In the emerging, revolutionary field of nanotechnology - science and engineering at the level of molecules - venture capitalists play a key role. When Congress approved a bill allotting $3.7 billion over four years to nanotechnology research, it designated most of the money for universities and government agencies, not companies.
A lot of nanotech companies are stuck in this situation where they may well have promising technology, but in order to develop it further, it's vital to have private equity, since it's expensive to do this research and does take a long time, Stephen Maebius, a partner in the Washington office of Foley & Lardner and leader of the firm's nanotechnology industry team, told UPI's nano World.
In the journal Nanotechnology Law & Business, experts list the top 10 venture firms most active in nanotechnology.
The top firms are those that others watch closely, said Ruben Serrato of Canon USA's research and development group, and managing editor of NL&B.
They offer a combination of scientific expertise, industry contacts, and a history of nanotech deal success, Serrato told Nano World. Because they are closely watched, their due-diligence findings are the key to whether a company gets funded.
Their commitment to nanotech makes them lead investors on deals, even when other firms invest more money. This is somewhat unique to nanotech, because of the highly specialized nature of the investments.
The top nanotech venture capital firms look at large numbers of deals and are committed to small-scale technologies, Serrato added. This criterion for developing the list is key, since many VCs invest in specific markets and may fund nanotech startups without recognizing the value of nanotech in and of itself.
For example, he said, a life sciences fund might invest in a nanotech company making a new diagnostic, but not be focused on the broader value of the underlying enabling technology.
We tried to exclude these kinds of VCs and that is why 'total amount invested' is not the criteria we use, he said.
Serrato explained that by focusing generally on small-scale technologies and not exclusively on individual markets, the nanotech companies his firm profiles are acquiring competencies in core technologies, such as carbon nanotubes, that will be building blocks for many different industries in the future. The fundamental knowledge they are acquiring now will provide them with a real competitive advantage over other VCs in the future.
In alphabetical order, the leading nanotech VCs are:
- ARCH Venture Partners. Serrato noted they had early high-profile investments such as Nanosys and have a large technology competence to draw from in life sciences and semiconductors.
They also possess deep technical knowledge and are active in industry conferences and trade groups, he added.
ARCH has clearly been a leader in nanotech investments, Maebius said, such as Cambrios, the spinout from MIT with Angela Belcher, who recently won a MacArthur Foundation genius grant for her pioneering research in organic methods to develop electronics and other nanotechnologies.
Nanophase was one of their first ones as well, he said, adding that Nanophase Technologies, of Romeoville, Ill., is one of the only nanotech companies to have completed an initial public offering.
- Ardesta, which publishes the nanotechnology and microtechnology industry bible Small Times and created or invested in 15 companies. One is Konarka Technologies in Lowell, Mass., which is developing lightweight, flexible solar power panels with research contracts from the U.S. military and the California Energy Commission.
They also very active in many of the industry events, Maebius said.
- Draper Fisher Jurvetson, which can boast triumphs such as Hotmail and has roughly $3 billion in capital commitments and offices in the major technology centers around the world. DFJ has invested $73.6 million in nanotechnology so far and has another $3.2 million in process to close before the end of the year. Steve Jurvetson is co-chair of the NanoBusiness Alliance.
DFJ is arguably the highest-profile nanotech firm, Serrato said, with highly visible nanotech investments such as SiWave.
- Harris & Harris Group. A leader both in terms of total investments and number of investments, Serrato noted. Active leaders in nanotech industry conferences, organizations and exhibited expertise in commercialization challenges. Harris & Harris is also worth watching because they are publicly traded, so it is possible to actively track public market interest in their progress and this in nanotech.
Harris & Harris was also one of the first investors in Nanophase.
- Lux Capital, one of the first investor advocates for nanotechnology. The company has made only five investments in nanotech so far, including Nanosys and NanoMateria, but their publications and pure focus on nanotech makes them a firm to watch, Serrato said. Their growth would mark a real focus by investors on nanotech since that is all they focus on.
- Morgenthaler Ventures, a large firm whose sheer size and strong general technology focus has resulted in a growing nanotechnology investment portfolio, including life sciences and optics, Serrato said.
- Nanotech Partners, the investment arm of Mitsubishi. Serrato considers the firm important, both because of its core technology focus on carbon nanotubes, but also because it represents the growing importance of global investments in nanotechnology.
- NGEN Partners, which arguably has the strongest scientific credibility of any venture capital firm focused on nanotech, Serrato said.
The NGEN model brings together an outstanding group of limited partners. Scientific advisers conduct due diligence and LPs assess commercial viability. NGEN possesses significant deal flow and lead roles on numerous deals, he said.
- Polaris Ventures, whose life-science portfolio is strong, with a commitment to support industry conferences, Serrato said. The firm has more than $2 billion under management and current investments in more than 60 companies.
- Sevin Rosen Funds, which has general interest in high technology and is very active on new nano companies, particularly optical components, Serrato said. SRF consistently has made early stage investments in pioneering technologies and also is active in supporting industry conferences.
Serrato noted many of the largest conventional venture firms also could be included on the list, including Sequoia Capital and Kleiner Perkins.
However, it is still unclear whether they have an ancillary interest in nanotech or whether they consider it a core strategic focus, he said. Interestingly, pure financial investors, which have traditionally been leaders, are now forced to play a follower role in nanotech investing, because of the complexity of the underlying science and a lack of experience in this industry.
Over time, he added, the firms will need to gain such expertise or partner with firms that have it.
It's not always the big names in venture capital that end up funding some of the more prominent nanotech companies, Maebius noted. There are opportunities for other venture-capital firms to get into this area.
He mentioned the Lurie Investment Fund and Galway Partners as two firms that have invested in NanoInk, a startup based on the revolutionary dip-pen-lithography technology from Northwestern University that can print nanoarrays from virtually any ink onto practically any surface.
Serrato and Maebius said key strategies that typify firms investing in nanotechnology include a strong understanding of competing technologies that exist today or in research pipelines, recognizing groundbreaking science, and appreciating the importance of intellectual property.
Also, such firms look for solid management in companies when talking about successive rounds of investment, as opposed to seed stages, Maebius said. Then, in looking at how far out products are, these firms also look for opportunities for near-term commercialization.
NanoInk has immediate revenues based on selling research tool products to the industry. In addition, they have farther-off potential for developing useful applications based on their technologies.
Venture firms appear to have grown more cautious in their nanotech investments. For example, Lux Research, in its recent Nanotech Report 2004, predicted $200 million in venture capital investment in 2004, down from $325 million in 2003 and $386 million in 2002.
I think that's very good for nanotechnology, Serrato said, because the way I see it, nanotech is a building-block technology, and it's important that it has not only committed capital, but sustained capital.
He said the biggest risk is a bubble like that with the Internet, where a lot of tech was developed, and when the bubble burst, a lot of companies were hung out to dry by unrealistic expectations. Because of the Internet boom and bust, the venture-capital and business community in general are more cautious about which nanotech they invest in.
This situation leads to two tendencies, Serrato explained. One, it concentrates capital on the strongest companies, and (two), it sets more realistic expectations. Not every company will go IPO in the next three years - it might take five or 10 to succeed.
This means more of a sustained, long-term commitment to developing the technology. That's better than a big investment boom today, and then all of a sudden, five years from now, when they're more mature, it goes bust because it's not funded.
When it comes to nanotech companies looking to choose from several venture firms, Maebius said, I think entrepreneurs really need to think about what sort of business models the venture capital firms are proposing, and what the vision of this venture capital firm has for developing their technology.
Do they, for instance, have connections to other collaborators that may be good fits for this particular technology?
Serrato said the current leaders in the field are largely self-evident, because there have been only a few marquee deals and nanotech remains a small industry with well-known players.
Over time, as nanotechnology continues to grow, he said, it will become harder to track the many firms involved and increasingly important to differentiate between the relative strengths of firms in subcategories such as nanobio vs., say, nanolithography.
In the end, Serrato said, not only will venture capital alter nanotech, but nanotech will alter venture capital.
VCs now active in nanotech will possess distinct competitive advantage in the future, he said. The patents, standards and research priorities being established today will be the foundation for many of tomorrow's industries.
VCs not currently active in nanotech will experience a relative weakening, because they will lack either real or perceived capabilities in the basic technologies at the heart of new markets.
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