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Oct. 28, 2005 – Nanotechnology faces many obstacles dampening its market viability — namely funding constraints precipitated by Wall Street’s wariness of technology. The vast majority of nanotech companies worldwide are small startups or university-led initiatives. Only 10 percent of these companies have ever attracted venture capital, according to our research, and just 10 percent of those have received more than one round of financing.
This trend won’t last. Nanotechnology companies are actively courting potential institutional and venture capital investors. Simultaneously, investors and company stockholders have contacted leading tech companies to ask about future cutting-edge nanotech applications. The level of interest seems to effectively feed on itself.
Industry money is finally approaching the level of government funding (totaled approximately $8 billion combined in 2004) for nanotech research & development. Corporate spending rose to $3.8 billion in 2004, spearheaded by companies including IBM, Hewlett-Packard, Motorola and GE.
And in 2005, a handful of emerging nanotech companies has obtained collectively more than $100 million in late-stage funding deals. The prospect of industry IPOs has the added effect of drawing additional funding to early-stage nanotech companies. Once one of the nanotech companies successfully goes public, others will likely follow.
We expect that the next IPO window will present itself within the next 12 months as the pendulum between lab discoveries and commercialization shifts towards the latter. This forecast, of course, is predicated on the assumption of an overall healthy economy and capital market environment.
The most likely entry will demonstrate strong management, good technology, sound intellectual property and visibility of revenue and profitability. The best candidates could also have strategic relationships in place and be visible to the relevant end use sector instead of simply relying on a “nano” label. To further outline the potential winning characteristics of next-stage nanotechnology participants, consider the importance of commercially viable products, intellectual property and parent companies.
Commercially viable products
During the Internet boom, many companies with adequate business plans could go public. But in 2001, disenchantment set in — the dot.com bubble altered market sentiment as investors became less aggressive and more wary about early technology stocks.
As a result, today most institutional and venture capital investors demand commercially viable products — for nanotech, that means companies with near-term opportunities (that is, a 3- to 5-year roadmap to major commercialization of a company’s products).
To date, most nanotech companies have produced very little commercial revenue, but change is afoot. Real products based on nanotechnology are entering the market, including microscopes, anti-coat wound dressings and drug delivery products, as well as catalysts for the chemical, pharmaceutical and water treatment industries.
Some nanotech-focused companies may form and leverage a partnership or alliance with an established firm during the early stages of bringing a new product to market. Whether it is a major distributor, a potential user/integrator of the technology, or simply a large corporate investor, such partnering tends to provide validation of company technology and potentially expedites the commercialization process.
Intellectual Property
Nanotechnology is likely to yield numerous “killer applications”. Hence, a broad IP-focused company could theoretically capture some of the value created by the market-moving nanotechnology applications and products of the future.
That said, IP is worth nothing unless it is successfully brought to market. As such, we believe there will be a premium on manufacturing know-how, at least during the early years. In addition, unlike the dot.com era, we believe the markets will demand profitable nano-production.
Parent Companies
Still other VCs and institutional investors are banking on a “safe bet” — the nanotech operations that function as subsidiaries of large, otherwise profitable companies. In this situation, investors still are left to wonder how and when the parent company intends to “unlock” the value created by the nanotech-enabled division, as the parent company may not get credit in its valuation for the nano division’s milestones until the markets can value the business on a stand-alone basis.
Since nanotech is still in its infancy, investors should consider a basket approach to purchases. Investors willing to do their homework could reap the nano rewards over the coming decade.