Casual investors will chase the next trend but the stalwart will stick with nano

03/01/2006

Being a numbers person, I’m always looking for meaning in data. The recent IBF Nanotech Investing Forum in California provided new information that begs some analysis.

Here’s the quandary: Venture capital funding for nanotechnology went from $196 million in 2004 to $434 million in 2005, according to analysis by David Forman, Small Times associate editor. Attendance at the investing forum was flat, if not lower than last year. The number of startups looking for cash was dismal.

Dollars up, interest down. If more dollars go into the technology (small tech hit $1 billion in venture investing in 2005), why would interest fall?

The first explanation would be that interest in nano investing isn’t falling, but interest in this specific conference decreased due to factors unrelated to investing drive - poor speakers, disorganization, etc. That would be understandable, but everyone I spoke to thought the conference had been a stellar event in past years. Palm Springs, golf, sunshine, great networking, solid programming - what isn’t there to like?

So, if it wasn’t the conference itself, then we are led down a path many of us would rather not go. Did interest in nanotechnology venture investing already hit its peak? Or is this just an evolutionary trend in which we move from broad technology to specific market applications? Or is this conference just a fluke?

Nano isn’t for the faint-hearted. First, no one can agree on what it is. Is Intel nano or not? What makes a property novel? Second, it is complex. It’s hard enough to understand how things act, react, move and behave in the normal world, let alone try to create products in a realm where those laws no longer apply.

Did I mention that conclusive toxicology studies aren’t available? Who cares if there are thousands of products on the market that are toxic (for example batteries and cleaning supplies) if nano gets a bad public rap like genetically modified foods?

We haven’t talked returns yet. Venture capitalists like big exits. Too bad they are few and far between for nano companies to date and the future prospects are not that hot. On the IPO panel I sat on at the conference, the highest expert projection was four nano IPOs this year. I think we will have to stretch our definition of what is classified as a nano company to get that count.

Time to market doesn’t work in nano’s favor when it comes to venture capital. It takes lots of capital and a commitment to many rounds of financing. Five to seven years is average for most nano companies - with the exception of clinical trial products, which may come to market in our children’s lifetimes. It is a long, long road when Food and Drug Administration approval is thrown in the mix.

We didn’t even tackle the question that gets many people rabid: Is there really a nano market? Or is nano just a platform technology that has no meaning without a vertical industry application. If you are a tool company, you may not care what vertical you are selling into, but only that your prospect is doing nanoscale research or manufacturing that requires processes and equipment unique to the technology. Some venture capitalists say there isn’t enough upside potential in tool companies to make it worth an investment, though.

While I’ve spent most of my column discussing why venture capital isn’t a great fit for nanotechnology, this isn’t a recent conclusion. Our tracking of the space over the years has shown that a very small percentage of companies are venture-backed. This is an area where early hype drove a lot of curiosity and interest. But the players with expertise and risk tolerance have stayed, thus the series of large follow-on rounds in 2005. Many of the interested, but not invested, will move on to the next fad. Can anyone say clean tech?

I wish nano was continuing to be a hot investment trend, but it isn’t surprising that the bloom is fading. Deep vertical venture capitalists will invest in the technology when it makes sense for the industry. Corporate players will invest, acquire and partner with the companies that will best further their long-term goals. And government will continue to feed the valley of death funding for at least the short term.

I’m trying to be realistic about the “bubble” that always seems 18 to 24 months out. Nanotechnology is here to stay. Venture dollars flowing to the space will continue to grow. There are endless applications and opportunities for nanotechnology to improve and revolutionize our lives. However, the growth in “nano” investing as a specialty is reaching its peak. Those who can stomach the ride will remain.

Patti Glaza is vice president and publisher at Small Times. She can be reached at [email protected].