Canaan Closes $600M Fund; Building on Past Successes

By Trista Morrison
BioWorld Today
Staff Writer

Despite a recent wave of contraction in the health care venture capital industry, Canaan Partners raised $600 million in its ninth fund. Granted, the bulk will go to tech investments, but about $100 million is earmarked for drug developers, and a further $100 million will go to medical device, diagnostics and health care IT firms.

General Partner Brent Ahrens said the fundraising process was relatively smooth, with the oversubscribed fund closing just three months after the offi cial private placement memorandum went out. But Canaan’s limited partners showed “a lot of trepidation” about backing health care investments in particular, he told BioWorld Today.

That’s not surprising, as many health care venture funds have been under pressure from LPs for failing to provide suffi cient returns. In the last few months,that pressure seemed to intensify into a much-feared contraction, and the industry was abuzz with media reports of Prospect Venture Partners’ fundraising troubles, Scale Venture Partners’ and Highland Capital Partners’ decisions to exit the health care field, personnel changes at Versant Ventures and the merging of the life science teams at ATV and Morgenthaler Ventures.

“I was sitting down with an LP maybe five or six weeks ago, and his opening statement was something along the lines of, ‘our investment committee doesn’t like health care, so what are you guys doing?’” Ahrens said.  The answer Ahrens gave – to that LP and to many others – was that Canaan is sticking to the strategies that have allowed it to provide good returns thus far, while at the same time looking for ways to push the envelope and expand those strategies.

One strategy that has worked well for the fi rm in the past and that it plans to continue is focusing on therapeutic areas where it has expertise, including infectious disease.  Canaan was an investor in antibiotics firm Peninsula Pharmaceuticals Inc., which was acquired by Johnson & Johnson; then in Peninsula spinout Cerexa Inc., which was acquired by Forest Laboratories Inc.; then in Cerexa spinout Calixa Therapeutics Inc., which was acquired by Cubist Pharmaceuticals Inc. (See BioWorld Today, March 30, 2009.)

In addition to antibiotics, Ahrens said Canaan is interested in antivirals and vaccines, as well as antifungals.  Ophthalmology is another indication of focus, both from the drug side and the device side.

Another core Canaan strategy, according to Ahrens, is doing more on “OPM” – other people’s money. That mightmean government funding, like for portfolio company and biodefense player Chimerix Inc. Or it might mean spinning out technology that has already received significant investment: Canaan is an investor in Pfi zer Inc.’s antibiotic spinout Durata Therapeutics Inc., as well as the spinouts mentioned above. Advanced BioHealing Inc. is another example: Canaan helped the fi rm acquire an alreadymarketed drug from Smith & Nephew, leading to a $750 million acquisition by Shire plc and a 15X return for Canaan. (See BioWorld Today, May 19, 2011 .)

Canaan also plans to stick to its strategy of investing about 85 percent of its new fund into the first institutional round for a fi rm – although Ahrens noted the defi nition of first institutional round can mean anything from a seed investment to a Series B. It might mean a Series A round in a company like Durata, which already had a Phase III product, or it might mean a Series A round in a preclinical university spinout. “We are stage agnostic,” Ahrens said. “It’s more about the risk profile of each company.”

All of this illustrates how Canaan has achieved success in the past, but where is the firm pushing the envelope for the future?

Some venture firms are experimenting with new business strategies: product-centric rather than company-centric models, or build-to-buy models in which a venture firm and potential acquirer work together, for example. Ahrens said Canaan has had discussions with potential big pharma partners regarding company building, but for now, the firm is more focused on ways to expand its existing strengths.

For example, although Canaan has offi ces in India and Israel, and about 25 percent of its investments are in ex-U.S. companies, most of that is on the tech side. Yet the health care team is exploring ways to leverage that international presence, Ahrens said. Additionally, seed investments have become an increasingly important part of Canaan’s investment strategy over the past decade – again more on the tech side than the health care side, but Ahrens sees that as another area in which the health care team can grow.

Canaan’s health care plan seems to have resonated with LPs. The one-third health care to two-thirds tech breakdown of the current fund is consistent with the last several funds Canaan has raised. Ahrens said Canaan is finishing up with its previous fund and will start investing the new fund in a few weeks.