A recent Wall Street Journal article warned investors to steer clear of Silicon Valley's latest "fad" - Nanotechnology.  What the article failed to note was the $1 trillion estimated market for "Nano" products by 2015, offered by Michael Rocco of the National Nanotechnology Initiative, (NNI) the government agency sponsoring research in the field.  It also failed to recognize that, of the large number of states and localities currently investing in Nanotechnology startups, only one of those places is Silicon Valley , as investors across the country, and indeed the globe, are rushing to embrace the companies that will define Nanotechnology's future. Finally, when it comes to bringing any new products to market, the first step necessary is for the venture capital community to come to the fore and invest in the companies that will make the idea a reality; something that until now, has happened on a relatively limited scale for Nanotech.
The question addressed by this article is whether the environment surrounding Nanotechnology has reached a point that is attractive for venture investors. This article will attempt to answer that question by approaching it from several angles. In part one, we will define Nanotechnology and introduce the reader to the ground covered thus far by scientists in the field. In the second part, we look at why venture investors have only recently entered onto the Nanotech stage. In part three, there will be an analysis of the problems faced both by entrepreneurs and venture investors in Nanotech and a look at the potential future of venture investing in the "Small Tech" industries.
Overview of Nanotechnology
At its essence, Nanotechnology is the process of building materials and machines from the "bottom-up" on the molecular scale.  The idea, originally offered in 1959 by one of the twentieth century's most renowned scientists, Dr. Richard P. Feynman, is the formative basis for what has become modern Nanotechnology. The idea that scientists and engineers could design and assemble structures at the molecular level to create machines and materials capable of actions and properties never before seen in the natural world is both the allure and the danger of Nanotechnology.
Nanotechnology is not new. In the environment, Nanotechnology is all around us; it is the fundamental tools and mechanisms of biology. Nanotechnology in the modern, human-manipulated world is also not a truly recent concept. Chemists and biologists have been creating materials on the molecular scale since the first decade of the twentieth century.  However, it is only within the last ten to fifteen years that scientists and engineers, from backgrounds in chemistry, biology, physics, materials engineering, computer science, and elsewhere. have found correlation amongst their various works in the "nanosphere." Ultimately, it is the product of massive advances in science and technology, along with the work of key individuals such as Dr. Eric Drexler (along with his organization, the Foresight Institute) and more recently, people such as Raymond Kurzweil  and even former House Speaker Newt Gingrich, that have helped pushed Nanotech to the scientific, social, and political fore.
A Sense of Scale
Nanotech operates in the world of the ultra small. To give some sense of scale, the "Nano" in Nanotechnology refers to the Metric System unit of measurement for one billionth of a meter. Thus, the nanotechnologist is operating on the scale of 1/1,000,000,000 of a meter - work in "Nanometers." To some extent, the mind has a hard time wrapping itself around dimensions at this scale. Casting back to high school science might provide a better perspective. When your physics teacher told you about atoms, he or she might have mentioned that atoms are about one-tenth of a nanometer across. Sitting in the middle of the scale of structures that are still usefully measured in nanometers is the DNA double-helix, weighing in at a hefty 2.3 nanometers in width. In the tangible world, a nanometer would roughly equate to 1/50,000 the width of a human hair. 
At the opposite end of the scale from the size of Nanotech's materials and products are the costs associated with Nanotechnology research and development. As was mentioned earlier, the typical Nanotechnology project could easily contain research elements from any number of "pure" science fields including: chemistry, physics, biology and their derivatives, in addition to engineers from electrical, chemical, material, and mechanical backgrounds. Combining these personnel needs with the various tools of the trade, massive computing power, often in conjunction with scanning-tunneling or atomic force microscopes, and the costs of R&D for any given Nanoscale project can tumble rapidly beyond the reach of any entrepreneur or some large institutions.
Picking Teams: Defining the Segments of Nanotechnology
Any panel discussion on "Nanotechnology" will have a proclivity to degenerate into an academic turf war if not carefully contained. The difficulty of defining exactly what falls within the scope of "Nanotechnology" is a daunting task in itself, with strong academic and economic motivations at issue for those defining the segments of Nanotech. As such, while the terms used here are fairly typical, they are by no means universal in their application. A good starting point in defining "Nanotech" generally, draws on two items already mentioned above. First, for "Nano" to be "Nano," the scale of the resultant product must be on that scale - in the range of single or small clusters of molecules. This is important because of a recent trend in companies which add "Nano" to their name without adding any "Nano" to their product line; much as ".com" was once the surname of corporate choice.  Second, for a product to fall into the realm of "Nanotechnology" in the Feynman sense, the end product must have been created from the "bottom up." Essentially, this requirement eliminates a great many "pseudo-Nano" products, often in the Bio or Bio-pharma sphere, that are created from a "top down" approach of development; essentially chipping away at a micro or macro scale material until it reaches nanometer size.  While these two limitations may feel picky in their granularity, they have a huge impact on whether or not the team developing the product will be eligible for public or private funding in addition to how the product will be received among competitors and purchasers.
With the general definition of "Nano" aside, a second useful designation is between "wet" and "dry" Nanotechnologies. Simply put, "wet" Nano relates to products and processes developed with a biological - often human - component, or based on organic materials.  The field of wet-Nano generally contains "Nano-bio" (or "Bio-Nano" depending on the speaker) along with various forms of Nano-Pharma (Nano scale pharmacology) and other related, biology based, products. Typically, the "wet" fields of Nanotech are considered nascent but further down the road of Nanotech, if for no other reason than the associated Food and Drug Administration (FDA) regulatory compliance issues that delay the commercialization of a product. However, this does not meant that companies have shied away from the field, nor does it mean that products have yet to enter production or commercial availability. To the contrary, some of the earliest Nano companies, including those such as Nanofibers and Protiveris are on the cusp of bringing products to market.
"Wet-Nano" aside, it is the various fields of "Dry-Nano" that are the most diverse and require a further degree of segmentation. "Dry-Nano" includes a variety of products engineered at the molecular level for uses too various to consider. Essentially, there are four main categories in this area: materials, electronics, sensors, and the tools that make each of these Nano products possible. In the "Segmentation" section below, these various fields, in addition to the general field of "wet-Nano," are defined in greater detail along with a description of some of the investments that have or will be made for each sector.
Who has the Purse Strings?
With this high-level understanding of what it means for a product to be considered a "Nanotechnology," the next issue is to understand who has been funding the research that is turning Nanotechnology into a reality. This section will cover the five main sources of funding for Nanotech that have been used thus far:
Each one of these categories has played a distinct role in making Nanotech enter a phase of research and development, rather than pure scientific speculation. More importantly, understanding where the money has come from thus far addresses the ultimate question of whether the time is now right for further venture investing in Nanotech.
Government Funding in the US - Federal - The National Nanotechnology Initiative
In a move that surprised many in the Nanotech field, President Bush, as part of his 2002 budget, requested an increase in funding for the National Nanotechnology Initiative (NNI) from $422 in 2001 to $604 million. The NNI, founded under President Clinton in 2000, is the backbone of non-private research funding in Nanotechnology. Eight federal agencies receive funding including: the National Science Foundation (NSF), Department of Defense (DOD), Department of Energy (DOE), the National Aeronautics and Space Administration (NASA), and the National Institute of Standards and Technology (NIST) - with the bulk of the funding going to the DOD and NSF.
In the Executive Summary for the initial grant application to Congress, the White House stated:
The President has made the National Nanotechnology Initiative (NNI) a top priority? The Administration believes that nanotechnology will have a profound impact on our economy and society in the early 21st century, perhaps comparable to that of information technology or of cellular, genetic, and molecular biology.
The mandate of the Initiative is solely to "support long-term nanoscale research and development and breakthroughs."
The goal of the NNI is not venture oriented, but rather, an attempt to insure that the US does not fall behind in the effort to advance the various Nanotechnologies. The method of the NNI grants are fairly typical, with each of the agencies tasked with a specific set of goals for funding Nanotech research. Each agency stipulates the terms of the grants it will fund as to size, term, and eligibility, but each agency specifically denies funding for-profit organizations. 
Overall, the NNI has been extremely efficient in organizing grants to a variety of prospective technologies in a large array of Nanotechnological field. Assuming its continued funding, the NNI is likely to play a critical role in the further advancement of Nanotechnology as it effectively shifts the incredible costs of Nanotech out of the competitive, private funding arena and offers the opportunity for truly creative investigation into fields of Nanotechnology which may not appear initially attractive to investors.
Government Funding in the US - State and Local
An interesting phenomenon is also underway for government funding in Nanotech at both the state and local level. Small Times, a magazine dedicated to the various "Small Technology" fields of Molecularly Engineered Mechanical Systems (MEMS) and Nanotech, recently announced its first survey of the "hot spots" for Nanotechnology companies to locate. The study, which gauged the level of research, industry, innovation, workforce, production costs, and the availability of venture capital funding, provided an interesting glimpse into the contest to woo Nanotech companies to their vicinity. Among perennial favorites like Silicon Valley (ranked #1) and Boston (ranked #3) were several newcomers to the field of localities willing to take the risk on new technologies. Among the contenders for the crown were Southern California (#2), the New York / New Jersey Metro area (#4), the Austin / Dallas / Houston corridor (#5), and Chicago (#6). Other frontrunners included Albuquerque, NM, the North Carolina Research Triangle, Metro D.C., Michigan, and Ohio. 
What makes these states and localities innovators in the Nanotech space is not only their willingness to embrace "Small Tech," but the variety of creative means that they are using to fund its development. Many of these localities are providing a variety of tools such as tax relief, guaranteed funding, research and development dollars to state institutions, organizational assistance, technology transfer programs, and in the case of New York and Texas, state sponsored research programs.  This combination of direct and indirect funding has eased the startup burden on new Nanotech companies and shifted a degree of associated risk to the state and local government.
Government Funding - Abroad
On a daily basis, the list of countries jumping on the Nanotech investment bandwagon grows. Most countries have indicated a dual interest in Nanotech investing. The first aspect of investment is a pure worry that if they fall behind in the race for miniaturization through Nanotechnology, the loss of time in catching up may never be regained. More importantly, many countries are looking to Nanotech and its economic potential as a means of stirring economic growth and job production in the long term.
Amongst the key foreign players are Japan , (at approximately $200 million US dollars in federal Nanotech funding) the UK, France , and amongst other recent entrants, the Peoples' Republic of China, which suggested that it would be spending heartily on Nanotechnology in the coming years as part of the country's "tenth five-year plan."
It remains to be seen as to what exactly will become of the various initiatives underway to advance Nanotechnology around the globe. It seems likely that one or two potential results will occur, either alone or in tandem. The first possibility is that some locations will become best known for research in specific fields of Nanotech, much like China has already done in identifying "materials" Nanotechnology as their primary field of Nano interest.  However, there is also a strong undercurrent of nations that are beginning to work together to provide greater breadth to their Nanotech funding in a variety of fields as has occurred by way of the EU, and in a similar pact between Russia, China, the EU, and the US.
In the end, it is only the spirit of the competition that will matter for international Nanotechnology initiatives. Regardless of their internal nature - whether the goal is to generate funds directly for the government via a quasi-venture model or through economic stimulation - it is the hope of many that these initiatives will rest solely in the economic sphere and not enter into a "Small Tech" arms race. As former Speaker Gingrich intoned at the recent NanoBusiness Alliance conference in New York City, the first Nano organization devoted to the cross cultivation of business and government interest in Nano, the value of healthy competition between nations vying for dominance in the various Nanotech industries only leaves the people of all nations better off in the long run. 
As is typical with many new technologies, major corporations have foot the bill for a great deal of Nanotechnological research thus far. Largely, this research has not come in the form of what might be called "primary Nanotechnologies" - core Nano materials such as carbon nanotubes and various particles such as dyes and sensors - but rather, in the form of research for how these Nano products fit with or displace materials currently in use. Motorola plans for continuing a line of research into the use of Nano materials for molecular memory technologies Intel and IBM have also been involved in work with various Nanotechnologies, particularly the potential of carbon Nanotubes for use in fab-less semiconductor production. Similar examples could be cited for a variety of other Nanotech segments.
Investments by the venture arms of these companies have a huge impact on Nanotechnology companies. First, they provide ready-made customers for products built by smaller Nanotech companies. Intel and IBM have both made clear that the likelihood of any Nanotech startup displacing them at any point in the foreseeable future is minute. While this may be disappointing to some, it is a fact for the time being. However, that should by no means discourage inventors and potential investors from backing new Nanotech companies competing in the semiconductor market. In the same discussion of the lack of "killer app" Nanotechnologies currently on the table, managers at Intel and IBM's venture arms have made clear that they continually invest in the potential technologies of the future. 
Apart from acting as customers and investors, large companies also will play a significant role in the formation of growth and exit strategies critical to the venture lifecycle of Nanotech. Many new Nanotech companies have found that corporate partnerships or even outright licensing of IP can provide them with the funding they need for more advanced work with their own brand of Nano products. Such a model of technology licensing has already been employed in two instances by McGovern Capital, a seed stage / merchant bank investor in Nanotech. Additionally, while there has thus far been little in the way of active merger and acquisition of Nanotech companies, some speculate that this is a combination of a lack of fully formed products within the Nano industry in conjunction with a general lack of M&A activity across the full breadth of the tech sector. 
Venture Investing - 2002
The NanoBusiness Alliance has recently addressed several of the key questions surrounding private investment in the Nano space. In their most recent survey, the NanoBusiness Alliance estimates that there are some four hundred and fifty Nanotech startups currently operating. It is not clear how many of these companies are venture backed or how much venture funding has gone into Nanotechnology startups in total.  Moreover, it is only in recent months that institutions and individuals are looking to harness to power of various forms of "Angel" funding. Recently there was the introduction of a new "Angel Network" for individuals willing to act at the most early stage of venture investing in Nanotech. Ultimately, the best method of understanding venture investing thus far in Nanotechnology is to look at some of the investments that have been made in various Nanotech sectors, the investors making them, and the companies that they are funding.
 Dr. Michael C. Roco, National Nanotechnology Initiative and a Global Perspective: "Small Wonders," Exploring the Vast Potential of Nanosciences, National Science Foundation Symposium, Washington, DC March 19, 2002.
 Small Tech's Hot Spots, smalltimes, March/April 2002, Vol. 2, No. 2, pg 27-28.
 See generally, Richard P. Feynman, There is Plenty of Room at the Bottom, (1959), reproduced in The Pleasure of Finding Things Out: The Best Short Works of Richard P. Feynman, (1999) at 117. (This work by Dr. Feynman is a seminal text in the field of Nanotechnology, and along with Dr. Drexler's Engines of Creation, sited below, is required reading for individuals interested in Nanotechnology.)
 K. Eric Drexler, Engines of Creation: The Coming Era of Nanotechnology, (1986) at 4.
 Raymond Kurzweil, The Age of Spiritual Machines: When Computers Exceed Human Intelligence, (1999).
 B. C. Crandall, Nanotechnology: Molecular Speculations on Global Abundance, 1 (1997).
 Beware of Nano-Pretenders, The Forbes/Wolfe Nanotech Report, May, 2002, vol. 1, no. 3, at 1.
 Genevieve Oger, Spotlight: France, Nation finally introducing entrepreneurs to its top research institutions, Small Times, March/April 2002, vol. 2, no. 2, at 42.
 See Jen Lin-Jiu, China, Emboldened by Breakthroughs, Sets out to Become a Nanotech Power, Small Times, December 17, 2001.
 See generally, Jack Mason, Visionaries see the Promise and the Nightmares of Nanotech, Small Times, May 22, 2002.
 Candace Stuart, Nanotechnology's Potential Needs Decades of Work Before it is Realized, Expert Panel Says, Small Times, March 19, 2002.
 Howard Lovy, Nanofinancing 2002 Conference: IBM, Intel, Advise Nano Companies to Start Small, Small Times, March 21, 2002.
 Tech Takeovers are Scarce, Despite Fallen Stock Prices, New York Times Syndicate, April 21, 2002.
 The difficulty of arriving at an approximation of investment in the Nanotechnology sector is a function of the current economic environment and a lack of a clear rule defining what constitutes a "Nanotech" company.