Private money fails to make the small world go ’round

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Dec. 12, 2002 — Nanotechnology may be the next big thing, but that doesn’t mean nanotech startups are getting funded.

Numbers are hard to come by, but one estimate says only 20 nanotech deals were done in the first half of 2002, and the pace has not quickened.

“The private capital hasn’t flowed in quite as aggressively” as expected, said Nathan Tinker, vice president of research at the NanoBusiness Alliance. Tinker said governments currently outstrip venture capitalists as nanotechnology investors.

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A variety of factors play into this seeming dearth of funding, among them:

  • Overall economic malaise;
  • Nano’s status as primarily science in many fields;
  • A paucity of executives and VCs who understand the science.

“Nano isn’t going to be an overnight success — it’ll be more a series of gradual successes,” said Steve Jurvetson of Draper Fisher Jurvetson. Jurvetson is one of the more bullish venture capitalists when it comes to small tech. DFJ has made 14 investments in companies developing nanotechnology, MEMS and microscale technology in 2001 and 2002, and continues to do one to two deals in the space per month. But even he says that it’s too early to tell whether nanotech will spawn crops of startups, or be largely defined by how current corporations apply it.

“It may very well be that one day we don’t use ‘nano’ to describe companies,” Jurvetson said.

Until commercial models and exit strategies become clearer, most VCs will tread cautiously. Charles Janac, chief executive of Nanomix Inc., said his review of VentureOne’s data shows that 19 nanotech investments were made in the first half of 2002, and he expects that pace slowed in the second half. VentureOne’s official statistics go through the first quarter of 2002, when five investments were made. Nanomix, formerly Covalent Technologies, got a $9 million second round in September.

Part of the issue for nanotech companies stems from the drop in overall venture investing, which is now back to 1996-97 levels. Nanotechnology presents special obstacles for investors, because of the intellectual property involved and the limited number of people who understand the science and can picture how to commercialize it.

“It’s a difficult field to understand. You have no herd mentality here, unlike in 802.11 (Wi-Fi wireless technology),” said David Aslin of 3I, the giant British private equity firm, speaking at the recent Global NanoSIG conference. 3I has made several investments in small tech firms in Europe, and is actively looking at deals in the United States.

The need to understand the science, and the potential need to see five to seven years go by before an investment generates a return, means many VCs will stay out of this early phase of nanotech investing, predicts Patrick Ennis of ARCH Venture Partners. ARCH funded Nanophase Technologies Corp. in the 1980s, and now is invested in Nanosys Inc.

“I wouldn’t expect to see an accelerating number of companies being funded every year,” Ennis said. He said he thinks that as few as 20 to 40 startups may be all the nanotech market will need in this stage of its development.

Does nanotech need a company that helps define the commercial potential of the field and has a splashy initial public offering? While it would obviously open doors in the capital markets, most VCs think nanotechnology has such broad and varied applications that it will succeed even without a pivotal IPO.

“With nano, you’ve got such a broad range of stuff to apply it to, it’s hard to say where there are going to be clear winners,” said Tinker of the NanoBusiness Alliance. He said nanotech may not produce a killer app.

Most counsel patience. They note that a number of companies are generating revenue from various sorts of small tech, most of them under the radar. That pattern may continue for some time.

“Venture investors want to find the next great thing. People want nano to hurry up and grow up. That’s the wrong perspective,” said Daniel Leff of Sevin Rosen Funds, which co-led Nanomix’s second round. Sevin Rosen thinks that two areas, nanomaterials and nanoinstruments, are already overfunded. But it thinks nano-optics and nanoelectronics have good potential.

The question for everyone is, when? “We continue to see very novel and exciting science,” most of which is not ready for commercial application, Leff said.


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