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Early-Stage Shops Will See Lion’s Share of Clarus Ventures’ New $660M Life-Sci Fund

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Life-science venture-capital firm Clarus Ventures this week said it will spend most of a newly closed $660 million fund on early-stage life-science companies, including university spinouts.
 
Clarus, which has offices in Cambridge, Mass., and South San Francisco, Calif., said individual investments from the fund will range between $20 million and $60 million and go to biotechnology, specialty pharmaceutical, and medical-technology companies.
 
Nicholas Galakatos, managing director of Clarus Ventures, this week told BTW that the firm expects about 80 percent of its cash to fund biotechnology startups and 20 percent of its cash to fund medical-device companies.
 
The medical device companies would likely be “very late stage — almost commercial stage,” Galakatos said, while on the biotech side, Clarus is aiming to have “almost an equal weight” between early-stage, mid-stage, and late-stage opportunities.
 
“The early-stage opportunities could be in part spin-outs from universities and in part young biotech companies that can’t afford to take all their programs forward,” Galakatos said. Mid-stage companies, he said, are those with compounds about to move into the clinic, while late-stage companies are those that have compounds already in clinical trials.
 
Clarus’ investment track record leans heavily toward companies that were founded based on university-developed technologies. Of the 15 companies in which it has invested to date, at least seven were spawned from university life-sciences research.
 
According to Galakatos, investments the company has made in such companies include Centaurus Pharmaceuticals, a spinout of Rockefeller University; Taligen, a University of Colorado startup; and Variation Biotechnologies, founded on research from Harvard University, Children’s Hospital of Eastern Ontario, and the University of California.
 
According to Clarus’ website, the firm has also invested in Oxford Immunotech, formed from University of Oxford research; Comentis, based on Stanford University research; Esbatech, a spinout of the University of Zurich; and Proacta, which was founded on technology licensed from Stanford and the University of Auckland.
 
Galakatos said that Clarus has a set of characteristics it seeks in startup companies to help mitigate the risk of investing at such an early stage.
 

“Ideally we want to see a situation where the technology is very well-protected from the intellectual property perspective.”

“Ideally we want to see a situation where the technology is very well-protected from the intellectual-property perspective,” Galakatos said.
 
Another important factor, he said, is that the company’s technology “is not an incremental improvement over something else that is out there, but is a fundamental improvement;” and that the firm “has a very clear path of how this technology can evolve to generate a set of pharmaceutical products that can get into the clinic on a relatively rapid path.”
 
Galakatos said that although a large number of its investments to date have been in startups located on the East or West coasts, Clarus doesn’t have a geographical preference for its ventures — though he stressed that geography is often dictated by the talent pool that is available to draw from in the area.
 
“If we’re going to build a startup operation, [we] need to be in an area where recruitment is likely and very promising,” Galakatos said. “Historically that has focused our level of interest on the two coasts. But we will go where the opportunity is, with the consideration of whether we can build the company at the location, or whether we need to figure out some other alternative.”
 
The new fund, called Clarus II, is the second pool formed since the company was founded in 2005. The first fund, Clarus I, closed in late 2005 with commitments totaling $500 million.
 
Both funds received commitments from essentially the same group of undisclosed limited partners, although “a small, select group” of new investors also participated in the Clarus II fund.
 
The company has to date committed 90 percent of its Clarus I proceeds. Galakatos said that this includes investments in about 15 companies, with two investments yet to be made.
 
Although the company hasn’t disclosed the amounts of its individual investments to date, it said in 2005 that the Clarus I fund would invest up to $50 million per company, with a preferred investment size of $20 million to $30 million per company.
 
Clarus said it expects the fund to enable it to increase individual investment amounts, a strategy that underscores the growing amount of capital needed to nurture early-stage biotechs.
 
This week, a Clarus spokesperson told BTW that the firm will likely be able to increase its individual investments because the Clarus II fund is bigger than the Clarus I fund. However, he also said that in its first round of investments, Clarus found that some opportunities called for slightly larger investments, and thus the firm expanded its anticipated range of investments with the new fund.
 
The establishment of the Clarus II fund also reflects an overall uptick in biotech venture capital in recent years. According to the annual MoneyTree Report released last month by the National Venture Capital Association and PricewaterhouseCoopers, US venture-capital spending hit a six-year high in 2007, buoyed largely by record investments in life sciences and clean technology companies (see BTW, 1/23/2008).
 
The report indicated that the life-sciences sector, which includes biotechnology and medical device companies, hauled in some $9.1 billion in VC cash last year compared to $7.6 billion in 2006. The most significant growth occurred in the medical-device industry, whose VC take last year rose 40 percent to $3.9 billion from $2.8 billion in 2006.
 
According to the report, in 2007 life sciences also accounted for 31 percent of all VC bets in the US — also an all-time high — making it the top-ranked investment sector last year.

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