Nanotech Lures Bankers, VCs With Promise of $1 Trillion Market
July 27 (Bloomberg) -- In a windowless lab tucked inside International Business Machines Corp.'s Almaden Research Center south of San Jose, California, a scanning tunneling microscope stretches almost to the ceiling, dwarfing Andreas Heinrich.
Amid the snaking wires and the cut AriZona iced tea can that insulates a protruding pipe, Heinrich is viewing a particle thousands of times tinier than the width of a human hair.
``This is about looking at the properties of a single atom,'' says Heinrich, wearing a T-shirt, jeans and slip-on shoes. ``We're starting with the smallest components and building upward.''
Heinrich is experimenting with ways to create semiconductors and data storage devices. Venture capitalists, lured by potential breakthroughs in electronics, medicine and textiles, are heading to the labs in search of inventions based on nanotechnology, the study and manipulation of particles smaller than 100 nanometers. A single nanometer is equal to one-billionth of a meter.
After decades of hype and false starts, the National Science Foundation forecasts that $1 trillion worth of nanotechnology- enabled products will be on the market by 2015. This year, corporations and governments will spend more than $11 billion on nanotechnology research, according to Cientifica, a London-based consulting firm.
VCs are hovering, eager to create startups and then shepherd them to the public markets. Last year, venture firms invested $496.5 million in nanotech-related companies, 21 percent more than in 2004, according to Lux Research, a New York-based firm that studies nanotechnology.
Not a Novelty
``Nanotechnology is no longer just a novelty,'' Lux Chief Executive Officer Peter Hebert says. ``It's working into the industrial food chain.''
Wall Street is wading into nanotech. New York-based investment bank Punk, Ziegel & Co., which focuses on health care and life sciences, and WR Hambrecht & Co., a San Francisco-based investment bank that persuaded Google Inc. to use an Internet auction for its Aug. 18, 2004, initial public offering, are hiring Ph.D.'s to scout developments and advise clients.
In March, San Francisco-based Global Crown Capital LLC started a $250 million nanotechnology-focused hedge fund, the first of its kind.
Indexes are sprouting up to monitor publicly traded nano companies such as Hillsboro, Oregon-based FEI Co., which builds microscopes for nanotechnology-minded scientists. The Lux Nanotech Index of 26 companies gained 53 percent from its inception in June 2003 to yesterday. The index fell 1.6 percent this year through yesterday, compared with a 6.1 percent drop in the Nasdaq Composite Index.
FEI, Veeco
In October 2005, PowerShares Capital Management LLC initiated an exchange-traded fund to track the Lux index. The fund had gained 4.8 percent as of yesterday. Shares of FEI increased 12 percent this year to $21.41 yesterday as the company began selling its new Titan microscopes, which let scientists look at particles less than a 10th of a nanometer in size.
Woodbury, New York-based Veeco Instruments Inc., another nanotechnology toolmaker, gained 26 percent to $21.92 as demand increased among electronics makers eager to explore new ways of building devices with tiny materials. FEI and Veeco are two of about two dozen nanotech-related companies whose stocks are traded on the Nasdaq Stock Market.
``Investors are waiting for evidence that companies are going to be turning the technology into profitable businesses,'' says Jay Ritter, a finance professor at the University of Florida in Gainesville who studies IPOs.
Built From Scratch
Heinrich and his team at IBM are trying to use nano- technology to create new types of electronics from scratch. Five years ago, they took a handful of molecules and built a minuscule system that performed logic like a computer circuit does.
Heinrich isn't alone in his endeavors. Thousands of scientists worldwide are manipulating atoms, discovering how things work in sizes too small for most people to comprehend --and talking with investors on the prowl for moneymaking ideas.
Experiments using nanotechnology may yield new ways to tackle everyday annoyances such as ketchup stains or lead to the creation of microscopic devices that detect and treat cancer, Hebert says. VCs are investigating oil-eating molecules that clean up spills, fabric fibers treated with tiny particles to repair rips and cheap solar panels made of newly invented materials.
Internet Frenzy?
Aspen Aerogels Inc., which makes acoustic, fire and thermal insulators, and NanoOpto Corp., a developer of optical semiconductors, may test their prospects in the public markets in the next year or two, Hebert says. An Internet frenzy-like flood of entrepreneurs and investment bankers may follow.
``There are a bunch of people waiting at the exit doors,'' he says.
Charles Harris says he's building the case that investors can make money in nanotech. From his office in New York two blocks from Central Park, he directs Harris & Harris Group Inc.'s 12- person staff, which includes Ph.D.'s who roam university campuses and pluck out promising projects.
In May, Harris spearheaded a $7.5 million investment in Santa Clara, California-based Innovalight Inc. The company, started at the University of Texas in Austin, is manipulating silicon particles that measure 2 to 10 nanometers. At that size, the particles become soluble, enabling them to absorb and store solar energy with the goal of producing electricity.
Since 2002, Harris & Harris has made 30 investments in startups that specialize in what it calls ``tiny technology.'' Charles Harris switched to nano-only deals that year, making Harris & Harris the only publicly traded VC firm devoted exclusively to nanotechnology. To underscore the point, he changed the firm's Nasdaq ticker to TINY.
`Betting on Charlie'
Investors hungry for a taste of nanotech are turning to Harris & Harris, wagering that its shares may soar if companies such as Innovalight have successful IPOs, WR Hambrecht analyst John Roy says.
``It's a way to participate in the run-up,'' says Roy, who rates Harris & Harris stock a ``buy'' and says he doesn't hold any. ``You're betting that Charlie can continue to make good, educated picks.''
Harris & Harris shares have almost doubled since the firm switched its ticker on March 27, 2002, rising to $9.76 yesterday from $4.89.
Harris says he became a nanotechnology believer after his firm's 1994 investment in Romeoville, Illinois-based Nanophase Technologies Corp. Nanophase makes existing particles that block the sun's ultraviolet rays even smaller and more efficient and applies them to products ranging from nonsticky sunscreen to wood preservatives.
Into the Labs
``Doing the due diligence on Nanophase got us interested,'' says Harris, a trim 63-year-old with close-cropped white hair. ``The light bulb went on. Going into nanotech full time was more gradual. We had to make sure there was a pipeline.''
That meant studying what scientists were working on to see whether experiments might turn into salable products. In 2002, Harris hired Douglas Jamison, who'd worked at the University of Utah in the office responsible for finding commercial outlets for the university's research.
``We've deliberately chosen to try and add value to our investments by not only having venture expertise but also the understanding of the science and the technology transfer,'' Harris says.
For all of the nascent industry's brainy employees, fancy equipment and mind-boggling technology, Harris says, making money in nanotech isn't any different from how he has pursued investments in the past.
`Mundane Business'
``Nanotechnology is exceptional in terms of what it physically does,'' he says, seated at a cherry boardroom table in his office. ``Once you get through the heavy science, it's just the mundane business of building a company.''
Still, the route from science project to viable business can take years and suffer twists and turns. Conrad Burke started evaluating Innovalight in 2003 as part of his job as a venture partner at Dallas-based Sevin Rosen Funds. Sevin Rosen had created Innovalight two years earlier with Arch Venture Partners LP's Austin office and Austin-based Triton Ventures Inc. after University of Texas researchers developed ``nano ink.''
The fluid held microscopic bits of silicon that caught and stored the sun's energy. The VCs posited the substance might help make long-lasting light bulbs or cheap solar panels.
``We liked it because it addressed enormous markets,'' Triton Managing Director Scott Collier says. ``This was highly risky but potentially revolutionary.''
Disruptive Technology
VCs call that kind of science a disruptive technology because it may threaten existing products, assuming that experiments' results hold up in mass production -- a question that, in Innovalight's case, is still unanswered.
The VCs gave Innovalight two more years to grow. Last year, Sevin Rosen asked Burke to take another look. He decided that making light bulbs was too competitive. Solar panels, in an age of spiking energy prices, were a better path. Burke became Innovalight's CEO in August 2005.
In March, he set out to raise more money. Enter Harris & Harris Managing Director Daniel Leff, who's based in Santa Monica, California. He flew to Santa Clara to tour Innovalight's labs with two New York-based colleagues. They donned goggles to peer at Innovalight's brew of silicon crystals.
Harris & Harris, along with four other firms, agreed to invest $7.5 million. Now, Innovalight has to figure out how to roll its nano ink onto sheets, cut the sheets into tiles and attract customers for solar panels it says will be cheaper and lighter than the ones on today's buildings.
`Room at the Bottom'
Burke expects the first products in 2008. He says his backers won't be satisfied with a nifty panel that consumers don't buy, even if scientists discover new ways to manipulate tiny materials.
``If all you do is move nanotechnology forward from an academic perspective, that's a sad outcome,'' Burke says. ``Nothing matters unless you build a successful outcome.''
Investors have been waiting for almost five decades for nanotech to catch fire in a meaningful way. Richard Feynman, who won the Nobel prize in physics in 1965, described nanotechnology's potential in 1959 in a lecture at California Institute of Technology in Pasadena.
In the speech, titled ``There's Plenty of Room at the Bottom,'' Feynman noted: ``As we go down and fiddle around with the atoms down there, we are working with different laws, and we can expect to do different things. We can manufacture in different ways.''
Nanotech Inspiration
Feynman, who died in 1988, imagined then-theoretical processes for mapping DNA, building smaller computers and -- most interesting to the nascent semiconductor industry -- creating smaller circuits. As the chip industry took shape in the following decades, its researchers and engineers were the first to try to incorporate manufacturing breakthroughs using nanotechnology- inspired methods.
The global semiconductor industry, which the Semiconductor Industry Association predicts will reach $250 billion in sales this year, is staring at the likely limit of Moore's Law, a theory that has driven engineers to design smaller and faster chips.
Intel Corp. co-founder Gordon Moore discovered that engineers could double the performance of microprocessors about every two years by shrinking the size of the circuits that carry electrons across silicon wafers, thereby increasing the number of transistors on a single chip.
Intel's first microprocessor in 1971 contained 2,300 transistors; a recent chip, code-named Montecito, has 1.7 billion transistors on a piece of silicon the size of a postage stamp. Today, most Intel chips sport wires 65 nanometers thin. The Santa Clara-based company said in June it will move to 45-nanometer wires in most products by the end of 2007.
End to Moore's Law
With anything smaller than about 20 nanometers, there's a problem with manufacturing. Engineers agree that Moore's Law will collide with the physical limitations of materials in the next 10 or 15 years.
Today's manufacturing process, known as complementary metal- oxide semiconductor technology, or CMOS, isn't able to control ever-tinier circuits because the properties of silicon and the circuits change when used in such minuscule amounts.
Given the barrier, chipmakers are studying how to build the basic elements of semiconductors from the atomic level up. They're using nanotechnology tools such as the scanning tunneling microscope that let engineers study atoms' behavior and figure out the best ways to manipulate them.
Down the hall from Heinrich's lab at IBM's research center, Kevin Roche, a 23-year IBM veteran sporting a blond crew cut, spends his days tinkering with atoms using a machine called a PLD- TEON. The acronym stands for pulsed laser deposition and thermal evaporation of oxides and nitrides.
Silk-screen T-shirt
The machine sprouts tubes and wires and is decorated with circular windows that look like a ship's portholes. It constantly shoots atoms of inorganic materials such as metal alloys through a filter so that Roche can press them onto a silicon wafer in various configurations.
``Think of it like a silk-screen T-shirt,'' Roche, 45, says, trying to put the science into words someone with less than a Ph.D. can grasp. Roche says he wants to understand how the electrons in each layer of the materials interact with electrons in other layers.
One big goal is determining how to move electrons more efficiently -- using their natural spinning properties instead of pushing them around, which generates too much heat in a small device like a microprocessor.
Roche's team already has discovered new ways to make random access memory semiconductors. He says this latest work may yield nanotechnology-inspired breakthroughs in storing information.
`A Thousand Flowers'
Researchers may not see results or even figure out what projects to pursue for a while, says Pushkar Apte, vice president of technology at the Semiconductor Industry Association, which commissions research projects and lobbies governments on behalf of U.S. chipmakers.
``We're in a phase of letting a thousand flowers bloom,'' he says. ``Three to five years from now, the job becomes harder, because we'll be shifting to the five most likely flowers. It's one thing to have an idea; it's another to do it in practice.''
One possibility is semiconductors made with so-called carbon nanotubes, which are about 50,000 times thinner than a human hair. Under a powerful microscope, they resemble a roll of chicken wire.
Nanotubes developed by IBM and others can conduct electric currents. Their size, at around 2 nanometers, may allow them to shrink beyond the limits predicted for the aluminum or copper circuits typically used in today's chips.
While nanotubes buried in the guts of an electronic device may enable it to be faster and smaller, nanotech researchers and their backers are pushing to drive awareness and sales with products that consumers can latch onto. That, in turn, may convince investors to jump into nano-related stocks.
Ripping and Staining
Nano-Tex in Emeryville, California, is one company working on everyday uses for nanotechnology. In a converted former women's fitness center, its scientists spend their days ripping and staining clothes to figure out how to protect them.
David Offord, Nano-Tex's chief scientist, became its first employee after an experiment took an unexpected turn. Offord was working for Alnis Biosciences Inc. in Emeryville and experimenting with repellent shells that would protect enzymes and allow them to function in hostile environments, such as oil spills.
In his spare time, Offord figured out how to apply the same protective technology to fabrics by wrapping individual fibers in a coating of fluorine atoms, thereby preventing stains.
Wilbur Ross
Offord and David Soane, who'd started Alnis, formed Nano-Tex in July 1998. The company won backing from textile maker Burlington Industries Inc., which invested an undisclosed amount and used Nano-Tex's technology to create water-repelling cotton fabrics and a stain-resistant silk.
Billionaire Wilbur Ross bought a 50 percent stake in Nano-Tex through his $614 million purchase of Burlington Industries in 2003. Ross created International Textile Group by combining Burlington and Cone Mills Corp. in 2004.
Nano-Tex is counting on Gap Inc., L.L. Bean Inc. and other clothing companies to educate customers about nanotechnology, says Renee Hultin, Nano-Tex's executive vice president of global sales.
Gap's Old Navy stores sell stain-resistant children's clothes; closely held L.L. Bean markets slacks with similar stain- fighting characteristics. Both companies tout that the clothes' fibers have been specially treated to resist wrinkles and stains using Nano-Tex's technology.
``If our products aren't easily understood, there's no need for them,'' Hultin says. ``That translates pretty easily to an investor.''
Hawaiian Punch
In Nano-Tex's break room, Offord shows off his handiwork. He buys a can of Hawaiian Punch fruit drink from a vending machine and pours the neon-red liquid into colleague Matt Hurwitz's shirt pocket. It sits in the pocket while Hurwitz sips it out with a straw.
The shirt -- bought off the rack at a Gap store in San Francisco -- is unstained and dry because its fibers were treated with Nano-Tex's chemistry.
Offord, 38, says his scientists are working on ways to make clothes that can fix their own small tears or let the wearer change the fabric's colors. He's intent on pushing the science only into useful places and says he fears a nanotechnology craze may lead investors to fund bad ideas. For nanotech research to make sense, a scientist must have a specific problem in mind, he says.
``Otherwise, you've got a hammer in search of a nail,'' he says.
Tricky Balance
That tricky balance between gee-whiz science and the art of building a viable business is why few venture capitalists are able to sniff out research projects that will generate helpful products and then stick with them, says JoAnne Feeney, an analyst at Punk Ziegel.
Even Harris & Harris, with its exclusive focus on the tiny, has discovered that things don't always go according to plan when cultivating nanotech companies.
Nanosys Inc., a Palo Alto, California-based startup that Harris & Harris invested in, works with tiny amounts of silicon and other materials to make lights and electronic devices. It filed to go public in April 2004. Four months later, it pulled the offering.
``The timing of that decision was about the appetite for IPOs,'' Nanosys Chairman Larry Bock says during an interview at the company's offices less than a mile from Stanford University.
Bad Timing
The Nasdaq Composite Index dropped 8.5 percent in the period from Nanosys's filing to its withdrawal. Freescale Semiconductor Inc., which was spun off from Motorola Inc., and Dex Media Inc., a phone book publisher, cut the prices of their IPOs during that period, citing unpropitious market conditions.
Since then, Bock has signed a deal with Sharp Corp., the world's biggest maker of LCD televisions, to develop new liquid crystal displays and fuel cells. In April, Nanosys won government contracts valued at $4.6 million, including deals with the U.S. Army and the Department of Energy for undisclosed textile, lighting and communications products.
The company has about $70 million in the bank after raising $40 million last November from investors, including Harris & Harris, Chief Financial Officer Peter Garcia says. ``We're going to finance it so we don't have to go to the public markets,'' Bock says.
Harris & Harris won't see a return from Nanosys for some time without a Nanosys IPO. Harris says that doesn't mean he's putting pressure on other investments, such as Innovalight.
He says the firm's successful offerings, such as Nanophase, have been at least four years old before they went public or someone acquired them.
``We're trying to create whole new markets here,'' he says. To reach that goal requires a delicate blend of science, risk- tolerant money and capable managers who can build companies that turn out real products.
The VCs, hedge funds and Wall Street firms wading into nanotechnology are banking on the decades of research in making things tiny finally adding up to something big.
To contact the reporter on this story:
Jason Kelly in Atlanta at jkelly14@bloomberg.net.
Last Updated: July 27, 2006 00:00 EDT |
