Is nanotechnology ready for prime time investment? The venture capital (VC) community mostly says no. Just a handful of dedicated investors attend nanotechnology conferences routinely, hoping to spot the most promising opportunities. The landscape is dominated by science projects, claim skeptics. They point to the tremendous amount of research yet to be done before anything useful can be extracted. They argue that many of nanotechnology's end products will be commodities, not the kind of business in which start-ups can succeed. If nanotechnology is so great, where are all the success stories? Such investors are misguided. Their view of the nanoworld is a function of their need to simplify its tremendous diversity and complexity combined with their normal practice of screening investments by elimination – a process that does not favor nanotechnology investments – and the relatively short investment time horizon mandated by their financing structure.
True, much nanotechnology is still too early for VCs. Most VC funds have a ten-year life span. The general partners must distribute the profits, if any, from the last of the investments in a fund to its outside investors within ten years of the start of that fund. It takes three to four years to screen and make the initial investments in the companies in which each fund will ultimately invest. Thus, if any deal has a projected exit in excess of five years or so, its attractiveness as an investment declines significantly, especially in the third and fourth years of the fund. And, as most battle-scarred entrepreneurs and investors will tell you, success always takes longer than anticipated. So VCs will gravitate toward even shorter time horizons.
Can VC investors successfully invest in nanotechnology? Absolutely. The impact of nanotechnology will be large and pervasive. The challenge, as always, will be to find investments that can deliver superior returns at acceptable risks within the timescale required by the VC fund structure. One must start by differentiating between nanoscienceand nanotechnology. Nanoscience involves basic researchat the nanoscale. At this atomic and molecular scale, certain phenomena exist that can yield new and useful properties at the macroscale. Examples include surface effects (e.g. changing the surface properties of a fabric by attaching nanoscale fibers to repel liquids) and molecular forces (e.g. to order and assemble nanoscale building blocks into device structures, such as next-generation nonvolatile memory), as well as thermal vibration, quantum effects, and others. Nanotechnology involves the commercializationof proven nanoscience into a useful product that can be marketed. Government agencies fund nanoscience research; VCs fund nanotechnology commercialization.
Nanotechnology is not, by any means, homogeneous. Sectors have major differences in application focus, customer needs, scientific maturity, and time to commercialization. The market characteristics and science of bulk nanocarbons used to make bowling balls chip- and crack-resistant are nothing like those of Motorola's nanotube-on-glass-based emissive displays for largescreen TVs, which are nothing like those of Nanospectra Biosciences' nanoshells for killing cancer cells when heated by external infrared light.
Fortunately, there are sectors that are ripe for investment, such as instruments. Advanced microscopes are the picks and shovels of the research community, but the research market alone is relatively small. If, however, they can be used in a production environment, the volume becomes interesting to investors.
Bulk nanomaterials may or may not be good investments today. The technology may be mature but the market characteristics are commoditylike. Nanoscale does not mean macro profits. For example, nanoclays are increasingly being used by automakers to make more lightweight, stiffer, and less brittle step assists or body moldings that don't warp. But, while the benefits are attractive, they are noncritical and unlikely to be proprietary to single vendor. Automakers will not pay much of a premium. Other bulk nanomaterial suppliers may be in a better position to capture more of the added value that their proprietary products or technologies create. Keep a close eye on Nano-Tex, inventor of the nanoscale fiber technology that makes fabrics spill-repellent.
Other exciting nanotech sectors have a good chance of producing revenues, profits, and attractive exits within the time frame of most VCs. Sensors, displays, and next-generation memories are all worth a serious look. Others will also have a big impact, but the gestation cycle is currently too long for VCs. Advances in nanotechnology may help us meet our energy needs via polymer-based photovoltaics, fuel cells, solid-state lighting, and nanotube fiber bundles for electricity transmission. The greatest impact of all is likely be in medicine, where nanotechnology will contribute to novel diagnostics, imaging, therapeutics, drug discovery, drug delivery, and medical devices.
Nanotechnology offers a continuum of commercialization opportunities that spans many applications over multiple timescales. Many of these are ready today, or will be soon. Smart investors would be wise to start placing bets.
[1] Norm Wu is a managing director of Alameda Capital, Pleasanton, California.