Canaan, a 35-year-old early stage venture business that invests in both software and healthcare, isn’t deterred by the sluggish market. It recently completed the closing of two new funds totalling $850 million in capital commitments: a flagship fund worth $650 million, its 13th, and a subsidiary fund worth $200 million to support its portfolio firms that have broken away.
The sum raises the company’s assets under management to $6.8 billion, little more than the $800 million that Canaan raised for its 12th flagship fund in October 2020.
It seems odd that Canaan closed an opportunity-style fund in the current market. The fact that early-stage investors host later-stage funds makes it difficult for certain institutional investors to adequately diversify their own assets, they complain in private.
Due to a market where exits are scarce and IPOs are even scarcer, an increasing percentage of early-stage investors are likewise choosing to forgo specialised late-stage funds. For instance, Felicis, a different early-stage investor, recently made the same choice. Lux Capital, another early-stage investor, is currently raising a single fund after previously raising many funds at once.
Maha Ibrahim, a seasoned Canaan general partner who joined the company 23 years ago, claims that the second fund was established for a variety of reasons. She begins by highlighting a subset of the firm’s portfolio companies that need more funding, both on the tech and healthcare sides. She adds that the new fund gives Canaan a “great way to support companies and get a lot more ownership in them” given that many investors are now “sitting on their hands at the late stage.” Ibrahim maintains that the team sought to “make room for supportive LPs,” and that the flagship fund was “oversubscribed.”
It makes sense that its current investors would want to re-up. According to Canaan, the company has had ten IPOs, four public listings, and eight M&A exits during the last five years, resulting in returns of about $1.7 billion. The IPOs of Day One Biopharmaceuticals in May 2021, TheRealReal in June 2019, and Arvinas, a biopharmaceutical business, in September 2018 are a few of those outcomes.
Canaan also invested in Kustomer, a provider of customer service software, which Meta purchased for $1 billion in February 2022. However, according to recent reports, Meta is currently mulling over several alternatives for the company’s disposal as part of a larger cost-cutting strategy. Hewlett Packard Enterprise recently bought Axis Security, another portfolio business, for an undisclosed sum.
Ibrahim also underscores that Canaan is “really an early-stage focused fund” and wanted its main fund to reflect as much. “It’s cleaner for us,” she says.
As for where that money might end up, Ibrahim cites cybersecurity as having a “very strong market pull right now.” Canaan has already been involved in this sector, having invested early on in both the eight-year-old company Snyk (currently valued at around $7.4 billion) and the industrial cybersecurity company Dragos, whose valuation reached $1.7 billion in 2021.
“It’s our intention to back winners at reasonable prices,” she says. “We’re powering into a market where there will be up rounds for the winners, but I don’t think at nearly the stratospheric valuations as before.”
The company is still engaged in some healthcare-related fields, such as immunology, neurobiology, and cardiology. Canaan even occasionally serves as an incubator for such businesses, helping to launch Day One Biopharmaceuticals.
“We saw opportunities within oncology that we could focus on, so we thought why should we let others start it if we can do it?” says Ibrahim.
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