Scottsdale-based venture capital firm Canal Partners is looking to diversify its portfolio and invest in a broader range of startups in Arizona and southern California.
After bringing on two experienced investors as partners, the VC firm is expanding its investment parameters to include high-growth, "anything-as-a-service" and subscription-based, recurring revenue companies. Canal Partners has primarily focused on investing in software-as-a-service companies in the past.
Entrepreneur Chad Horstman and former finance executive Perry Jacobson recently joined Todd Belfer and Robert Lunny as partners at Canal Partners to help source potential new investments, raise capital and serve as board members to portfolio companies, according to the firm.
“Since our inception in 2008, we’ve aimed to form true partnerships with the founders and teams we invest in and provide them the resources they need to succeed,” Belfer, managing partner at Canal Partners, said in a statement. “The connections, resources, and experience Chad and Perry bring to Canal Partners are invaluable and will prove a tremendous asset to our portfolio companies and investors.”
Canal Partners is working to expand on the success it has relished in over the last 12 years, including current and past portfolio companies such as WebPT, Picmonic, PetDesk, CallRail, Attribytes, and Allbound that have continued to experience year-over-year growth and tremendous gains in market share, according to the firm. Several companies that Canal Partners has invested in have realized healthy exits as well.
Canal Partners said it has an internal rate of return (IRR) of 54% since its formation. Most venture investors seek a 30% gross IRR on their successful investments, according to multiple firms. According to its website, Canal Partners typically invests between $1 million and $3 million into target companies. The firm has invested $36 million in startups since its inception.
New partners
Horstman is the founder and former CEO of Yandy, an online retail company that he launched in his garage in 2006 and successfully scaled to a $50 million in revenue company before exiting in 2015. Now, he is the majority owner of three new startups, including one he launched during the Covid-19 to import masks from China.
He said a strength that he brings to the table is e-commerce and online marketing.
Horstman said being asked by Belfer to join Canal Partners came as a surprise. “I thought we were just smoothie buddies,” he said. "We just got smoothies every day and talked about business and talked about Canal.”
Jacobson was the managing partner for New York-based private equity firm Brookstone Partners for more than 15 years before joining Canal Partners during the pandemic. At Brookstone, he sourced several major deals for the company, actively served on several boards including Anomatic, Dension Pharmaceuticals and Virginia Abrasives, and formed strategic alliances with high-net-worth investors to raise funds for portfolio companies. Prior to Brookstone, Jacobson spent nearly two decades on the New York Stock Exchange as a trading floor governor, specialist and owner.
Jacobson said he met Belfer on a boat between Naples and Capri, Italy while on his honeymoon with his now ex-wife 15 years ago. They kept in touch as Jacobson is a golfer and frequently traveled to the Valley to golf. Belfer convinced Jacobson to move to Scottsdale full time earlier this year and join Canal Partners.
Target companies
Canal Partners is looking to invest in companies native to Arizona and southern California because the Grand Canyon State is underserved in terms of venture capital, Horstman said.
“I think there is enough of a startup scene here that we will be able to find deals,” he said.
Jacobson said the VC firm invests in startups that have “proved their concept” but may just be lacking marketing or sales force.
“They just need some fuel for the engine,” he said.
Startups ideally have to be generating about $3 million in revenue, but they don’t have to be profitable.
Horstman said software-as-a-service and subscription-based companies are prime targets for investors because they tend to get higher valuations once they start to take off because revenue is reoccurring.
“We try to find a company where what they have in place in terms of marketing and customer acquisition is something that can be replicated,” he said, “and the target market is large and essentially need more money to go after their target market and grow. It is an important niche for us to focus on because… the results speak for themselves.”
As of right now, Jacobson said Canal Partners finds most of the companies it invests in through word-of-mouth referrals based on the VC firm’s reputation.
Jacobson said that Canal Partners does face competition when looking to invest in some successful startups.
“The nice thing [I’ve observed] from my short experience is if they can do a deal with someone local, they prefer it,” he said. “The Arizona network here is very loyal to Arizona. I think they want to keep business here.”
