RA Capital: Rajeev Shah
"The ideal investors find a balance."
Ensconced on the 18th floor of the iconic Berkeley Building in the heart of Back Bay, the offices of RA Capital cut an impressive figure. Well-lit conference rooms showcase panoramic views of downtown Boston. Espresso and mineral water are promptly offered to guests. Crystal sculptures of viral capsids and C.elegans serve as totems; reminders of how “RA Cap” invests its nearly $9 billion dollars.
Yet in the beginning, before the Back Bay building and billions in AUM, the firm had a more homegrown charm: “There was a point at which Peter brought in a poker set and wrote the name of each company on a chip and put them on a table--we then went chip by chip and broke down every company,” remembers Rajeev Shah, Managing Partner and the firm’s third employee (behind founders Rich Aldrich and Peter Kolchinsky).
When Shah joined RA Capital in 2004 he was newly-married, 27-years old, and leaving a stable job at a promising biotech company (Altus Pharma). “The opportunity to work closely with Rich and Peter to build a new organization and invest in cutting-edge companies was worth the risk,” he says. In the span of a month, he got married, bought a condo in Kendall, and joined RA. His first task: get up to speed on all the work Kolchinsky had done over the prior two years. “When I started, Peter had 60+ word documents detailing meetings and diligence on companies sitting on his computer desktop… my first project was developing version 1 of our Research Management System [RMS].” Now, many versions later (built by professional software engineers), RA Capital’s RMS contains decades of diligence and captures detailed notes from dozens of scientists from Tech Atlas to keep its research current.
Shah and Kolchinsky took a Moneyball approach to investing—looking at the companies that had been passed over, and rigorously analyzing the data. “Rich [Aldrich] told us that when you go to a conference, you’ll often see two biotech companies: one to the left with investors flooding around it, and the other on the right with no one there. Go right. That is where you find something that might be irrationally unappreciated and inefficiently priced. Peter and I took that to heart, and it is part of our ethos.”
The strategy worked as well as it did for Moneyball’s Billy Beane—perhaps even better. With over 100 employees and $9B AUM, RA Capital is at the pinnacle of Boston biotech. Yet Raj and the team remain pragmatic, stressing that grounded optimism is the only way to succeed in this game: “we find that the ideal investors are those who find a balance between these extremes of optimism and cynicism. They are capable of arguing both for and against a company's potential, weighing the pros and cons before reaching a decision.”
In our interview Raj expands on his early days at Altus and RA, and describes the first investment that he led for the firm. He discusses lessons learned in helping to build RA Capital, and the trends in science and medicine that he finds most encouraging. Last, he gives advice to new biotech investors, and describes how RA Capital trains its investors to analyze science, medicine and (more recently) climate change: “ask how do we get to yes and what data do we need to see to get there? This is often a grounding question that helps us stay both optimistic and realistic.”
Below is an interview with Rajeev Shah, Managing Partner of RA Capital from October 2023:
1. What first got you interested in medicine and science?
My interest in medicine and science comes from my family. My mom has been a radiologist for 40 years, and my dad was an electrical engineer who worked for Bell Labs in the 1980s. He'd bring home cutting-edge technology that ignited my curiosity. Early on, I was a STEM-focused kid and loved math and science. By high school, I had already engaged in research but was on the fence about pursuing medicine.
When it came to college, I had to choose between Cornell and Johns Hopkins. Despite my mom's initial disappointment, given Hopkins’ reputation in the medical community, I chose Cornell for its culture and for the flexibility to explore other fields. In any case, I fell in love with chemistry there and ended up doing a lot of research. At one point, I contemplated doing a PhD, but found myself interested in exploring the business side of science. I was eager to enter the workplace--a lot of my friends in college went to San Francisco to work at dotcoms and other tech companies. I came east and found an opportunity at Altus, which was at that point a relatively small biotech company in Cambridge.
2. What was that experience like and what did you learn about drug development?
Altus was an incredible first job out of school. When I joined as a Senior Project Leader, I knew little about drug development but was eager to learn. At the time, Altus had a unique protein crystallization technology and was going after a variety of diseases: growth hormone deficiency, cystic fibrosis, pancreatic insufficiency, etc. I served as essentially an “internal consultant” and was focused on improving a lot of internal processes across the company. As a result, I rotated and was exposed to a range of teams and functions including manufacturing process development, regulatory affairs, clinical development, preclinical research, and commercial business development. By the end, there was still a lot left to learn but I felt like I understood drug development a lot better than when I started.
3. What is the founding story of RA? How did you get connected with Peter Kolchinsky? What factors did you consider when joining RA as a partner?
The founding story of RA Capital is closely intertwined with my friendship with Peter. Peter and I actually overlapped for a year at Cornell, but we first met in 2001 in Boston through a mutual friend. At that time, Peter was finishing his PhD at Harvard and contemplating a role in business development at Vertex Pharmaceuticals, potentially working for Rich Aldrich, then CFO/CBO of Vertex. Rich was also the Chairman of Altus. Rich was planning to leave Vertex and ended up collaborating with Peter to found RA Capital (RA representing “Rich Aldrich”). Initially, Rich invested $4 million in 2002, which Peter managed to grow to $10 million by 2004.
So I was in touch with both Peter and Rich, sharing thoughts and perspectives on their investment ideas. I had no idea at the time, but these conversations served as an informal interview process. Meanwhile, I was considering going to business school to deepen my company building and investment skills.
But Rich changed my mind. He had extensive experience in the biotech industry and advised me to skip business school and instead join RA. He pointed out that if RA failed, I'd have a great story for a future B-school application, but if it succeeded, I’d be where I wanted to be, without the debt of an MBA. It was a compelling offer, and at age 26, with a fiancée and no kids, it felt like an opportunity with asymmetric upside – I could learn a lot and lose a little. Ultimately, the opportunity to work closely with Rich and Peter to build a new organization and invest in these companies outweighed any reservations I had.
4. What were the early days of RA like with respect to building the organization from the ground up?
In the early stages of RA, Peter and I were focused on a handful of key things: managing and sharing information, establishing a track record, and building our credibility as thoughtful investors.
When I started, Peter had 60+ Word documents detailing meetings with companies sitting on his computer. I knew a bit of programming, so my first project was developing version 1 of our Research Management System (RMS), which is a system that we still use today but thankfully has evolved significantly. At the time [2001-2004] there were only a couple hundred biotech companies that were publicly traded and in the clinical development stage--we weren't yet investing in privates. So we just decided to work our way through the list. There was a point at which Peter brought in a poker set and wrote the name of each company on a chip--we then went chip by chip and broke down every company.
Initially, our RMS was a simple database that organized data by drug rather than company. It captured financials, milestones, and our notes, allowing for better collaboration. I think now with our tech team at RA we’re probably on version 45.
We formally established a fund structure in 2004 so that we could bring in outside capital. Most of our early investors were friends and family who had enough faith in our abilities and our approach. Over time that investor base grew as we continued to deploy capital and generate a longer and more robust track record as investors.
I’d say one of our biggest challenges along the way was getting access to great management teams and their IR teams. Given we were relatively unknown, it took time for us to get invited to the right conferences and meet with all the teams on our target list. Along the way we were fortunate to have friends in the broader biotech investing community, who allowed us to sit in on meetings and collaborate on diligence.
We emphasized coming extremely prepared to company meetings. We did our homework extensively prior to first meetings and capitalized on all the publicly available information that we could when doing our preliminary due diligence. This helped us ask companies better questions and helped establish our reputation as thoughtful investors. Over time, we were eventually able to engage directly with company executives, starting with smaller, speculative companies that were perhaps less selective about whom they talked to. But as our assets grew, we were able to access more and more companies and investment opportunities. By roughly the end of 2006, our AUM had reached $50 million, which allowed us access to industry conferences and increased our visibility in the investment community.
5. What were some early investing lessons you learned at RA? Are there any memorable deals that come to mind?
Rich Aldrich handed me Michael Lewis’ Moneyball right after it had been published. He said we should bring Billy Beane’s mentality to our investing. When you go to a conference, you’ll often see two biotech companies, one on the left, with investors flooding around it, and one on the right, with no one there. Go right. That is where you find something that might be irrationally unappreciated and inefficiently priced. So, Peter and I took that to heart and that mantra has existed as part of our ethos.
So when we started, we focused on the few hundred companies in development stage and kept an open mind. We tried not to judge companies on their initial appearance or their recent stock performance. We focused on companies that were ostensibly undervalued, trading near cash, or may have been either misunderstood or neglected.
A memorable early investment that comes to mind is Avigen. They were known for their gene therapy assets and, at the time, gene therapy was considered science fiction and faced a lot of skepticism. We ended up buying their stock, but not for the gene therapy assets. They were trading near cash but managed to license a drug marketed in Europe to treat muscle spasticity called tolperisone from an Austrian pharmaceutical company. I led the diligence process which required engaging European doctors to better understand the drug's efficacy, safety and potential. My diligence confirmed that although clinical development may be challenging, there was a market inefficiency here: the market had not appreciated the asset or its market opportunity in the US, and most importantly, people hadn’t really figured out that Avigen wasn’t just a gene therapy company anymore.
We bought the stock and the company executed on their clinical development strategy. We ended up exiting prior to data, because the investor community had caught on to Avigen’s new story and the stock increased to our fair value estimate, even prior to any new data being generated. At that point, we felt that the investment had more downside risk than potential gain. The trial ultimately failed, not because of the drug's efficacy but from some of the challenges of designing a study for spasticity.
This was an early time in my career where I developed a strong conviction in an investment and learned about managing it after the buy decision. The experience taught me much about portfolio management and the importance of continuously reassessing a company’s fundamental value as new data emerges and benchmarking it to its current value.
6. What do folks coming from a deep scientific / medical background initially get wrong about biotech investing?
I often find that people who join investment firms that have strong science or medicine backgrounds often fall into one of two buckets: the optimists and the pessimists.
Some people are just wide-eyed and inspired by recent breakthroughs and successes, such as Moderna's. There’s sometimes a naivete that assumes solid science inevitably leads to successful drugs. They don’t fully grasp the high rates of failure in drug development. This is why at RA, we most often build our team by hiring associates into TechAtlas that have a scientific foundation, curiosity, humility, and often limited work experience. They’re not expected to immediately identify new investments, but rather identify the medicines or the kinds of medicines that are likely to be impactful to the diseases they study.
Then there are the people who have witnessed the industry's frequent failures and approach investing with excessive skepticism. They're quick to point out every potential flaw, whether it's intellectual property issues, manufacturing challenges, or unseen competition. This cynicism can lead to paralysis, where the fear of failure prevents their ability to invest.
The ideal investors find a balance. They can argue both for and against a company's potential, they can weigh the pros and cons before reaching a decision. They understand that most things fail, but know that the goal is to invest wisely by considering things like valuation, execution, and competition. As part of our process at RA, a key question we often ask is how do we get to “yes” and what data do we need to see to get there. This is often a grounding question that helps stay both optimistic and realistic.
7. Which broad areas of science and medicine are you most excited about seeing develop in the next 5-10 years?
As I’ve progressed in my career, I’ve found myself getting most excited about new therapies and technologies that target areas of high unmet need and that have the potential to give patients what they want – a cure for their disease. Those aren’t always possible with existing technologies and we've made strides towards managing diseases that we can’t cure yet. Like Vertex Pharmaceuticals' progressively better treatments for cystic fibrosis. But our investments lean towards cures, with an eye on one-time therapies that are hopefully benign in terms of safety, particularly for chronic autoimmune disorders that patients live with for decades. I’m excited to see what gene therapy and editing can do for inherited genetic diseases and what cell therapy is capable of. That’s a space where recent innovations and applications could provide novel treatments for a range of conditions.
8. The market has been going through a bit of a downturn recently, what is one short piece of advice you would give to early-stage and later-stage biotech entrepreneurs?
My quick advice is simple: in the current market, both early-stage and later-stage companies must allocate their resources more efficiently toward the highest value-creating activities and projects. Pursuing multiple parallel programs and preserving broad optionality hoping for a market rebound similar to 2020 is not realistic. It’s essential for management teams to recognize that they need to prioritize and focus on what will generate value from both an investor’s perspective and a potential strategic partner’s perspective.
9. Any updates or announcements you want to make about RA?
As you might have seen we've got a new planetary health team. We’ve broadened our focus to include planetary health because we believe in a broader vision of health that encompasses our environment, and we believe that there will be great returns for the investors that can dig in and understand these technologies and challenges. Curing diseases like cancer and Alzheimer's loses its significance if our planet is suffering extreme environmental degradation. We’ve always felt that in biotech, the investors that have the technical know-how and take a holistic approach to identifying the most promising and impactful opportunities are going to be successful, and we’re taking the same approach with planetary. This is an evolving effort that we believe will mature significantly over time and may redefine healthcare to encompass the well-being of our planet alongside human health.
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