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Oct. 8, 2003 – Taking a stake in a nanomaterials maker such as Five Star Technologies Inc. is a little outside the ordinary for venerable venture firm Morgenthaler Ventures.
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It’s not that Menlo Park, Calif.’s, Morgenthaler doesn’t invest in materials startups. It does. In fact, one of its general partners used to head up the materials lab at Bell Labs.
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Nor is Morgenthaler new to nanotech. It counts NanoOpto among its portfolio companies, and has investments in other varieties of small tech.
It’s just that when Morgenthaler invests in a materials company, the startup is usually already targeted toward a specific application and industry. Take portfolio company Paratek Microwave for example. The Columbia, Md., developer of electronically tunable components and antennas “chose to exploit a material for communications,” said Greg Blonder of Morgenthaler.
“It’s the application that makes the money rather than the material,” he said.
Five Star is expected to announce today that it received $4.5 million in its second institutional round of funding. Led by Morgenthaler, the round also includes the participation of Chevron Technology Ventures, Early Stage Partners, Industrial Technology Ventures and other unnamed investors.
So why would Morgenthaler lead an investment in Five Star, a Cleveland nanomaterials outfit seeking to supply widely disparate sectors? To be, in effect, in the materials business? According to Morgenthaler’s Blonder (who used to head up Bell Labs materials science research division), two things stood out about the company.
First, Five Star claims that its process is inherently scalable. “That’s the first thing we liked about it,” Blonder said.
Second, the company had already identified a number of markets for its nanomaterials. “These days with all the economic uncertainties, we’ve seen companies fail that had excellent opportunities but the cash ran out before the market appeared.”
There are about 100 companies worldwide providing nanomaterials, according to Thomas Abraham, vice president of research at Business Communications Company Inc. (BCC) , a Norwalk, Conn., research firm that tracks nanomaterials, among other sectors. He said Nanophase, Inframat, NEI and Altair have been among the industry leaders and that the major suppliers tend to be smaller companies.
Five Star is seeking to differentiate itself by focusing on complex oxides — that is, combinations of two, three, four or even more metal oxides in a compound. Such nanomaterials can be custom designed for specific applications. Abraham said that complex oxides represent a relatively small portion of the overall market, but a growing one.
With the recently raised funds, said Five Star president and chief executive Jim Mazzella, the company intends to develop applications in the areas of energy (catalysts), advanced polymers and pharmaceuticals and drug delivery. A core technology team will work with individual business development groups set up to serve each market. Although the company’s primary focus is on developing and selling advanced materials, it will also license the technology to a customer who requires that nanomaterial processing be integrated with other manufacturing infrastructure.
Five Star uses a process called hydrodynamic cavitation — ordinarily a destructive force that occurs naturally in fluid flow — to make nano and micro structured materials. In hydrodynamic cavitation, bubbles within a fluid implode, releasing energy that can amplify a chemical reaction occurring within a reaction chamber. The result, Mazzella said, are smaller and more uniform nanoparticles.
The world market for nanoparticulate materials reached $492.3 million in 2000, according to BCC, which forecasts a market worth $898.8 million in 2005. Abraham said those numbers have not been revised since their publication in 2001. Although he considers them conservative, he cautioned that the growth in nanostructured materials for electronic, magnetic and optoelectronic applications — responsible for $333 million in 2000 and forecast to be worth $667 million in 2005 — will be slower than anticipated due to the economic slowdown.
Nanomaterials have attracted a significant amount of venture interest this year. Catalyst developer Nanox Inc. of Quebec garnered $2.9 million in July. In June, Nanotechnologies Inc. of Austin, Texas, announced an equity investment from and joint development agreement with Air Products and Chemicals Inc. The previous month, Catalytic Solutions Inc. of Oxnard, Calif., closed on $32.4 million in funding, one of the largest nano-related financing rounds so far this year.
Mazzella said he anticipates that there will be another funding round in the future for Five Star, though he declined to speculate when. The company currently has a window open for participation from a few other firms with which it began speaking late in the fundraising process.