Buzz

Investing in Nanotechnology (Part 2)

Michael Butler, NYU School of Law


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 defined Nanotechnology and introduced the reader to the ground covered thus far by scientists in the field. In this second part, we look at why venture investors have only recently entered onto the Nanotech stage. Finally, part three will analyze the problems faced both by entrepreneurs and venture investors in Nanotech and look at the potential future of venture investing in the "Small Tech" industries.

Investing in the Spaces

The discussion now turns to several of the industry segments that have thus far shown promise for the future of Nanotechnology and have been the subject of some level of venture investing. Only time will tell the true breadth of the various industries Nanotech will effect or, of its own volition, create anew. For ease of discussion, the reader should note that each topic follows a pattern where the segment is defined and given some size, and then key players - both investors and companies - are described along with their constituent products and dollars invested. There will also be some discussion of potential customers in the field, prospects for further growth, and future technologies, along with consideration of the viable exit strategies for the companies and their investors. Wherever possible, actual VCs and their portfolio companies have been used to give the reader referenceable examples of the nature of investments in each segment.

Materials: Particles, Coatings, Tubes, and Fabrics

While not always the most glamorous side of the proposed uses of Nanotechnology, with products thus far including stain resistant jeans[1] and "ever-clean" toilet bowls, the potential uses of Nano materials has vast appeal for investors for a variety of reasons. Simply put, while some of the Nano materials under development are rather bland in nature, the potential size of the constituent markets is enough to make the head spin. An additional attraction for investors in this space is the fact that many Nano materials products have comparatively rapid time-to-market and the benefit of being able to be introduced into products currently in production by other industries.

Perhaps the single greatest success story of a Nanotech company in the materials marketplace is Nanophase, an Illinois based company that has been operating since 1994 and entered public trading with an IPO in 1997 (NASDAQ: NANX). Nanophase makes a variety of products - what they refer to generally as "Nano Particles," for use in everything from ceramics to medical products. Nanophase was initially backed by Harris & Harris Group, a publicly traded small business investment company and a leading Nanotech investor, in 1994 for an undisclosed sum. Many feel that the success of Nanophase is directly related to its goal of not introducing "disruptive" technology, but rather, to find uses for Nanoscale materials in Micro and Macro scale products which are already commercially available.

A similar approach has led to the success of Carbon Nanotechnologies Corporation, which produces single-walled carbon nanotubes for a variety of commercial uses. For those unfamiliar with the technology, carbon Nanotubes are the equivalent of taking the Buckminster Fullerene form of carbon (C18 - shaped like a soccer ball) and stretching it into an oval shape. Carbon nanotubes are renowned for their strength and semi-conductive properties and have shown viable uses in everything from computer chips to liquid crystal displays. Initially funded by the researchers from Rice University who have made many of the major Nanotube related discoveries, CNI has since received a significant follow-on investment from a pair of angel investors Gordon Cain and William McMinn, "known for a number of leveraged buyouts in the chemical industry during the 1980s and 1990s and, more recently, for key investments in the biomedical area."[2]

Ultimately, it is companies like these that are likely to have the most success in the quest for venture capital dollars related to their Nanotech research. Their combined ability to bring materials to market which can be quickly built into existing products and the existence of viable exit strategies through acquisition or public offering make many Nano material companies a good bet in the short to mid-term.

Electronics: Moletronics and Photonics

The range of applications for Nanotechnology in the electronics, telecommunications, and other hardware products is one of the ultimate goals of much Nanotech R&D. Two examples of Nanotechnology in this space that have received a degree of venture funding include Moletronics and Photonics.

Moletronics, an abbreviation for "molecular electronics" is "the idea that individual elements of computer circuits could be formed using single molecules of substances." The basics of the idea is that circuitry of all types could be made more dense, fast, and efficient by compressing their size to the range of molecules. Moletronics is not wholly committed to products solely at the "Nano" scale, but it is the phrase used to cover both Nanoscale research in the area and the slightly larger MEMS devices that serve similar functions. Photonics, a related field, often uses a combination of atomic and molecular scale systems to develop products for the communications industry.

Both Moletronics and Photonics have received extensive funding both from government and private investors. Galian Photonics Inc, recently closed a second round funding of $4.4 million for further development of its products which include applications as splitters, couplers, filters, and other components for the telecom industry.[3] An example of a company that has received both critical acclaim and significant venture backing for its work in Moletronics is Nantero. Nantero is developing a form of random access memory (RAM) for computers that it hopes will replace other forms of nonvolatile RAM (such as DRAM and SRAM) for use in all forms of electronics, and specifically, home computers. Nantero has already received $6 million of funding from a variety of venture sources including Harris & Harris, Draper Fisher Jurvetson, and Stata Venture Partners.

The allure of these sectors, much like that of the Nano materials considered above, is that while the scale of new devices is different than that of more traditional electronics, the concepts involved are not wholly new. Companies like Intel, IBM, and HP, and investors with focuses in semiconductors and MEMS circuitry like Sevin Rosen, Ventures West and others, are all fully capable of moving new products into this market. Moreover, truly revolutionary products in the field have yet to find their way off of the drawing board, so there is still a time where Nano scale products can be readily integrated with existing product lines without forcing massive retooling for electronics manufacturers.

Sensors and Filters

One of the fields already reaching its adolescence in the realm of Nanotechnology is the development and deployment of "sensor" devices. The NanoBusiness Alliance is set to release a report chronicling the development of this sector of nanotech; a sector that purports to already have US product sales for 2001 in the $770 million range.[4] The fundamental assumption driving the growth in the Nanotechnology sensor industry is the idea that if you cannot identify the presence of a substance - harmful or helpful - then you will not have the ability to deal with the issue on either the macro or micro scale. More to the point, "protection of human health and ecosystems requires rapid, precise sensors capable of detecting pollutants at the molecular level."[5]

Several examples of Nano sensors already exist in the lab and a few are moving into commercial production. A team of researchers at Stanford University recently announced the completion of a Carbon Nanotube based sensor that is capable of identifying Ammonia (NH3), Nitrogen dioxide (NO2), Carbon monoxide (CO), and other gases, at the level of twenty parts per million (20ppm); a factor of accuracy at least 1000 times more sensitive then conventional gas detectors. The researchers have suggested that such sensors will have a range of practical uses including detection of biochemical weapons, air pollution, and even organic molecules in space.[6] Similar "electronic nose" products, such as those produced by Osmetech, a British company which has already made its initial public offering, to identify various infections in humans, use conductive polymers to sample an environment and note conductive changes when certain vapors bind to the polymer.[7] Technologies like these can be used to sense environmental changes such as chemical content, pH, and other factors crucial to environmental scientists at levels of detection previously impossible to reach under natural conditions; as opposed to those that were previously only available in the lab.[8]

WetNano

Nanotechnology at the "wet/dry" interface - the area where organic materials meet inorganic Nano materials, is viewed by many as the crown jewel of Nanotechnology. It is also seen as one area of Nanotechnology that is not likely to see the light of day for some time. Essentially, both the problems and benefits of government strictures in this area, namely those of the FDA, make investments in Bio Nano and Nano scale pharmacology a difficult field in which to operate.

On the down side, it is often only the largest companies that are able to invest in "wet" Nano. However, they often do so in conjunction with startup companies in the Nanotech space. Matsushita Electrical in conjunction with Tensor Biosciences recently agreed to work on what they are calling "Brain-on-a-Chip" technology for use in drug discovery.[9] Similarly, a great many new technologies in the Bio-Nano field have been coming out of government initiatives which are also able to handle the huge costs of FDA approval. Recently, the DOD unveiled a new form of fabric which is impregnated with an Nanoscale anti-clotting factor, capable of stopping relatively serious wounds on the battlefield. In their recent display of the new technology, many marveled at its versatility and the possibility of the lives it might one day save, while simultaneously being discouraged by the large, attached label reading "Not for Human Use."

Even with the difficulty surrounding the FDA approval process, there is a boon for both investors and companies acting in the BioNano space. The fact is that while FDA approval is an arduous process, it is also a known quantity with a fixed timeline that investors in the field are familiar with and are accustomed to calculating into their returns. Moreover, FDA approval does add specific milestones for both investors and companies acting in the Bio-Nano world and provides for realistic hurdles and vetting of any potential products before they come to market.

Picks and Shovels: Software, Microscopy, and Self Assembly

The idea that the only ones who get rich in new technologies are those who sell the entrepreneurs their tools goes even further back than selling the "picks and shovels" to California Gold Rush miners. However, in the Nanotech arena, the supplies required by researchers come with hefty price tags that some investors, such as Josh Wolfe of Lux Capital, see as brining "constant income" to companies - particularly those at the wet / dry interface. For Wolfe, the example of Accelrys, a software development subsidiary of Pharmacopeia, a drug development firm, is on point with Accelrys generating a continued and growing percentage of Pharmacopeia's bottom line.[10] Such examples exist in other areas of the burgeoning Nano software industry, often in the form of CAD/CAM products used to model various Nanotech research projects, in addition to software and small hardware devices developed in the lab by researchers which are later modified for commercial sale. Nanocs, a Carbon Nanotube startup founded by four New York University students, has survived its first year of business venture free based solely on dollars earned selling technology developed in their lab.

A second major field of "picks and shovels" are the companies, such as British based NT-MDT, (an acronym for Nanotechnology - Molecular Devices and Tools) which are providing the imaging hardware for Nanotechnology startups. Atomic force, scanning-probing / scanning-tunneling microscopes, and associated computing and imaging equipment, are the only tools available for Nanotechnologists to actually view the work that they are performing. As such, companies that are supplying these machines, along with the multitude of materials for the research, stand to make out well as Nanotech goes mainstream.

While materials and equipment suppliers remain the Nanotech industry's safe bet, some investors, such as genomics analyst Charles Duncan, a director in Dresdner Kleinwort Wasserstein's (DrKW) Equity Research Division, argues that though it maybe true that "nanoinfrastructure" companies are a safe bet, they are not a good bet over the long-term. The basis of the argument is that venture capital is an institutional risk class that should be just that - risky - and the level of return on such companies simply does not provide the multiples to invest in such companies as a "venture" investment.[11]

While there is a grain of truth to Mr. Duncan's observation, there is the corollary fact that diversification within a venture portfolio may also have some value and that investing in Nanotech's "picks and shovels" is a type of vertical diversification that can have extreme potential as the industry expands. Coincidentally, if Mr. Duncan was interested in more risk, Nanotechnology offers a peculiar breed of companies, such as Texas based Zyvex, which are currently working on the future's equivalent of Nanotech tools. Zyvex, a venture backed company which began operations in 1999, is considered the first "pure-play" company in the search to create a Nano "assembler." Often the subject of rampant speculation - both for good and ill - the concept of an "assembler" is the science fiction of current Nanotech research. The idea behind the "assembler" is that while a variety of Nanotechnologies are possible, they are still largely driven from the "Macro" level with scientists physically pushing and pulling molecules into place. The concept of the "assembler" is the quest to have the various products of Nanotech self-assemble at the molecular level with little more than computer instructions, the base materials, and some form of electrical stimulant. The idea of molecular self-assembly rings of both the true potential of Nanotech, when machines are able to build themselves from the ground up, and the danger of unregulated development in the field (a topic hotly debated but beyond the scope of this article.)


[1] Eddie Bauer along with several other companies are using Nano scale particles like those produced by North Carolina based Nano-Tex to add stain and water resistant features to the fabric of the clothing they produce.

[2] See Carbon Nanotechnologies - Background.

[3] Brief: Galian Photonics Secures $4.4 Million, Small Times, May 03, 2002.

[4] Small Tech Sensors: US Markets, Applications and Forecasts.

[5] See Part 1, note 15.

[6] Mark Shwartz, Scientists Develop Tiny Sensor that Detects the Smallest Traces of Poison Gases, Stanford Online Report.

[7] Tom Henderson, British Medical Sensor Company Gets FDA OK, Looks for Partners, Small Times.

[8] See the NanoBusiness Alliance.

[9] Matsushita Electric and Tenor Biosciences Sign Agreement to Commercialize Advanced Drug Discovery Technology, Business Wire, May 7, 2002.

[10] Jayne Fried, Invest in the Picks and Shovels or in Those Who Mine Nano Gold?÷ Small Times, November 16, 2001.

[11] Jayne Fried, Invest in the Picks and Shovels or in Those Who Mine Nano Gold?÷ Small Times, November 16, 2001.