ANATOMY OF A SMALL TECH STARTUP:
LAB TO ‘SUPER STEALTH’ TO PRODUCT

By Jack Mason
Small Times Correspondent

SOMERSET, N.J., March 4, 2002 — Creating a company is a little like making a baby: you need the right people in the right place at the right time, with the seed of scientific innovation and some fortuitous chemistry.

The creation of NanoOpto Corp., a fledgling firm building optical components based on nano imprint lithography (NIL) developed during two decades of research at the University of Minnesota and Princeton University, illustrates how every startup has a unique character and incubation.

NanoOpto’s genesis traces to January 2000, when Professor Stephen Chou, director of Princeton’s Nanostructures Laboratory, got a knock on his door from

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NanoOpto built and equipped its Somerset, N.J.,
fabrication facilities in only four months, acquiring
everything from lab suits to million-dollar fab
machines at auctions for pennies on the dollar.
Howard Lee, a veteran of Sun Microsystems Inc., Apple Computer Inc. and several tech startups.

Chou had long dreamed of building a company around his technology and had already been in touch with venture capital firms. He had also met Ed Zschau, a former U.S. congressman from California and management professor at Harvard and Stanford who was a visiting faculty member at Princeton.

Lee had run Apple’s Macintosh Division and developed microprocessors as vice president of engineering at Sun. Lee was quickly impressed with Chou and his patented process for producing nanostructures with imprint lithography, essentially a very sophisticated way to stamp out a matrix of nano pillars using a mold of plastic.

“Steve and I shared the vision of creating the Applied Materials of nanotech,” says Lee. “This is a real platform technology that could revolutionize many different industries.”

Indeed, while the technology had a wide range of potential applications, Chou and Lee knew they had to focus it on a target market. Venture capitalists would also expect to see a working prototype or proof-of-concept product in a market with clear demand.

“I asked Steve to build something, anything,” recalls Lee. Both agreed that an optical component offered the fastest time-to-market potential. “Six weeks later he came back with a polarizer,” a device in optical networks that controls a beam of laser lights.

One of those VC firms Chou had originally contacted was Morgenthaler Ventures. Senior partner Gary Shaffer introduced Chou to Greg Blonder, a partner based in Princeton. With undergraduate and doctoral degrees in physics, Blonder was also able to quickly assess the technology and its commercial prospects.

On the positive side, Blonder learned that Chou had been “commercially thoughtful” in developing and patenting his technology. Blonder also believed the technology could quickly be applied to build optical components that would generate revenue in the five-year horizon VCs typically have for a return on an investment.

Of course, there were negatives and risks. None of the founders intended to be involved in the company full-time or long-term. Investing in a startup without permanent management in place goes against one of the cardinal rules of venture capital, but Blonder notes that NanoOpto warranted the exception.

With the company officially incorporated in June 2000, Lee says, the next few months were spent working out an agreement with Princeton and financing with Morgenthaler and other investors, including Bessemer Venture Partners, U.S. Trust and New Enterprise Associates.

Blonder and Lee agree that the technology’s broad potential made it challenging to put a price tag on the investment. Should it be valued as a technology for building optical components or for its broader, though more vague, potential as a platform technology?

Ultimately both sides recognized that it was impractical to try to frame the deal beyond the optical component “slice.” Also, with the economy continuing to weaken, especially in the telecom sector, all parties recognized that the environment for a startup wasn’t getting any friendlier.

By the start of 2001, NanoOpto had initial funds in place and was operating in what Lee describes as “super stealth” mode — in the early days it was Lee and two assistants in a temporary executive suite. He laughs when recounting the bewildered response he got when he went to deposit a $12 million check at a local bank branch in February 2001.

Lee found that New Jersey doesn’t have the same well-established startup support infrastructure he was accustomed to in Silicon Valley. “Everywhere I went, I had to bring our bank statement and a personal credit card,” he says about shopping around for office furniture, computers and supplies.

Meanwhile, Lee and Chou were beginning to look for senior management and found a buyer’s market in talent, receiving more than 7,500 resumes and considering nearly 1,600 of them for 33 positions.

They were also busy hunting for company headquarters, eventually selecting Somerset based on location — it was near where many of the telecom executives and engineers they wanted to recruit already lived.

The founders found their CEO in Barry Weinbaum, a 21-year Lucent Technologies Inc. veteran who joined the company in August. As a vice president in the company’s Optical Networking Group, Weinbaum understood the “value chain” of the network business, was a “systems and operations guy” and had experience starting up business units “under cover of the mother ship,” as he puts it.

What attracted Weinbaum to NanoOpto was that it had matured in such a short time and had a technology that was both exciting and ready for the real world. He points out that the company built and equipped its fabrication facilities in only four months, acquiring everything from lab suits to million-dollar fab machines at auctions for pennies on the dollar.

“Today you have to be compelling, and you’ve got to be real,” says Weinbaum. “Nobody has time for hype or fa├žade.”

With NanoOpto’s closing of $16 million funding in December, today’s product announcements and plans to be producing in volume by June, Weinbaum knows the clock is ticking.

But what intrigues Hubert Kostal, the company’s new vice president of marketing and sales, is that if NanoOpto succeeds, it could “represent the fabric that the next communications network will be based on in three to five years.”

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