Welcome to the Canaan Partners Newsletter!

Exciting transformations are underway at Canaan, our portfolio companies and in the technology and healthcare industries – and our new quarterly newsletter will serve as a way to communicate thought-provoking news with our friends, partners and investors on a regular basis. As you know, Canaan just closed its 8th fund in January with record interest from investors. The $650-million Canaan VIII global venture fund brings Canaan’s total capital under management to $3 billion. We look forward to investing our newest fund this year in the U.S. and abroad– and to keeping you updated on our progress via this newsletter.

We kick off our inaugural newsletter with an insightful look at the market for user-generated content: our partners weigh in how companies will finally make money from it. Also in this newsletter, you’ll find out about Canaan’s new and follow-on investments and find an in-depth interview with Jason Glickman, CEO of Canaan portfolio company Tremor Media, as well as updates from many of our portfolio companies. 

UGC: Which Business Models Will Deliver?

Interactive advertising is growing – and evolving – at warp speed. From keyword campaigns and online video, to mobile and email marketing, advertisers are racing to keep up with all of the ways to connect with their customers. Digital media companies, on the other hand, are racing to come up with the most compelling advertising models to woo all those marketing dollars. We asked investment professionals on the Canaan digital media team which advertising models will generate the most revenues. Here are their predictions:

Highly-targeted social network advertising will take center stage. Last year, advertisers figured out that social networks have the most eyeballs – trumping news and information sites as the number one online destinations. Big brands, and smaller long tail marketers as well, are eager to connect with the highly-engaged communities on Facebook and beyond, and they will pump significant marketing dollars into social network advertising this year. A whole new advertising model is taking root around online communities that will allow marketers to reach very specific groups of people.  With the old online advertising models, marketers spent top dollar to place banners advertising jeans on a site like iVillage, but the targeting didn’t go much deeper than that. Now, with community-based micro-targeting, the same marketer could buy an ad on Facebook targeted just to women who like 7 For All Mankind jeans. It’s incredible when you realize the opportunity this opens up for advertisers. It’s like sending out messages with an eyedropper instead of a hose.

Pickspal, an online community of sports fans, is a great example of a company that used to be a destination site and now is also a community application within Facebook that is highly attractive to advertisers. When Pickspal was just a website, they successfully attracted several hundred thousand users. But then they rolled out a Facebook application, and they got millions of new users in a very short time. The company has now attracted advertisers with massive deals to reach these new members, which can be broken down into extremely targeted groups based on their team preferences. These micro-communities are self-selected based on shared interests, and advertisers are chomping at the bit to reach such targeted groups.

Advertisers will finally find a way into the mobile phone. This year, marketers will reach consumers on their cell phones, and they’ll find ways to do it that won’t irritate users. The first step toward reaching mobile users is the disintegration of walled gardens, which is already happening. Increasingly we’ll see the emergence of open standards for the mobile web, which will make mobile web browsing a more uniform experience across all sites. And when there is a common mobile Internet platform, marketers can more easily create campaigns that work across all mobile sites. The first widescale mobile marketing campaigns won’t be massive SMS spam-outs, because advertisers have already figured out this type of advertising is seen as annoying by most cell phone users. Instead, we’ll see less intrusive methods, like mobile search and discovery.  Getting a text ad from a local Chinese restaurant alongside natural search listings of Chinese restaurants isn’t that intrusive; in fact, most consumers would actually find it helpful.

We’re also seeing embedded mobile marketing beginning to take hold. This is where ads are part of a functionality or entertainment experience, such as video ringtones or sponsored online games. A lot of people would watch a small ad in exchange for getting to do something entertaining on their phone for free. A company like Cellcast, which allows people to play games and quizzes on their cell phones in India, is a great example of a media company that can offer advertisers access to a highly-engaged audience; one of the company’s games, an online and mobile reverse auction, Bid2Win, received 30 million responses from 2.5 million individuals in a span of one year.

Distribution will trump destination. In the past, advertising on content sites has been all about the number of eyeballs, and destination sites have spent millions trying to attract new members so advertisers will pay top dollar for placements. But that model is expensive and doesn’t guarantee advertisers are reaching a targeted audience. Going forward, syndication models will take center stage as media sites find new ways to monetize their content. More and more media companies will sell their content, especially user-generated content, to online channels focused on particular topics.
Associated Content, the leading UGC media site on the Internet, is a great example of how content monetization is evolving. Associated Content has gathered millions of articles and videos from over 75,000 contributors, and all of the content is organized into highly-targeted channels that interest distinct consumer groups – from old car enthusiasts to breastfeeding moms. The company is starting to sell this long tail content to sites all over the Internet, and they can attach advertising to the content as it passes through the syndication channel. If you think about that opportunity for advertisers, that means they can distribute unique messages to micro-segments. It’s a dream-come-true for advertisers, and it also allows media companies to monetize non-mainstream content. Canaan has invested in another company that plays in the long tail advertising space, Peer39. The company has a cool technology called SemanticMatch that matches advertisers’ campaigns to highly-targeted, granular content from thousands of online publishers offering content in hundreds of categories. Syndication will really start to generate revenues for media sites – and offer a whole new advertising channel for marketers – this year, because there is a massive amount of content on the web that has yet to be monetized. 

An Interview with Tremor Media's CEO, Jason Glickman

Tremor Media is a video advertising network that provides brands with in-banner, in-stream and other emerging video advertising opportunities on over 800 top-tier publisher sites with a combined 92 million unique visitors per month. Canaan participated in Tremor’s $8.4M Series A round in September and continues to offer hands-on operational and strategic guidance to the rapidly-expanding company as it cements its lead in video advertising. We recently sat down with Tremor Media CEO Jason Glickman to find out what’s next in fast-moving video advertising market.

Tremor Media is growing incredibly fast. Tell us about the past year.
The last year has been a wild ride, and we’re gearing up for even more growth in 2008. When we closed our funding in September 2006, we had 14 people on staff. Now we have nearly 60, and we’re still hiring. But most importantly, our monthly revenues are now seven times greater than they were one year ago. We’ve signed up a lot of Fortune 500 advertisers, and they’ve been so pleased with the results of their video campaigns, that many of them are coming back to do repeat and ongoing campaigns; we’re proud of that milestone, because we’re in this business to offer compelling, effective advertising opportunities to our clients.

On the technical side, we’ve rolled out several new ad formats. A year ago, we just offered in-banner and in-stream video ads, but now also offer in-game, viral widgets and something we call the showcase format, which is a combination of a banner and in-stream advertising. We’re also working with a few advertisers to launch UGC video reviews via a partnership with ExpoTV, where we run videos of real people positively reviewing a brand’s products.

How is Tremor different from other online video companies?
I think what really sets Tremor apart is that we are built around generating revenue. We have built our technology, partnerships and services around the goal of generating significant revenue each month, and I think that commitment to success is reflected in the advertisers and publisher we’ve attracted to our network. Our advertising clients are all Fortune 500 brands, including Sony, American Express and Circuit City.

Forrester Research predicts the video advertising market will grow to a $7.1 billion by 2012, up from only $471M this year. What types of video advertising (in-banner vs. in-stream, pre-roll vs. post-roll etc.) are generating the most revenue?
First off, I think that estimate, as large as it sounds, is a conservative figure. If you think about the $80 billion spent per year right now on television advertising, I think much of that budget will move online. Already, people spend as much time online as they do watching TV, and each year they are spending less and less time in front of the TV. Tremor is already benefiting from this shift, as many of our advertisers are aggressively migrating some of their TV budgets online.

On that note, do you think online video viewers will be receptive to video ads?
They already are, as the CPM rates for video advertising show. Brands pay top dollar for ads that work, and they’re paying more for video ads right now than all other formats. So consumers are obviously responding in a big way to video advertising. That said, there is always the risk of alienating consumers with overly-intrusive advertising, and I think advertisers are getting more innovative about creating ads that aren’t perceived as an intrusion, but almost as part of the entertainment itself. One way of doing this is to make sure ads are highly targeted. When an ad really appeals to the person who sees it, they don’t find it irritating. Tremor engages in multi-level targeting for all the ads served on our network. We do geo-targeting, frequency capping (where we make sure a certain ad is not played too often) and channel targeting based on themes like autos, finance and travel. We have also recently introduced behavioral targeting, serving ads to viewers based on where they’ve been lately online or what they’ve clicked on. Lastly, we tell our advertisers to keep it short! For any short-form video under four minutes long, we encourage ads to be less than 15 seconds long, and hopefully even shorter.

How has video advertising affected online publishers? Are they making more and more of their inventory video-based?
Yes, there’s a huge shift toward video. Publishers are making the video areas of their sites very prominent, and every day, there are more and more publishers launching video portals. As I said before, video ads are garnering the highest CPM rates in the industry, so it’s no surprise that publishers are quickly embracing the medium.

How has video advertising affected advertisers? Are they allocating more and more of their ad spend to video?
We are seeing big name advertisers put a lot more budget put towards video, and they are allocating budget in advance. In addition, advertisers are producing video ads that work best or only for the online format. Right now, most advertisers prefer to work with a network like Tremor that serves ads to highly reputable publisher sites, because they are still a bit worried about having their videos served alongside questionable UGC content. But brands are even getting savvier about UGC, finding ways to leverage its immense popularity, for example, by letting users create video mashups that promote their brands.

What’s next for video advertising?
We’ll see larger and more budgets being allocated to online video. We’ll also see standards being created in the online video market, both in the technological and measurement areas. With so many ad formats and dozens of ways to measure the effectiveness of campaigns, there are still a lot of logistical headaches for us to solve. But that will happen quickly, and the IAB is starting to come out with video measurement standards. Also this year, we’ll see new formats, such as in-game ads, being tested and we’ll see advertisers getting more comfortable with UGC and viral marketing strategies, like widgets.

Personnel Updates

Dr. Stephen Bloch Promoted to General Partner
In Feburary, Canaan announced the promotion of Dr. Stephen Bloch to General Partner. After serving as an entrepreneur and practicing physician, Dr. Stephen Bloch joined Canaan in 2002 and knows firsthand the challenges of building successful healthcare companies. Dr. Bloch led Canaan’s investment in Amicus Therapeutics (FOLD), a clinical-stage biopharmaceutical company developing next-generation oral therapies for the management of genetic diseases. He also sits on the boards of Advanced BioHealing, a developer of regenerative wound healing therapies, and Marinus Pharmaceuticals, a leader in development of drugs to treat serious neurological disorders. Dr. Bloch joins existing general partners: Brent Ahrens, John Balen, Wende Hutton, Maha Ibrahim, Deepak Kamra, Guy Russo and Eric Young. Congratulations Stephen!

Mickey Kim Joins as Principal
In September, Canaan announced that Mickey Kim, MD joined the firm as a Principal in its Westport, Connecticut office. Dr. Kim will work with Canaan’s global teams to identify healthcare trends and pursue investment opportunities, particularly in the biopharmaceutical, medical device, healthcare services and diagnostic sectors in the U.S. and Asia. Mr. Kim brings a unique mix of investing, entrepreneurial, consulting and technical experience in both the U.S. and Asia. Prior to joining Canaan, Dr. Kim co-founded Pacific Point Ventures, a venture capital fund investing in biotechnology service companies in Asia, and was a Principal at BioVentures Investors, a venture capital fund investing in biopharmaceutical and medical device companies in the U.S. He also served as a strategy consultant at McKinsey & Company and CSC Healthcare, and co-founded an Asian technology venture capital fund. Welcome Mickey!

Upcoming Events

Canaan Sponsoring GigaOM’s Structure 08 Conference
Canaan Partners is pleased to announce our sponsorship of the upcoming Structure 08 Conference. Put on by Giga Omni Media, the publisher of GigaOM and other leading technology industry blogs, Structure 08 will take place June 25, 2008 at the Mission Bay Conference Center in San Francisco. Structure 08 will sort through the emerging and disruptive computing technologies that make up the building blocks of the next generation of the Internet, such as virtualization, SaaS and cloud computing. It will also feature representatives from the companies pioneering such technologies, including Sun Microsystems, VMWare and Amazon.com, and the startups that are leveraging them. Canaan has been integral in helping plan Structure 08 and we look forward to meeting many friends and colleagues at this groundbreaking event. For more information, visit http://events.gigaom.com/structure/08/.

April 23, 2008
Maha Ibrahim panelist for Wireless Innovations 2008

April 24-25, 2008
Maha Ibrahim to judge at Web 2.0 Expo Launchpad

May 27-29, 2008
Brent Ahrens and Seth Rudnick to speak at ILSI-BioMed Israel 2008

June 4, 2008
Warren Lee to Speak at Advertising 2.0

New + Follow-on Investments

Canaan Partners has been busy building its portfolio by making new investments in the next latest-and-greatest entrepreneurs and technologies around the globe. We recently welcomed three future market leaders in communications, enterprise and cleantech markets to our growing list of innovative portfolio companies. Canaan also recently completed several follow-on fundings, bringing three of our leading technology companies the capital they need to reach market dominance, build their global brands and move toward successful exits.

New Investments

EnStorage
In January, Canaan led a $2M Series A round in EnStorage, a highly innovative Israeli clean tech company that is developing a low-cost regenerative fuel cell energy storage system. Siemens Venture Partners and Greylock Partners also participated in the round. EnStorage’s product levels the power-grid load to strengthen the production capacity of solar and windpower generation plants. Still operating in stealth mode, EnStorage was founded a year ago by CEO Eran Yarkoni, CTO Prof. Emanuel Peled and VP of R&D Dr. Arnon Blum, and its cutting-edge technology is based on years of research into power storage by Prof. Peled. Canaan Venture Partner Izhar Shay, has joined the company’s board. EnStorage is Canaan’s first clean tech investment in Israel.

N-Trig
In February, Canaan led a $28M Series B investment in Israel-based N-trig, whose DuoSense technology allows people to write with a special pen in regular handwriting on mobile computing devices. N-trig breaks the mold in text-input technology, combining a simple pen and zero-pressure touch for mobile computers into a single device. Evergreen Venture Partners and current investors also participated in the round. In addition to the investment round, N-trig also recently secured a credit facility of $5 million from Plenus, a leading Venture Lending Fund in Israel. It will use the new funds to expand partner relationships with leading OEMs worldwide and launch new breakthrough mobile computing platforms. Already, N-trig’s technology is being deployed by Dell Computer, with the recent launch of its Latitude XT Tablet PC, with more manufacturers set to announce N-Trig-enabled products soon. Canaan Venture Partner Izhar Shay, has joined the company’s board.  For more information, please visit http://www.n-trig.com.

Xirrus
In March, Canaan led a $26M Series C investment in Xirrus, the only Wi-Fi “Power-Play” that can replace Ethernet workgroup switches with Wi-Fi as the primary network connection for end users. Existing investors U.S. Venture Partners, August Capital and QuestMark Partners also participated in the round, which will be used to fuel further acceleration of customer acquisition and international expansion. Xirrus has been growing by leaps and bounds, as enterprises transition their wired networks to high-performance, cost-effective wireless environments. Xirrus Wi-Fi Array implementations provide more coverage, more bandwidth, more throughput, more encryption, more intelligence, and support for more users per cable drop than anything else available in the industry today—resulting in a solution that uses 75% fewer devices, power, cabling, switch ports, and installation time than competitive offerings. Canaan General Partner Eric Young has joined the board of Xirrus. For more information, visit http://www.xirrus.com.

Follow-on Investments

Coaxia
In April, Canaan co-led a $11.5M Series C round in CoAxia, a leading medical technology company focused on perfusion augmentation therapies that improve outcomes for patients with cerebral ischemia resulting from stroke, vasospasm and other conditions. Prism Venture Partners co-led the round, with Baird Venture Partners, Affinity Capital Management, Johnson and Johnson Development Corporation and SVB Capital Partners also participating. CoAxia will use the capital infusion to further ongoing FDA trials of its NeuroFlo Perfusion Augmentation Therapy for acute ischemic stroke, as well as to support other ongoing feasibility studies to evaluate use of the same technology in additional stroke populations. The company plans to complete enrollment in its NeuroFlo trial within 24 months; the trial already counts 125 patients in Europe and North America. For more information, visit http://www.coaxia.com.

Conism (formerly BharatMatrimony)
In February, Canaan led a $11.8M Series B round in Conism, the parent company of BharatMatrimony, the world’s largest marriage matchmaking community. Mayfield Fund and Yahoo also joined the round. BharatMatrimony is one of India’s biggest Internet success stories. Founded in 1997, BharatMatrimony now has 29 offices in India and abroad, over 750 employees and over 10 million registered users. Conism now operates other highly successful Internet properties, as well, including ClickJobs.com, IndiaProperty.com, IndiaAutomobile.com, IndiaList.com, IndiaPages.com, BharatMatrimony Centre, LoanWala.com and DesiMatch, as well as two social responsibility initiatives BharatBloodBank.com and BharatEyeBank.com. The company’s CEO Murugavel Janakiraman is one of India’s most respected entrepreneurs. For more information, visit http://www.bharatmatrimony.com.

Portfolio News

Ellacoya Acquired by Arbor Networks
Canaan portfolio company Ellacoya Networks was acquired by Arbor Networks in January. Arbor Networks is a leading provider of secure service control solutions for global business that protects more than 70% of the world’s service provider networks from security threats such as DDoS attacks, botnets and worms as well as network issues such as traffic and routing instability. Arbor acquired Ellacoya for its market-leading deep packet inspection (DPI) solutions deployed at the broadband edge in some of the world’s largest Tier 1 service provider networks. Arbor believes the acquisition positions it to take advantage of a significant market opportunity as service providers place increased importance on traffic and service management to efficiently and securely deliver new, revenue-generating IP services.

Coapt Systems
Coapt Systems, a developer of bioabsorbable implants for the fixation of soft tissue in the plastic and reconstructive surgery markets, announced a new CEO in April. Laureen DeBuono took the helm of this innovative medical implant company after 20 years C-level experience serving both public and private medical device and aesthetics companies.

BiPar Sciences
BiPar Sciences, a leading biopharmaceutical company developing and commercializing potential new classes of tumor-selective drugs designed to meet the significant unmet needs of cancer patients, has a new CEO. In February, BiPar named Hoyoung Huh, M.D., Ph.D. as President and CEO and he started his new role on March 3, 2008. Dr. Huh previously served as COO and head of the pegylation business unit at drug development company Nektar Therapeutics. At Nektar, Dr. Huh led significant, revenue-generating partnerships with major pharmaceutical companies, including Amgen Inc., Bayer AG, Baxter International Inc., Bristol-Myers Squibb Co., Novartis AG and Roche Holding Ltd. Dr. Huh managed more than 500 employees across global sites in key functions, including research, clinical development, manufacturing, marketing and business development. Dr. Huh serves on the board of directors of BayBio, a biotechnology industry association and Nektar Therapeutics. Dr. Huh received his M.D. and Ph.D. from Cornell University Medical College/Memorial Sloan Kettering Cancer Center and his A.B. from Dartmouth College.

Ebates
In April, Ebates, the pioneer and leader of online Cash Back Shopping, appointed Kevin Johnson as CEO. An Internet veteran with over ten years of e-commerce experience, Mr. Johnson previously served as a president and general manager of Acxiom Digital, one of the world’s largest and most experienced email marketing service providers and a top twenty-five interactive agency. Before joining Acxiom Digital, Kevin was the senior vice president of client services at Netcentives and general manager of the company’s email marketing services division, formerly Post Communications. He also co-founded and served as CEO of Passporta.com, an e-commerce business providing hard-to-find local specialties straight from the world’s best sources.  Mr. Johnson received an MBA from Stanford University and a BA from the University of California at Berkeley.