And now it is time to close the book on this one. Looks like the stink from the company's association with Stamford International finally drove serious investors away.
OVEMBER 14, 2001
PREVIOUS NEWS ANALYSIS
Nanovation Goes Bust
lightreading.com
The fate of Nanovation Technologies Inc. was sealed yesterday (November 13) when its case was
reviewed by the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division.
The integrated optics startup hadn’t been able to organize a rescue plan by the deadline set by the
court, so the company will now be wound up under Chapter 7 of the U.S. Bankruptcy Code.
Nanovation’s remaining 52 employees were laid off yesterday, with the exception of a small transition
team to handle the liquidation of the company’s assets in the coming weeks. This will include selling
Nanovation’s state-of-the-art 108,000-square-foot planar integrated circuit fabrication facility in
Michigan, according to CEO Bob Chaney.
Chaney says that plenty of companies expressed an interest in recapitalizing or acquiring Nanovation
-- the options the bankruptcy court had given him 100 days to investigate (see Nanovation Up For
Sale ). But none of them had come forward with a firm offer in time.
In some ways, Nanovation is an extreme example of what many optical component startups have
gone through in the past couple of years.
The company began life as U.S. Integrated Optics and was renamed Nanovation in November 1998.
This marked its "transition from a research-oriented enterprise into a leading edge technology driven
company dedicated to the rapid development of commercial applications for its products,” according
to the press release issued at the time.
The renaming also marked the beginning of a big campaign to hype Nanovation's achievements in
making the optical equivalent of integrated circuits using indium phosphide technology. Robert Tatum,
the company’s president and CEO at the time, spent large amounts of money preparing the company
and potential investors for a blockbuster IPO (see Nanovation Prepares the Ground for an IPO ). This
included grandiose gestures such as giving Massachusetts Institute of Technology a $90 million grant
for research in this area.
In the end, Nanovation wasn’t able to launch an IPO when it planned -- in the late Spring of 2000
(when there still was an IPO market) -- for a couple of reasons.
First, it ran into problems translating lab-scale developments into mass manufacturing processes.
It’s worth noting here that Nanovation wasn’t a scam, even though it may have been over-hyped in its
earlier days. “Some of its etching is world class,” says the CTO of a startup also working with III-V
semiconductor materials such as indium phosphide, who requested anonymity. World-class etching
translates into smaller feature sizes and better yields, he adds. Making arrayed waveguide gratings
(AWGs) in indium phosphide, as Nanovation is reported to have done in its labs, is also no mean
achievement, the CTO says.
Second, Nanovation couldn't launch an IPO until it sorted out legal complications concerning the
way in which shareholders of Stamford International Inc. (Toronto OTC: STFD - message board)
would be treated. Stamford is a shell company whose only material asset is 8.8 million common
shares in Nanovation. It provided a backdoor route for what Chaney characterizes as "Canadian
penny-stock investors" to invest in Nanovation prior to its IPO.
These problems came to a head in July 2000, when Tatum was kicked out and Chaney took over as
Nanovation’s CEO (see Nanovation's CEO Gets The Heave-Ho ). Chaney dumped the idea of going
for an IPO and refocused the company on more achievable goals based on silica-on-silicon AWGs
and MEMS (micro-electro-mechanical system) technology (see Nanovation Comes Down to Earth ). He
also brought in Motorola Inc. (NYSE: MOT - message board) as a strategic investor. At the same time,
he negotiated his way out of the $90 million research grant to MIT, limiting it to $3 million.
Chaney blames Stamford International for Nanovation’s ultimate downfall. He says the company,
which is Nanovation’s largest common shareholder, blocked approval of a $10 million bridge round
(led by Motorola) during Nanovation’s efforts to raise Series C funding. As a result, Nanovation ran
out of money, had to lay off two thirds of its staff, and eventually filed for bankruptcy protection (see
Nanovation in Crisis and Nanovation Files for Chapter 11 ).
It's possible that Stamford International hoped to grab control of Nanovation by blocking the
Motorola-led funding round, but the ploy appears to have backfired badly. Stamford executives were
traveling today, and couldn't be reached for comment.
In a message to Light Reading last night, Chaney makes the following points “to set the record
straight”:
First, says Chaney, Nanovation’s engineers persevered throughout this turbulence because they
thought their technology was ahead of the field. On the silica-on-silicon side, “the team delivered a
working prototype (before filing for Chapter 11) of a true Photonic IC that had a 1x2 switch, 1x2
splitter, and 3 monitoring taps all on a single substrate. I believe this was in fact industry-leading
technology and, therefore, very valuable intellectual property."
On the indium phosphide side, Chaney says Dr. Wei-Ping Huang’s work at Nanovation was “highly
respected” by Motorola. Motorola recently claimed a breakthrough in chips by layering gallium
arsenide on top of silicon (see Motorola Breakthrough Makes Waves ). Motorola was planning to
“invest in us at a corporate R&D level to work with them to layer indium phospide on top of silicon."
(As it happens, Motorola today announced that it had set up a wholly owned subsidiary, called
Thoughtbeam Inc., to commercialize its semiconductor-on-silicon developments -- see Motorola Spins
Off Wafers .)
The second point made by Chaney in his message to Light Reading is that Nanovation’s capital
structure was “genetically defective." Rather than raise money via the normal venture capital route, it
had got embroiled with Stamford International. It had also raised $28M from more than 400 angel
investors in the 1998-1999 timeframe, “creating a very non-traditional capital structure that was
unwieldy at best...
”When I took over in July 2000, my plan was to attempt ‘gene-splicing’ by bringing in the smart money
VCs alongside Stamford's. While I believe our management and technology story was credible with
the smart money VCs, unfortunately, the existing antibodies (Stamford) continued to rear their ugly
heads and scare off these new, good genes...
”By the time the professional management arrived, the fate of the company had been sealed by the
non-traditional capital structure of the company and the (previously reported) antics of former board
members and officers...
”There was just too much baggage and too many broken parts that needed to be fixed, all within the
timeframe of the entire optical market collapse...
"However, I'm known for taking on tough assignments as I always enjoy a good challenge, and I have
no regrets that we couldn't get this one fixed in time. I'm energized (and educated) to lead my next
startup opportunity, but I'll be sure to personally perform more comprehensive due-diligence next
time.”
— Peter Heywood, Founding Editor, Light Reading
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