Nano VC funding hits high in 2005

01/01/2006

By David Forman

Private nanotechnology funding in the United States climbed significantly in 2005. However, the increase is the result of a number of funding trends rather than a simple rush to nanotech.

By the third quarter of 2005 (the latest for which data was available), venture firms had invested $312.8 million in 39 deals, according to a Small Times analysis of the MoneyTree Survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association. That puts calendar year 2005 on pace to far exceed the $196.4 million investors put into 45 nanotechnology companies during 2004.

The figure also tops the $301 million record for nanotechnology funding that Small Times tracked in 2003. Anecdotal reports suggest the pace would continue through the end of the fourth quarter, which would result in a deal total topping last year’s count of 45.

However, beware predictions of a nano stampede. What we are seeing is a cyclical wave of larger rounds for expansion and later stage companies combined with smaller rounds for newly funded companies, set against an overall uptick in venture funding. Although a slew of high profile nanotech funding announcements took place in the first quarter, the bulk of the year’s activity occurred in the second. Investors closed on $140.6 million in 17 rounds in the second quarter, compared with $108.8 million in 12 rounds in the first.

In a pattern reminiscent of late 2003 and early 2004, first and second quarter nanotech funding shifted somewhat toward expansion and later stage funding as a small cadre of startups appeared to prepare for the possibility of an exit window in 2006. Funding in the third quarter fell off somewhat, with 10 rounds accounting for $63.4 million.

Venture capital funding in the category of small tech - which comprises nanotechnology, MEMS and microsystems - is also on track to exceed 2004’s performance. In the first three quarters of 2005, investors deployed $812.8 million in 91 funding rounds, putting the category on track for its highest activity levels since 2001.