By Matt Kelly
Small Times Correspondent

BOSTON, Dec. 3, 2001 — Venture capitalists have stern words for nanotechnology researchers itching to cash in on their small tech ideas: It’s all about the business.

That was the message from a series of venture capitalists at Nanotech Planet’s Fall 2001 Conference and Expo in Boston last week. While bullish on nanotech’s promise in general and confident that it will lure its share of investment dollars, the speakers also warned that the sector is a long way from practical success.

“The hard part is the business side,” said Todd Hixon, managing director of the DFJ New England fund. “There are some real challenges.”

Hixon and others say plenty of ideas and research demonstrate nanotechnology’s potential for intriguing products and functions. But concrete problems of sales, marketing and manufacturing still loom for researchers with entrepreneurial gleams in their eyes. Until those problems are solved, investors will be skittish of the sector because they can’t easily calculate the possible financial rewards.

Chief among nanotech’s hurdles is proving its raison d’etre. Investors want to see companies that aim to fulfill clear market needs better than existing products or services, since those companies can attract customers.

Kevin Lalande, an associate at Texas-based Austin Ventures, said the most attractive investments are startups that take products that people already use and make them better, stronger and faster.

“If the market is already understood, it becomes more of a process question,” he said.

In contrast, he and others said, an idea that falls more in the realm of basic science is probably best left to government or academic funding until a useful end result is determined. Otherwise, investors and entrepreneurs could devote too much effort to a nanotech idea and then find no feasible way to commercialize it.

“You’ve got to have someone selling the stuff. Without that, you’re financing a science project,” said Mel Melsheimer, president of the Harris & Harris Group.

One example of a good company cited several times was Nantero Inc., a company in Cambridge, Mass., that closed on $6 million in funding in October. Nantero is trying to develop computer memory using nanotubes that would physically move to represent the “on” and “off” positions in a circuit.

While Nantero does not yet have a prototype, it has patents and research that promise “NRAM” — which the company defines as “a high-density nonvolatile random access memory chip, using nanotechnology,” that will be exponentially faster than the DRAM technology used today. Businesses routinely spend tens of billions each year on computer memory.

Hixon stressed that nanotechnology must also be able to show a significant advantage over existing products, at least a threefold improvement.

“Whatever is promised, what will be delivered is a little bit less,” he said. “And meanwhile, everything else is getting better.”

Hixon also questioned how mass-manufacture of nanotech products could be done cost-effectively. Self-assembling products might be a logical approach, Hixon said, but the science is still in its infancy and the practical upshot might be nanotech products skewed more to the biochemical rather than the mechanical. “Nature figured out how to mass-produce nanosized structures a billion years ago.”

Valuations are another common problem for nanotech entrepreneurs and venture capitalists. With few existing measures of how valuable a nanotech product could be, investors look to other yardsticks to estimate value, such as how much money a startup needs to function.

Hixon frankly admitted he wants to keep valuations “as low as possible … a lot of these deals are about sharing the pain point” to keep a project going as cheaply as possible.

Debra Peattie of RCT Bioventures agreed: “The economic value of what you might get at the other end is quite hard to determine.”

Peattie, who looks for “embryonic” ideas still in the lab phase, said she sometimes will try to structure an investment deal as a series of milestone payments to ensure that a startup develops and follows a solid business plan. Total investment in a deal like that would be top out at around $2 million, she said.

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