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Index Ventures: Arrive Early, Stay Late
From Dow Jones
April 17 2009
With two new funds raised in as many years, European venture capital firm Index Ventures hopes to deploy its capital to two areas it sees as neglected by many other venture investors: very early-stage deals and public equities. Partner Francesdo De Rubertis says, however, that the firm's strategy doesn't come easy, as it requires significant overhead to work.
Perhaps best known for deals like Skype Technologies SA and MySQL AB, the firm specializes in European deals and still tilts a bit more towards information technology than life sciences. At the Windhover Pharmaceutical Strategic Outlook in New York on Wednesday, we sat down with De Rubertis to talk about how this dual-prong strategy works, for example, with life sciences companies.
For its early-stage life science companies, Index is moving almost exclusively to operating companies without management teams, while for its growth-stage fund, the firm is looking to expand to the U.S., as it did with February's $24.3 million deal in publicly traded Ariad Pharmaceuticals Inc. of Cambridge, Mass. Here is an edited excerpt from our interview with De Rubertis:
Q: For your early-stage life science deals, where do you find these companies and what stage do you invest?
We work with universities and research institutions across Europe. These are very early deals, before the Series A, with $1 [million] or $2 million invested.
Q: Why does this model work for the life sciences?
A lot of drugs ultimately are not successful, but we want to do the pruning early, in preclinical, where we shut the company down after six months if it doesn't work before we've invested tens of millions.
Q: If your early-stage companies don't have their own operations, does that mean that you have to do more of it yourself within the firm?
This model is heavier on the venture fund. We have CEOs for the projects, people who work as project managers. We don't like to call them EIRs; they are external. They have upside on the project, but they don't have Index upside. Once they finish one project, they move on to another. That way, they have an incentive to kill a project if it's not working out since they will have another one waiting.
Q: With that extra money up-front, how cost efficient are these deals?
If I look at the number of Phase II molecules built with fully formed companies and compare them with the single-product companies like we have, the equity raised has been about one-third or one-quarter for them versus the fully formed ones. Of course, if the molecules are not as good, it's not worth it. I haven't done that calculation.
Q: The stock markets are going up now and people are saying that the PIPE boom is at an end. Do you see the debut growth fund [EUR400 million raised in early 2008] as a long-term strategy?
We started the growth fund in the beginning of 2008. It wasn't driven by the crisis. We saw value even then, but we couldn't capture it.
Q: How much overlap is there in your staff with the growth fund and the early-stage fund?
Surprisingly much. When we do our due diligence, we have the kind of network of contacts where people will tell us about the best value out there in the industry as well as the greatest unmet need. We can get two pieces of information with one call.
Q: Across all your funds, you have about $2 billion in committed capital for early-stage, but about $500 million for growth equity. Do you see this ratio changing?
With the first growth fund, we raised about EUR400 million. Next time, it will be about the same size, maybe even a little bigger. Over time, the two will be about equal.
Q: Your early-stage fund invests in European companies. Where are you looking at for your growth companies?
Globally. We have expanded our due diligence. We have hired, and are hiring, people to take care of the U.S.
Q: Do you take such a hands-on approach with your growth companies as you do the early-stage ones?
We do not take board seats in these companies. There is no management risk. For the life sciences ones, there is no pipeline risk. There is only financial risk, and that is exactly where we can help.
