Early this year, Canaan Partners, a 25-year-old venture capital firm, closed its ninth fund. With about $3.5 million under management, Canaan devotes about one-third of its investments to health care and two-thirds to the tech field. Recently, General Partner Maha Ibrahim spoke with business writer Sharon Kahn about what investments excite her—and what turns her off.
SK: Tell me a little about Canaan and what attracts entrepreneurs to partner with your firm?
MI: Canaan has offices in Silicon Valley, New York City, India, and Israel. Over two-thirds of our investments are early stage. That could be a couple of entrepreneurs coming in with a business plan, or a company shipping product with a number of customers.
We generally want to be not only good investors, where success is correlated with taking money from Canaan Partners, but also want a good reputation in working with our entrepreneurs. We are helpful every step of the way in forming companies at a very early stage, then helping those companies develop by bringing in management talent, providing expertise, advising strategic acquisitions—everything up to when Canaan cashes out either through a public offering or when the company is bought.
MI: I mostly look at two sectors: One is mobile, which is everything from applications to gaming—you name it. There is great promise by virtue of how many smartphones, tablets, and other devices are in the marketplace. But an overarching issue involves how a consumer finds applications and how a device maker finds an app maker to get an advantage with distribution. There's a huge tailwind favoring mobile apps, but a lot of headwinds, too. The space is fairly messy right now.
I'm also interested in data-center automation. Maybe it's a little less sexy, but opportunities in re-architecting the data center are tremendous, given the huge shift to virtualization that we've seen over the past couple of years. Virtualization, cloud computing, and analytics have enabled Internet and media companies to thrive. It's so much cheaper to get companies up and running through cloud computing than it was 12 or 15 years ago.
SK: What is the biggest mistake an entrepreneur has made during the pitch stage? What turns you off?
MI: I just Facebooked about this! I had an entrepreneur come in the other day who was already shipping product—he was past the development stage. I asked him about his revenue goals, and he said: 'We're not concerned about revenue.' I can't even describe what a red flag that is. Yes, I want companies that are building great product and great teams, but, more importantly, companies that create value. If you're tackling a big, big market, you should be able to extract more than a majority of that market. This entrepreneur had a mindset of 'If we just bring in as many customers as we can, we can figure out how to monetize that later.' I am fundamentally not in agreement with that. I believe if you have a very good product, the consumer should have a willingness to pay. I expect all entrepreneurs to be wildly optimistic—that's the great thing about entrepreneurs: They believe in what they are doing no matter what. But what I don't want is somebody who doesn't believe they have to perform, or has a different definition of success.
SK: Do you define success in the same way that the entrepreneur does?
MI: That's a hard question. The answer should be that we are aligned in the goal to build a great company. What a great company is depends, but it should be revolutionary, not just offering incremental change. A feature or a tool or an add-on to existing practices can make good companies, but a company that takes venture money needs to be able to transform a space, whether it is a big or small market.
SK: Revolutionary ideas by definition must require some convincing arguments from the entrepreneur before you're willing to give money.
MI: Absolutely. Again, that's the wonderful thing about entrepreneurs: They hear 'no' more than they hear 'yes,' yet they persevere. That's not to say they shouldn't be nimble, because they have to listen to feedback. At the same time, as a venture person, my job is to be open-minded. Because an idea has failed in the past doesn't mean that the same idea will fail five years later.
SK: Tell me about a success story.
MI: The one we're most proud of today is a company called Kabam, a gaming company that operates through social networks. The entrepreneur was an associate at Canaan Partners who came to me with an idea in 2007. I liked him, trusted him, so I said fine, we'll give you $500,000 and see where you get with this.
The Kabam concept was originally called "Watercooler," and was meant to be a social network within Facebook dedicated to sports-fan and TV-fan-based communities. The entrepreneur wasn't even talking about a gaming company in the beginning. He wanted to develop an enterprise social network that smelled kind of like LinkedIn but had more functionality, was prettier, and could enable conversation. Fast-forward four or five years, and companies like Yammer and Jive are doing exactly that. The idea itself was attractive enough to get us to put our money in, but if something isn't working, the entrepreneur needs to find something that will, or give the money back.
Watercooler grew tremendously from a user standpoint, but traffic was very difficult to monetize. So the entrepreneur transformed, course-corrected, pivoted—whatever you want to call it—until he landed on the business that Kabam is today. He was nimble and we continued to be impressed all along the way with his flexibility. This company will probably go public within 18 months.
This interview has been condensed and edited.