of capital under management, Versant may also be unusual in its approach to early-stage investing. Although it typically invests between $8-12 million per company over its life, it is not limited by any minimum investment criteria, and has invested as little as $50,000-100,000 in a seed-stage opportunity. Indeed, no stage is too early for the company, according to Wasserstein. "We will fund deals from conception to napkin stage and beyond. A lot of people think that funds of Versant's size can't do those types of deals, because of the amounts of capital that we need to put into companies and our other requirements. But we think that is a great place to invest, and we do so with plans to invest over the life of the company, which we've frequently done in Versant I and II." Wasserstein points out that Versant invested in Rox Medical, a new device company in chronic obstructive pulmonary disease, at the pre-product, even pre-prototype stage.

One way in which Versant has found such early-stage opportunities is through its relationships with incubators. The incubator—or accelerator--model offers a portfolio of companies, in which investors have the opportunity to make the first investment when companies are developed, Atwood explains, and this creates an efficient way to invest small amounts in companies and to back teams of creative scientists very early in the process.

Versant is a venture partner with the Innovation Factory, a creator of medical device companies, alongside Schroder Ventures Life Sciences and the Carlyle Group, as well as the incubator's own venture fund, Accuitive Medical Ventures. (See "The Innovation Factory: Re-Thinking the Incubator Model," START-UP, December 2003 (Also see "The Innovation Factory: Re-Thinking the Incubator Model" - Medtech Insight, 1 Dec, 2003.).) Versant also co-founded, with Bay City Capital, 5AM Ventures, a private company that acts like a $65 million fund dedicated to creating and building biotech companies. 5AM has eleven start-ups in its portfolio, including Alexza Pharmaceuticals Inc. , a drug delivery company founded by Alex Zaffaroni, the founder of drug delivery icon Alza Corp. (now part of Johnson & Johnson ). Alexza develops drugs that achieve rapid uptake when delivered through the lungs.

Similarly, Versant, Amgen Ventures, ARCH Venture Partners, MPM Capital, OVP Venture Partners and Alexandria Real Estate Equities have pooled $25.8 million to fund Accelerator Corp., a private company-cum-incubator that helps create new companies--from discoveries largely out of the Institute for Systems Biology in Seattle, as well as other sources. Atwood says that Versant has made about four investments in Accelerator, all well under $1 million. Among Accelerator's first companies are VieVax Corp. , which is working on vaccines for infectious diseases such as AIDS and SARS, and VLST Corp. , a start-up working in autoimmune and inflammatory diseases. [See Deal] [See Deal] In the current quarter, Versant is funding a new incubator, ForSight Labs, to create companies in ophthalmology. (See, "From The Foundry: an Incubator Focused on Ophthalmology,"START-UP, December 2005 (Also see "From The Foundry: An Incubator Focused on Ophthalmology" - Scrip, 1 Dec, 2005.))

Versant will also occasionally and opportunistically invest in companies at later stages, as it did with IntraLase Corp. , the developer of a non-cutting and precise tool for corneal flap surgery, which went public in October 2004. [See Deal] But unlike some other VCs, it doesn't view later-stage investing as a way to necessarily offset risk in an early-stage portfolio, Lubash says. "For taking those early-stage risks we get rewarded with a higher potential return. But in most life science companies, it is in fact difficult to remove a lot of the risk, even later on." That's because later-stage companies still bear market and regulatory risk. "Five years into it, you could fail to get approval, or fail to get physician take-up," she says. Health care services and IT are the exceptions, since they aren't subject to regulatory hurdles, Lubash explains. In those sectors, Versant does look at later-stage deals; for example, the firm invested in Fidelis SeniorCare Inc., a health plan for seniors who live in nursing homes. "We liked Fidelis because it has a strong founder, and it's in an area in which other companies have had some success. As a general principle in health care service investing, we look for a team that can execute, a differentiated model, and a model that offers sustainability in a sector that is largely a commodity world." Another Versant investment in the service sector is Vantage Oncology, which operates surgicenters for radiation oncology.

Versant has already realized several exits from its previous funds, and it hopes to repeat the successes of those. Pharmion Corp. , a specialty pharmaceutical firm focusing on cancer and related diseases, went public in 2003 with a valuation of $335 million. [See Deal] Versant holds stakes in specialty pharma firms Jazz Pharmaceuticals Inc. and Reliant Pharmaceuticals Inc. as well. Versant likes the clinical stage, in-licensing model, says Atwood, and will continue to look for teams and individual drug hunters, with an eye to putting together focused portfolios of drugs, as it has done with inflammation start-up Amira Pharmaceuticals Inc. , around a team of scientists formerly with Merck & Co. Inc.

Versant also aims to repeat the success of molecular diagnostics firm Genomic Health Inc. , which went public in Sept. 2005, five years after its founding, with a valuation of $292 million. [See Deal] Genomic Health, which raised over $100 million in pre-IPO private funding, took its biomarkers straight to the high-margin clinical market, rather than targeting drug discovery and development. It sells Oncotype DX, a validated 21-gene panel that quantifies the likelihood of distant recurrence in women with newly diagnosed, early-stage invasive breast cancer. Its panel also predicts the magnitude of chemotherapy benefits in those patients. Still in the Versant portfolio is clinically focused biomarker firm Predicant Biosciences Inc. (See Exhibit 1.)

Other exits include tool company ParAllele BioScience Inc. , merged into Affymetrix Inc. in early 2005; Salmedix Inc. , which Cephalon Inc. acquired to gain a portfolio of clinical stage drugs for blood cancers, and Syrrx Inc. , which Takeda Pharmaceutical Co. Ltd. bought in February 2005. [See Deal] [See Deal] [See Deal]

Going forward, Versant believes that the breadth of its investment team across all sectors of health care will help it capitalize on the key trends in medical technology. For example, Wasserstein sees tremendous potential for innovative solutions in health care via the convergence of technologies. He believes that Versant has the ability to leverage the breadth of its team to forge deals with combinations of devices and biologics, to create intelligent products with devices and IT, or to put together broader initiatives for disease management and therapies or new service delivery solutions for chronic conditions such as congestive heart failure.