July 26, 2002 — Corporate America, for all its scandals and schemes of late, still funds a good chunk of technology as it transitions from research to market.
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That also applies to the funding of nanotechnology, said Joe Lichtenhan, president and founder of Hybrid Plastics Inc., a Southern California nanomaterials company.
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The public “may not have a realistic picture as to who funds what and when” Lichtenhan said. The skewed perspective “is likely due to the anomaly of the dot-com era, which was nearly all equity funded via VCs.”
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Lichtenhan brought up the issue recently during theNano Republic Conference in Los Angeles. He quoted testimony that Lewis Branscomb, professor emeritus in Public Policy and Corporate Management at Harvard University’s John F. Kennedy School of Government, made recently to a U.S. Senate committee.
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Of the money that goes toward transition from research to market, Branscomb said, 34 percent comes from corporations, 29 percent from the federal government, 25 percent from angel investors, 5 percent from state and local governments, 4 percent from venture capital firms and 3 percent from university endowments.
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“If you just look at the dollars, clearly the federal government is the number-one investor in nanotech due to the National Nanotechnology Initiative,” Lichtenhan said later. “Corporate America is solidly number two as nearly every major corporation is either trying to adopt or has adopted nano into products.”
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Venture capitalists, he said, “seem to be exclusively funding narrow applications for nano rather than investing in companies that have a broad ‘nano’ domain expertise and who are providing nanomaterials.”
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Testifying last April before the U.S. Senate Committee on Commerce, Science and Transportation, Branscomb said “the primary sources of funding for early stage technology development are not venture capital firms, as many people believe. Nor are they state governments or universities.”
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Branscomb also said that “only a small number of VC firms are experienced at evaluating technology-based projects in early stages of development. A richer source of that talent is found among individual private equity investors, commonly known as angel investors.”
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Branscomb added that “in many cases, though not the majority, they (VCs) support firms that are bringing radical new technologies to market. However, even when venture capitalists do support technology-based enterprises, they prefer to support ones that have at least proceeded beyond the product development stage.”
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Branscomb and co-author Philip Auerswald are in the midst of publishing these findings in several places, including a book on entrepreneurship and a report to the U.S. Department of Energy. Auerswald, a postdoctoral fellow at Harvard’s Belfer Center for Science and International Affairs, and Branscomb have been working together on a study of early stage, technology-based innovation.
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Branscomb, in an e-mail to Small Times, said that because the data are not formally reported anywhere, the methodology used to reach the numbers are “rather crude.” Still, he added, “we are confident that the qualitative results are right: Angels, corporate early-stage venture and government are the large sources (of funding); VCs, universities and state governments are small. However, the latter are important.
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“Without VC, the angel investments would have nowhere to go when they are ready for entry to markets,” Branscomb said. “Without universities the source of much radical innovation would be restricted, and without states, the encouragement of incubators, etc. would also be lessened.”
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Pete Conley, a nanotech analyst at The Analytiq Group, an Irvine, Calif.-based technology research firm, agreed that while VCs are learning about nanotech, overall they might be more talk than action at the moment.
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“VCs have a love-hate relationship with corporate investors — feeling at times their economic interests are conflicted,” Conley said. “Nanotechnology companies almost require a significant corporate partner.” That’s one challenge facing VCs.
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“The timeline for most nanotechnologies from the lab to the commercial marketplace is 10 to 15 years — roughly 50 to 100 percent longer than most VC partnerships,” he added.
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Then there’s the “square peg/round hole” syndrome. “Most VCs are trained to focus their portfolio companies on one opportunity,” Conley said. “Nanotechnology is nonintuitive in its applications, which often defy that practice and many times have multiple, tangentially related markets/opportunities.”
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But venture capitalists are a creative, adaptive and hardy group that thrives on challenges, said one VC.
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“After the wave of irrational exuberance” in the public markets, “people have gone back to a spirit of collaboration,” said David Cremin, a partner with Los Angeles-based Zone Ventures, an affiliate of Silicon Valley-based venture capital firm Draper Fisher Jurvetson. “Venture capitalists in the end are going to drive the market.”