Patti Glaza
It’s been a crazy couple of months for conferences and events. Not surprisingly, the public markets and funding continue to be the main focus of conversation.
The debate about whether there is a real long-term public market for micro and nanotechnology companies has been going strong since Nanosys backed out of their planned IPO several years ago. Will people and institutions invest in a company because the technology is small scale in and of itself? Or will the focus be on the vertical industries they impact? Is Nucryst Pharmaceuticals really a nanotech company or a biotech company? While it is an interesting debate, there is a more fundamental question that should be addressed for companies considering the big jump. How well are public markets serving the small company? Not small as in “small tech” but small as in “not large”.
The key allure of the public markets for a budding, small company is access to capital and liquidity. Who wouldn’t want to go public over dealing with those blood-sucking venture capitalists? Just joking, and please folks, no letters to our new editor-in-chief, David Forman, on this one. VCs are like everyone else in the food chain: economics rule. They have to make above average returns for their investors, or they won’t be around for very long.
As I’ve said before in this column, there aren’t a lot of VCs that have the stomach to invest in technology companies that base their competitive advantage on atomic-scale science. So, the big panacea solution was to see if nano companies could emulate the biotech phenomenon and find investors in the public market that would buy into the dream and potential. The public embrace of nanotechnology has not happened yet, but what if it does? Are the public markets the right place to go for capital?
Yes, like many of the small company executives reading this article, I’ve had to manage cash flow to make the next payroll. There aren’t always many options. But when there are, a small company must fully understand the challenges it will face once public.
Let’s take the obvious one first. The pains of Sarbanes-Oxley have been beaten into all of our heads. And, there is hope that reform is on the horizon. Compliance in general, depending on your exchange, is not a trivial matter. But, leaving those costs (monetary and personnel) aside, what is another key issue that doesn’t seem to get as much attention?
Analyst coverage. Big companies get good coverage, and thus tend to get strong institutional investment. Institutional investment brings more stability and liquidity. Unfortunately, there aren’t many incentives for a banking analyst to cover the smaller company. Investment banking revenue isn’t significant enough. Close to 40 percent of Nasdaq companies, according to its Web site, have no analyst coverage. No coverage equals no visibility to institutional investors.
Of course you can buy analyst coverage these days. Either through firms selling their services directly, or now through the Nasdaq itself in a partnership with Reuters. Will sponsored research be any better than no coverage? Hard to say at this point, but it is worth watching. According to what I’ve heard through the grapevine, the dollars the Nasdaq will pay aren’t going to get the large firms interested. Whether the smaller analyst firms can get the attention of the institutional investors for the companies they cover will need to be proven.
Sagiv Shiv from Punk Ziegel made a good point (many, actually) during a presentation at the NSTI Nanotech 2006 show in May. Many of the business models being presented by nanotechnology companies today continue to appear unfocused to investors. Companies have too many market opportunities and potential applications for their technologies. Instead of focusing on breadth, these companies need to prove that they can commercialize their technology in a reasonable timeframe and be able to integrate into the supply chain of market segments that are growing. In addition, companies need to be aware of where they sit in the value-chain. Will they be a commodity materials supplier or a systems/component provider?
There are companies successfully straddling the nano/vertical market lines. NanoOpto is a good example. Nanotechnology is at the core of their applications, but they market themselves as an optical components company. While CEO Barry Weinbaum will tell you his company isn’t a nano company, it should be noted that the company hasn’t been opposed to funding from nano investors. Needless to say NanoOpto is on everyone’s watch list for what happens next – acquisition, IPO…
A lot of cool technology was discussed at NSTI. Universities are flush with nano cash. Put “nano” throughout your research grant proposal and we have been told your chances for funding go up significantly. Unfortunately, the capital inflow from venture capital/public markets isn’t where it needs to be. Until some of this imbalance is corrected, the large research funding going into nanotechnology from the government is likely to see a much lower return than should be expected.
Patti Glaza is vice president and publisher at Small Times. She can be reached at [email protected].
