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 will not make new investments in Canaan IX, although he will continue to oversee his prior investments, Ahrens says. One relatively new addition at Canaan, Warren Lee, has recently been promoted to general partner, and oversees digital media investments in the New York City area.

As always, there are plenty of things to worry about in the macro environment for making investments on startups with a new $600 million fund. Without going on ad nauseum, the list of concerns Ahrens mentioned are “frothy tech valuations,” an unpredictable FDA, and questions about the viability of the euro. Then there is so-called “syndicate risk” in which VC firms have to worry about whether their fellow investors will have staying power over the next 10 years to help support portfolio companies.

On the positive side, Ahrens said the quality of technology ideas emerging now constantly seem to be getting better. It’s safe to say that tonight, at Canaan’s annual reception at the JP Morgan Healthcare Conference in San Francisco, there will be a lot of kudos going around for raising a fund during a tough time, and plenty of optimism about what’s to come in the next few years. Ahrens, naturally, sounded fired up about what’s to come when we spoke by phone Friday afternoon.

“When you look at Apple, and the iPhone, think of all the technologies that came together to make it happen,” Ahrens says. “There’s the metal hardware, the slick glass touchscreen, Wi-Fi, cell connections, software to make it all work together, it’s downright amazing. Thirty years ago we weren’t close. It’s exciting to think in 10 years or 20 years what we’ll be using.”

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