Go long, say investors; Nano needs
help beyond the line of scrimmage

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BETHESDA, Md., Oct. 16, 2002 — Venture capitalists are increasingly interested in nanotechnology, but some experts are concerned about the degree to which investors will pour money into nano startups after the initial seed stage of funding.

Seed investors, said Alex Wong of Apax Partners in California., pump money into a company to the point where the “three guys in a garage” have their first prototype of a product. The next-level investors, he said, are much more interested in manufacturing and marketing.

Wong and others discussed the venture capital climate for nanotechnology at the recent 10th Foresight Conference on Molecular Nanotechnology.

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Wong said that second stage is tough across the board now because investors are much more focused on how far the product needs to travel from prototype to paying customers.

The problem is more pronounced with nanotechnology “because the timeframe is larger and the dollar amounts are greater,” he said in an interview after the conference. “Whereas a software company needs 10 or 20 million dollars to get to that level, for a nanotechnology company, because it’s a hardware company, it may be twice that number.”

Some investors, he said, are concluding that constant stewardship of nanotechnology startups is necessary. Instead of just injecting a dose of cash into a project and waiting for others to contribute, investors are deciding to stick with projects from the garage stage to profitability.

“In the past, there would be investors with seed money, then the next level of funding, then the full expansion,” he said. “Now you see a lot of companies looking for deep pockets early on, with investors who can support them through the lifecycle.”

Apax, for one, is taking this tack. The $12 billion firm invested in its first nanotechnology company, Nanomix Inc. in California, last month. Nanomix develops components for electronics, sensor applications and energy storage. Apax, together with the investment firm Sevin Rosen Funds, funneled $9 million into the company. “We’ll do our best to support the company through the next few stages,” Wong said.

The firm has decided to invest in a variety of nanotech startups, he said, in areas that could include tools to help build and visualize nanocrystals, nanoscience platforms that will serve as industry building blocks in the future, and specific products or materials that are enabled by nanotechnology.

“It’s too early to know where the winner will be, so we are going to make a handful of investments,” he said.

Charles Harris, chief executive of Harris & Harris Group in New York, a VC firm that specializes in small tech, said the trend is toward institutional investors taking over deals from start to finish. The evolving financial structure of technology deals could make it tough for startups that received seed money from smaller, boutique firms to get expansion investing, he said.

“Right now, it’s very hard to bring VCs to the table in any deal in which they were not already invested, because right now nobody wants to adopt anyone else’s children,” he said. “So you see a lot of deals being funded at the later stages by groups that are already around the table.”

The result, Harris said, is investors that don’t have deep enough pockets to pay startups’ costs year after year may disappear.

Noninstitutional seed investors and angels “played a valuable role, and I hate to see them get squeezed,” Harris said. “But I think that may be what happens.”

Jennifer Fonstad, managing director at the California investment firm Draper Fisher Jurvetson, said her $2 billion firm has an “acute interest” in nanotechnology. It now has about $16 million invested in eight different nanotechnology companies, said Fonstad, who is heavily involved in the company’s emerging technologies portfolio.

Like Wong, she asked: “Who’s going to fund that longer timeframe? I’m more concerned about the second round.”

Given the longer period between prototype and commercialization, Fonstad said, the characteristics venture capitalists normally look for, like customer revenue, may not be available.

Nanotech companies “may hit key technological milestones and identify key markets, but they may not necessarily have a completed product and a nice repertoire of customers” at the end of the seed stage, she said. “That problem may get exacerbated as they develop the company and the product and seek funding for it.”

And getting relatively big dollops of money early on is important to nanotechnology companies.

“You can work on software with a computer in your garage, but you’re not likely to be tinkering in your garage on a nanotechnology prototype for a memory device,” she said.


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