Global Trend

Nanotech Venture Capital Boom on the Horizon

At the end of last year, the U.S. government committed $3.7 billion in funding to a technology that few people had even heard of a few years ago. Big corporations are investing $3 billion in it this year. And venture capital firms have poured $1 billion into small startups that focus on it over the past five years.

Nanotechnology ? the science of manipulating molecules and atoms ? is the hottest technology to come along since the Internet. Like the Net, it offers the staggering potential to change millions of people’s lives and transform countless industries. And, like the Net, it is the subject of overblown hyperbole and investor speculation. Will the reality match the hype? Will nanotech bring mega-profits ? or will those profits, like nanotech itself, be too small for most people to see?

Let’s begin with a look at the potential of the technology. Nanotechnology focuses on matter that is smaller than 100 nanometers. A nanometer is one-billionth of a meter. To understand how small that is, consider this: If you put 80,000 nanometers side by side, you would have the width of one human hair. At this size, it’s possible to work with atoms and molecules to create tiny computers, security sensors, health-care treatments, ultrathin TVs, super-strong materials, and thousands of other innovative new products.

As the National Science Foundation raves on its Web site: “Imagine a medical device that travels through the human body to seek out and destroy small clusters of cancerous cells before they can spread. Or a box no larger than a sugar cube that contains the entire contents of the Library of Congress. Or materials much lighter than steel that possess 10 times as much strength.”

The foundation predicts that nanotechnology will revolutionize industries like manufacturing, electronics, drugs, aerospace, and many more. It projects the total value of the nanotech market at $1 trillion by 2015.

Because of predictions like that one, venture capitalists and individual investors have started to pump millions of dollars into nanotech firms, hoping to get in at the beginning of the boom.

But not everyone sees nanotech as a way to get rich. In fact, the frenzy for nanotech stocks resembles the mania for Internet IPOs a few years ago. Recently, such publications as the Wall Street Journal, USA Today, Investor’s Business Daily, the Boston Globe, and the Washington Post have declared that nanotech has all the signs of a stock market bubble that could wipe out investors who buy stocks in the new industry.

However, it’s worth noting one crucial difference. Unlike the e-commerce companies that went public without a product or a plan to make profits, many of the key players in nanotech are established, profitable corporations that are using nanotech to boost their existing product lines.

In fact, several products that are based on nanotech are already on the market, but few consumers realize it. They’re just traditional products that have been improved incrementally with nanotech modifications. Consider the stain-resistant khakis sold by Levi’s and The Gap. Microscopic nanofibers form a shield over the cotton fabric that would normally absorb a spilled soft drink. Nanotech components are also featured in IBM hard drives, General Motors SUVs, L’Oreal cosmetics, and Kodak digital cameras.

Nanotech is making it possible for companies like Intel to extend Moore’s Law past its natural limits to the next generation of chips. Because chips can’t get much smaller without losing some of their effectiveness, Intel, IBM, Motorola, and Hewlett-Packard are working at the molecular level on new chips. Intel’s Pentium 4 processors consist of 125 million transistors, each of which is just 50 nanometers wide.

What this means is that the established companies aren’t being blindsided like they were by the Internet. In fact, “the world’s premier nanotech company” is not some small start-up firm you’ve never heard of, with a name you can’t pronounce. Instead, it’s General Motors, according to a Fortune magazine article by Nicholas Varchaver. GM creates nanocomposites by making changes to clay at the molecular level. This causes the clay to bind to oil. The company will use 330 tons of the nanocomposites for the trim of its Impalas this year, and gradually extend it to the interior of the car and to the exterior panels.

General Electric is another traditional company that is racing to the forefront of the nanotech revolution. GE’s CEO, Jeff Immelt calls nanotech one of the “big trends we’re investing in for the future.” GE has assigned 50 scientists and engineers to work full-time on researching and developing new opportunities in nanotech. Recently the company introduced a new plastic that uses nanofillers to create a better bond with paint.

“Most, if not all, of the real advances have come out of large corporate laboratories,” says Stan Williams, director of quantum science research at Hewlett-Packard. He adds that big companies can invest the resources and time needed to bring new technologies to market. As he sums it up, “The best way to kill a technology is to put it in a small company, because most small companies wind up going bankrupt.”

If you look at patents, big companies are leading the way. The most nanotech patents in 2003 went to IBM. Others in the top 10 include Micron Technology Inc., 3M, and Canon.

Big companies are pouring capital into nanotech R&D on a scale that small firms can’t match. Today, there are more than 700 companies which are investing a total of $3 billion on nanotech this year, according to the Lux Capital venture firm. Only a few of those 700 companies are startups with funding from venture capital firms.

It’s not that the VCs aren’t investing in nanotech. Since 1999, they have spent more than $1 billion on nanotech firms, according to a Lux Capital analysis. According to TheDeal.com, a Web site devoted to venture capital, 130 companies now include the word “nano” in their names. “There haven’t been so many private companies sharing a phrase in their names...since the ubiquitous ‘dot-com’ graced the end of so many startups in the late 1990s.”

Start-ups like Zettacore, a maker of molecular memory chips, are attracting venture capital from firms like Draper Fisher Jurvetson and from Kleiner Perkins Caufield & Byers. In January, Zettacore received $17.5 million in a second round of funding from those firms. They’ve singled out Zettacore because it has an experienced management team and it is concentrating on a single industry sector for its technology.

A few of the other notable startups that have been backed by VCs include:
? Nanosys, a developer of nanowires and nanomaterials, which raised $52.5 million.? Catalytic Solutions Inc., which raised more than $40 million.? Nanosphere, a maker of gene-testing devices, which raised $15 million.

In the U.S. alone, there are about 1,200 nanotech startups, according to the NanoBusiness Alliance.

Steve Jurvetson, of Draper Fisher Jurvetson, has invested $88 million for his clients in more than a dozen nanotech startups. Jurvetson likes to proclaim that nanotech is “the next industrial revolution,” and he envisions it transforming all types of manufacturing.

And Vinod Khosla of venture capital firm Kleiner Perkins Caufield & Byers says of nanotech, “I can’t think of a major problem it can’t solve.”

In TheDeal.com’s assessment, “The promise is compelling: Build almost any chemically stable structure from scratch on an atom-by-atom basis, and it will transform everything from industrial production and design to drug delivery and discovery, environmental cleanup and electronics design and production.”

“This is going to be an innovation imperative for the Fortune 500 companies,” asserts Sean Murdock of AtomWorks, a nano business advocacy group. “Folks are going to have to know how to play in a world in which

nanotechnology can have a very real impact on their competitiveness.”

Jurvetson believes that the issue of whether nanotech will achieve its potential is a matter of “when, not if.” That means the venture capitalists have to evaluate when they should invest, and in which subsectors.

Looking ahead, we offer the following four forecasts:

First, the most important nanotech breakthroughs are several years away. Investors will have to be patient. In the short term, companies will introduce basic nanotech tools and materials, such as chemical sensors. In the next stage, they will create more sophisticated devices, such as solar cells, or medical devices that can be implanted in human patients. In the long term, we’ll see the rollout of innovative products in industry sectors that do not exist today, such as nanomedicine, artificial chromosomes, or quantum computers used in small-molecule design.

Second, the nanotech revolution will be led by established corporations like Intel, GE, and GM. They have the resources, the experience, and the existing products and markets that allow them to capitalize on the breakthroughs they are developing. Among the other corporations that are investing hundreds of millions of dollars each on nanotech R&D are Agilent Technologies, DuPont IBM, and 3M, according to Lux Capital.4 Not only do these corporations have the ability to increase their budgets for nanotech without asking VCs for help, they also have another advantage: They can be the biggest customers for the technology they develop. For that reason, a company like Intel is likely to be a better investment than a startup. Intel’s $20 billion in revenues from nanochips accounts for two-thirds of its total revenues, and it is spending billions on new R&D on nanotechnology.

Third, the future is not as bright for many of the nanotech startup firms. With so many large corporations working on nanotech, it’s unlikely that a new company will carve out a dominant position in an industry while the giants are sleeping, as Amazon and eBay did in e-commerce. The startups that are most likely to succeed and pay off for venture capitalists are those that form joint ventures with big companies to focus on applying a patented technology to a specific market segment. For example, a startup called Air Products and Chemicals Inc. formed an alliance with DuPont to develop nanomaterials.

Fourth, venture capitalists are likely to continue to take chances on nanotech firms. Through IPOs and acquisitions, a few of the startups will provide substantial windfalls for their backers. The problem is that there are no sure winners, so the VCs will have to diversify. As Jurvetson explains, “The safest long-term prediction is that the most important nanotech developments will be the unforeseen opportunities, something that we could not predict today.” That means the wisest strategy for those that do invest in nanotech is to spread the money around several firms.

References List :
1. Fortune, May 17, 2004, "Is Nanotech Ready for Its Close-Up?" by Nicholas Varchaver. ⓒ Copyright 2004 by Time Warner, Inc. All rights reserved.2. ibid.3. For more information about venture capital investing in nanotechnology, visit the Small Times website at:www.smalltimes.org/document_display.cfm?document_id+7792&keyword=zettacore&summary=1&startsum=14. The Deal.com, May 3, 2004, "Too Much, Too Soon," by Joshua Jaffe. ⓒ Copyright 2004 by The Deal LLC. All rights reserved.