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Inside the world of M&A, IPOs, and Venture Capital

Justin Hibbard
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May 03, 2005

Canaan Reaches the Promised Land

Sarah Lacy

During the last two years, most venture capital firms have been in the market for new funds and institutional investors have been busy crowning the haves-- those who showed enough success and discipline to warrant another go-round-- and the have-nots-- those that are quietly going by the wayside. Sure, there have been way more haves than people thought a few years ago, thanks to all the money that's antsy to come into the venture capital world. But it's still a process to get these investors (or LPs as they’re called) to part with their money, as partners of Canaan Ventures, of Menlo Park, will attest.

The firm, which doesn't have the cache of a Kleiner Perkins, has six funds under its belt with several big wins. It announced its seventh venture fund yesterday, totaling $450 million. In the downturn, several of Canaan's investors were "not as comfortable with the long-term nature of the business,” in the words of general partner John Balen. In other words, once they weren’t getting a steady stream of checks thanks to the undiscriminating IPO and M&A markets of 1999 and 2000, they started to get squirrelly.

So, this time around Canaan took the opportunity to upgrade some of its limited partner base to more seasoned firms used to the ups and downs of venture capital. Timing was perfect, given the number of limited partners clamoring to get in any Silicon Valley firm with demonstrable success, but the partners describe the fundraising process as a bit more challenging than other firms have let on. New LPs scrutinized how they handled their "triaging" of portfolio companies post-bubble, some spending more than a year talking to Canaan and others about Canaan in anticipation of the new fund.

One new investor is Abbott Capital of New York. Abbott’s Jonathan Roth said he first contacted Canaan about investing in their next fund about a year ago. "They've hung around the top quartile pretty consistently," he says. "You don't see their name bandied about but we don't really care about that."

He also appreciated that Canaan didn't have a single rock star dealmaker, describing their past returns as a team effort. That's a problem that some say is bedeviling those bigger, brand-name firms, as no limited partner wants to rely on one partner. Venture investors talk about succession planning a bunch, but it's an apprentice business and one that takes a good long time to learn. Abbot, for one, has refused to re-up with several firms because of weaker younger partners, and Deal Flow has heard rumors of other limited partners doing the same—with firms whose names would surprise you.

Sure, these funds are eventually getting raised-- but it's not always as much of a slam dunk as many are letting on.

08:44 PM

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