Banking & Finance

Canapi Venture’s Fund Raises Stakes

By Audrey Elsberry, posted Jun 7, 2024
Neil Underwood
Canapi Ventures, a financial technology-focused venture capital fund based on Live Oak Bank’s campus in Wilmington, has invested about 20% of its latest $750 million Fund II.

This fund, as Canapi President Neil Underwood told the Greater Wilmington Business Journal after its launch, is focused on supporting companies that further AI governance, cybersecurity and climate technology. At the venture firm’s Canapi Alliance Summit in New York City last month, which convened 100 bank executives and 50 fintech CEOs, the same three themes proved to align with industry officials’ projections, Underwood said.

In August, four months before Canapi officials announced Fund II, the company announced its investment in DynamoFL, now Dynamo AI. The company focuses on protecting data used to train large language AI models and ensuring LLMs can be used without regurgitating personal information.

“We’re in a highly regulated industry, so governance around artificial intelligence is a hot topic in financial services,” Underwood said. “There’s a lot of really interesting software companies that came up around AI, and you can’t do AI without data and analytics. So, data companies as well, we’ve been really digging into.”

Dynamo AI was founded in 2021 and is headquartered in San Francisco. Canapi invested in its series A funding round, which totaled $15.1 million, along with Nexus Venture Partners.

With AI governance comes the broader focus on cybersecurity, Underwood said, which is also a keystone of the fund.

“Cybersecurity and fraud are the No. 1 and No. 2 topics that bank leaders are really prioritizing,” he said. “And so of course, given our (limited partners) base, and our (strategy) in banks, that’s where we’re spending some time and investing.”

Island, an enterprise browser, received a $40 million investment from Canapi in its series C funding round in October. The investment was a part of Fund II, Underwood said.

The startup created a secure browser for businesses to use that protects user information while embedding enterprise needs in the software. The company was founded in 2020 and is headquartered in Dallas.

When the national news broke that UnitedHealth Group’s Change Healthcare experienced a cyberattack in February, leaking sensitive patient data, the company used Island’s browser to continue operations by securing employees’ personal devices, Underwood said.

Canapi’s investments are usually in early-stage companies raising seed rounds or early series rounds. Island was a later-stage addition as a series C investment, Underwood said, and a larger investment. The venture firm usually invests at least $10 million to $15 million in a portfolio company, he said, depending on the stage of the company’s venture development.

Canapi officials have been deploying Fund II for just under one year, investing in six companies so far. Fund II’s portfolio companies include DynamoAI and Island, in addition to startups Crux, ModernFi, Asset Class and Elpha. Fund II money was also used for follow-on investments in Fund I companies Codat and Nova Credit. Underwood said more deals are to be expected soon.

“We’re being really circumspect about, one, the companies we invest in, how much capital we give them and when,” Underwood said, “what their burn multiples are, that means... how much money they're investing every month, over how much net new revenue they're putting on.”

The venture firm has invested about $150 million out of $750 million fund, Underwood said. Fund II has a 10-year lifespan — four years of investing, followed by six years of collecting the return on that investment. Underwood said business is “tracking well” based on that timeline.

Underwood said the market is undergoing a “great valuation recalibration” right now. In 2020 and 2021, technology company valuations were above market value. Tech company executives are now accepting that valuations are less optimistic than they once were because of higher interest rates and venture funds being more choosey.

“Now we see the boards and the CEOs recognizing that the market has indeed changed, in a high-interest-rate environment, and that they're willing to maybe look at a down round or a flat round,” he said, “as compared to an up round.”
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