By David Forman
Feb. 1, 2005 — Two river routes lead to Wall Street in lower Manhattan. Sailing down the Hudson provides a wide, smooth ride, not to mention breathtaking views of the wooded cliffs of New Jersey — in short, a classy way to sail downtown.
The East River, by contrast, is a narrow, bumpy ride. The water is dark and oily from barge traffic. The stretch past LaGuardia airport is deafeningly noisy. And the currents are so dangerously tricky in one narrow spot that it’s officially known as Hell’s Gate.
Nanotechnology startups are likely to try both routes this year in their quest to land an IPO. Some will look for a classy ride with a large, established bank — think Nanosys’ aborted IPO, led by Merrill Lynch in 2004. Others will ply the somewhat less romantic route aboard a boutique bank willing to underwrite a more modest sum.
Retrenching for ’05
The nanotech business community appears to be gearing up for another run at the Street. For starters, experts continue to see nanotechnology’s potential for game-changing innovation and locate some of that innovation in the nanotech startup community. The World Economic Forum’s list of technology pioneers, unveiled in December, was replete with nanotech — Konarka Technologies, Polyfuel, Arryx, Molecular Imprints, Nanofilm, Quantum Dot and ZettaCore — that is, nearly 25 percent of the 29 companies selected as pioneers.
Investment banks have quietly continued to build up nanotechnology practices. Small investment banks have been bringing on nanotechnology analysts while big firms are continuing to initiate research. The latest is Citigroup Smith Barney’s London semiconductor equity research group, which put out a nanotech report in December.
Meanwhile, startups are retrenching. Nanosys recently completed a new building for manufacturing at its Palo Alto, Calif. headquarters, putting to rest speculation over whether the company intended to manufacture its own product or only license intellectual property to others.
Other startups have begun positioning themselves for a higher profile. For example, Austin, Texas-based Molecular Imprints has begun issuing regular news announcements, recently sold a tool to Hewlett-Packard and opened offices in Germany and Japan. In December, the firm hired a new executive vice president and chief financial officer, David Gino, who was involved in leading two previous companies through IPOs.
Late 2004 had its moments, even if they were modest. MicroEmissive Displays Group, a Scottish developer of polymer organic light emitting diode based microdisplays, floated 17.1 million shares on Nov. 30 under the symbol MED. The offering occurred on the Alternative Investment Market of the London Stock Exchange.
Reading the VC tea leaves
At first glance, private nanotechnology funding appears to be contracting. But that’s not necessarily the case. By the end of the third quarter, only $122.1 million had been invested in the field in the U.S., according to a Small Times analysis of the MoneyTree Survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association. That puts funding on track to be well below $200 million for the year, a far cry from the $301 million invested in 2003.
While the dollar amount has come down significantly, there has actually been a dramatic uptick in deal volume. By the end of the third quarter, investors had already invested in 30 nano companies, on pace to significantly outstrip the total of 34 funded during the entire year of 2003.
Beneath those numbers are essentially two generations of startups. The more mature of the companies founded in 2001 and 2002 raised fat rounds in late 2003 in anticipation of a possible exit window in 2004 or 2005. Consequently, they had no need to raise venture dollars last year.
At the same time, a new generation of nanotechnology companies turned to venture backers in 2004. That new crop sought earlier stage funding, which accounts for more deals but smaller rounds. The two trends led to more funding activity, but fewer dollars invested.
Nanotech’s leading entrepreneurs know the adage that luck comes when preparation meets opportunity. So expect that they’ll ply both routes to the public markets in 2005, plumbing the depths and gauging the currents all the way. But as 2004 showed, even if the approach is smooth sailing, there’s still no saying which way the winds will blow on Wall Street when they get there.
For nanotechnology, the percent of funding events classified as expansion stage or later stage steadily increased from 2001 to 2003. In 2004, however, the trend seemed to stall out as more rounds were classified as early stage.
Sources: Small Times and PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association MoneyTree Survey. Research by David Forman.