California dreamin’: A VC firm’s vision for West Coast-focused biotech investment

Bay Area versus Boston/Cambridge is one biotech debate that never ends. Each region has its merits, but San Francisco-based venture capitalist Heath Lukatch says one strike against the Bay is the lack of VC money for early-stage biotechs relative to what’s available in Beantown. More specifically, the West Coast lacks VC firms with close ties to the academic centers churning out biotech innovation, he said.

Lukatch is trying to even out the balance. He’s the founder and managing partner of Red Tree Venture Capital, a VC firm focused on investing in science emerging from West Coast universities. On Thursday, Red Tree announced the close of a $272 million fund, its first one. That fund has already started investing in startups.

The idea of a West Coast-focused firm came to Lukatch during a prior role as a partner at TPG. About seven years ago, he met Jennifer Cochran, a Stanford University professor of bioengineering. Cochran took a leave of absence to start Lagunita Biosciences, a healthcare investment company and incubator. He said he invested in Lagunita and sat on its board.

In the years since, Lukatch said discussions with Cochran and others returned to a familiar topic: the difficulty for local university innovations to secure financial support. By contrast, the Boston area’s Flagship Pioneering, Polaris Partners, Third Rock Ventures, and Atlas Partners have developed close relationships with nearby Harvard University and MIT. Lukatch concluded the West Coast needs to do the same.

“We thought it would be a great opportunity to do that because there’s a tremendous amount of innovation on the West Coast,” he said.

Lukatch and Cochran founded Red Tree in 2020. In March of that year, the firm started raising money for its first fund. The fund had its first close in August 2020 and Red Tree started investing soon after. Key to the firm’s investment decisions is a scientific advisory board comprised of academic leaders from West Coast institutions, many of them entrepreneurs who have experience founding companies.

The close academic relationships lead to early connections to promising innovations from academic labs, Lukatch said. As an example, he noted an innovation that was brought to Red Tree before its research was published in a scientific journal. The firm invested and the research was published soon after. Within a week, Lukatch said the company, which he declined to name, received calls from two VC firms.

Red Tree aim to be the first institutional capital in about half of the deals it makes, Lukatch said. Those investments can be seed or Series A financings. Red Tree Managing Director Jon Edwards said that the firm can help spin research out of a university, supporting experiments that can generate the data around which a company can be built.

“The data earns the additional capital,” he said. “Once we feel we have the data to build a drug program, that’s when we’ll go syndicate the deal.”

Red Tree is focused on investments in oncology, neurology, and immunology. Lukatch said a review of the biotech companies that went public or were acquired in recent years showed most were in one of those three therapeutic areas. A look at FDA-approved products also showed most of them were in those areas. Edwards acknowledged the challenging financial markets right now make it difficult for biotech companies to go public, but he said the companies Red Tree is investing in will remain private for awhile and the firm believes the public markets will come back.

Red Tree isn’t the only West Coast-focused VC firm. In 2018, Westlake Village BioPartners launched with $320 million in committed capital and a focus on investing in Los Angeles-area life sciences companies. While West Coast investment is Red Tree’s priority, Lukatch said his firm will participate in financings in other regions if the innovation is promising. Most of Red Tree’s investments will be in therapeutics, though some cash will be deployed in medical devices.

So far, Red Tree has invested in 10 companies. Nearly all of them, such as cancer drug developer Rondo Therapeutics, are in the Bay Area. Seattle is on the list of places to go next, though Lukatch conceded it probably won’t happen with Red Tree’s first fund.

“There’s great opportunities and even less venture dollars up there than other places on the West Coast,” he said.

Photo by Flickr user jchessma via a Creative Commons license