Canaan Partners Survives VC Turmoil, Raises New $600M Tech/Biotech Fund

1/9/12Follow @xconomy

Canaan Partners was fortunate to raise its last big venture fund just before the global financial crisis hit in 2008, and now it has a real reason to be thankful again.

The Menlo Park-based venture firm is announcing today that it has closed on Canaan IX, a new $600 million venture fund. Canaan plans to carry on with business as usual, as it expects to put about two-thirds of the money into tech companies, and one-third into healthcare startups, just like it did with the previous $650 million Canaan fund that closed in December 2007. The firm, founded in 1987, now has about $3.5 billion in capital under management.

Canaan’s new fund couldn’t come at a more critical time, as the venture industry has been in crisis for a couple years. Most venture firms—running low on cash from funds they raised prior to the downturn—are desperately angling for support from the pensions, endowments, and other limited partners that provide the capital that keeps them in business. Limited partners have carefully scrutinizing whether they should keep betting on VCs—who are supposed to take big risks, yet most can’t deliver returns that consistently beat the S&P 500, T-bills, or commodities. An estimated one-third to one-half of venture firms are thought to be slowly going out of business as they have struggled to deliver enough big-ticket IPOs and acquisitions to justify the risks they take.

“We truly do feel lucky,” says Brent Ahrens, a general partner at Canaan. “We’re delighted to have such a great group of LPs who are backing us, this time and historically. We owe it all to them. We are truly thankful to be in position to continue to do what we love to do. But at end of the day, to get there, you gotta produce results.”

Brent Ahrens

Canaan, like most venture firms, doesn’t disclose the actual returns it has generated for its backers, although it has clearly strung together some hits during the tumultuous past few years. Its portfolio saw a big acquisition (Shire’s $750 million takeover of Advanced BioHealing) and a sizable IPO with Active Network (NYSE:[[ticker: ACTV]]) in the past year. A couple of its drug developers, BiPar Sciences and Calixa Therapeutics, were acquired in the past several years. This month, SandForce, a maker of flash-storage devices, was bought by LSI for $370 million.

Canaan has long stuck to a position as a diversified venture fund, which bets on different sectors (tech and biotech) as well as different geographies (U.S., Israel, India). Many venture firms have recently leaned toward technology during the go-go era of Facebook, Groupon, Zynga et al., and away from biotech in a period of tough FDA regulation and fears about healthcare insurance price controls. Scale Venture Partners recently said it is getting out of healthcare investment, Morgenthaler Ventures and ATV are spinning out/pooling their healthcare teams into a separate fund, and Prospect Venture Partners declined to continue with its plan for a new fund. But Ahrens said Canaan has seen good balance to the returns from both its tech and biotech investments, and its LPs like its diversification strategy, which enables it to dial up one sector, and dial down investment in another when it chooses.

Still, Canaan plans to allocate its capital in the next fund as it has previously, with two-thirds going to tech and one-third to healthcare, Ahrens says. Healthcare includes drugs, devices, and health infrastructure or health IT ideas, he says. The breakdown largely reflects the expertise of the people at Canaan, who are mostly sticking around for the 10-year commitment to oversee this newest fund mature. Eric Young, a general partner who co-founded Canaan in 1987, is one exception, as he … Next Page »

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