Canaan Fund Comes Up Short –

Nowadays, if a private equity fund doesn’t reach its target capitalization, the news isn’t necessarily taken with a grain of salt, nor is it the worst thing in the world, either. Such was certainly the case with Canaan Partners‘ latest investment vehicle, which held a final close last month with $700 million in commitments.

That’s actually $50 million shy of the target Canaan set when it launched the fund at the end of last year, but the firm isn’t overly concerned by the outcome, said Deepak Kamra, a general partner there.

“We had closed on all of [the $700 million], except for two or three stragglers, at the end of the first quarter,” he added. “Instead of pushing it and addressing new LPs, we decided that $700 million will meet our objectives very well.”

While there’s no guarantee that current market trends will continue, with fewer companies raising less money these days, Kamra said there’s enough capital in the fund’s coffers now to serve the firm’s investing needs for the next two to three years, with some reserves left over for follow-on financings.

Last Come, Last Served

Although most of Canaan’s existing LPs came back with larger commitments, including General Motors Pension Fund and HarbourVest Partners LLC, and several new investors signed on, it wasn’t all wine and roses in the fund-raising trenches.

“Some of the larger LPs domestically who normally would have been great candidates for us were worried about allocations they had made to existing VC funds,” Kamra explained. “Some of those LPs had funds they were already in, and those incumbent funds came back earlier than expected to raise bigger funds. So in general, there was less money, existing funds were asking for more, and that didn’t leave room [in the LPs’ portfolios] for new funds.”

Still, Canaan managed to bring more than five new LPs on board, which was in line with the firm’s original goals, Kamra said.

Like its predecessors, Canaan Equity III will likely be 20% invested in life sciences, and the remaining 80% will be dedicated to information technology plays.

“Life sciences has been resurgent lately,” Kamra said. “We’ve always invested [in the sector], and we’re happy we stuck with it now that everyone is jumping back in.”

Primarily an early-stage investor, Canaan will likely pump between $5 million and $15 million into its portfolio companies at the outset, and could invest as much as $20 million over the life of an investment. By the time Fund III is fully invested, its portfolio will probably include about 30 companies.

It seems to be well on its way. Canaan Equity III has brought four companies into the fold to date, including San Francisco-based Proficient Networks Inc., a communications software company; New York-based Drug Abuse Sciences Inc., which develops medications for drug and alcohol dependency; Zolo Technologies Inc., a Colorado-based optical components firm; and Silicon Alley Seed Investors, a New York venture firm.

The last two are perhaps the firm’s most interesting deals to date. The Zolo investment marks the first time Canaan has pumped money into an optical play, and Kamra said he prides himself on having avoided the original VC gold rush into the sector.

“We’re now selectively investigating [opportunities in the optical space], and we expect to see a lot of optical companines coming back for money in the fall,” he added. “Most are still spending money, but there aren’t many customers today, so we still have to be careful. You can have great management and technology, but if the customers aren’t buying, it doesn’t mean anything.”

Moreover, Canaan recently funded Silicon Alley Seed Investors with Rho Management and Sevin Rosen Funds. As the name implies, the firm is primarily a seed stage investor, and that’s precisely where Canaan would like to be putting a bit more of its money to work down the line. Plus, it’s another source of deal flow, Kamra said.

Although Canaan has already begun investing from Fund III, there is still plenty of dry powder left in Canaan Equity II for follow-on financings, he added.