Expansion pushes Canaan fund to $650M

Canaan Partners finished raising its $650 million eighth fund last week, pulling in substantially more than its last fund due to its international expansion and the increasing capital requirements of its startups.

The tech and health care investor added on-the-ground operations in India and Israel since it raised $450 million for its seventh fund in 2005. The firm has not set any allocation targets for how much it will invest abroad, but wanted to be sure it could support the positive deal flow it saw from them, according to General Partner John Balen.

The firm, which has offices in Menlo Park, Calif., and Westport, Conn., has invested a little more than $11 million in three deals in India and $667,000 in one deal in Israel since its inception 20 years ago, according to Thomson Financial (publisher of PE Week). “We’ve said we’re going to walk before we run,” Balen says. “We were in India a long time ago—vs. just hiring some people to do it fast.”

Canaan’s partners decided to make its international investments as part of its main fund. “Instead of building a separate fund, we’ve comingled our strategies,” Balen says. “Instead of doing the best deals in a sector or a country, we’re trying to do the best deals in this era.”

But internationalization was not the only reason that Canaan increased its fund size. The firm’s partners felt they needed more money to support their early stage investment activity through each stage of company growth.

“We’d rather have [our startup companies] rely on us instead of going outside and diluting our investment and taking away control,” Balen says. “If you’re going to take a leadership position, you should be able to see the rewards from that.”

Startups can take more money than ever before to reach exit velocity when public markets are not receptive to IPOs or when corporate acquirers tighten the purse strings.

As a result, the firm found partnering in the later stages of company development was not as useful as it had been in the past. “Syndicates are narrowing and we’re getting higher ownerships, but the consequence of that is that if you want to continue keeping that stake, you need money for them to grow,” Balen says. “You don’t need as many syndicates if you have the capital resources available to you.”

Canaan plans to invest about 40% of its fund in increasingly capital intensive life science companies, which also drove its decision to raise more money.