I Have the Idea, You Have the Factory
November 16, 2005
Standing Out
By BARNABY J. FEDER
FEW business executives can explain nanotechnology, but plenty of them know they are wearing the results: L. L. Bean khakis and other clothing engineered for exceptional stain resistance. They may have also used clear sunscreens made with particles of zinc oxide or titanium dioxide that block ultraviolet rays.
And when corporate bigwigs head to their country clubs, there is a good chance they will encounter someone who has heard about NanoDynamics, a start-up in Buffalo that has been promoting its ability to rearrange the molecular structure of golf balls to damp the physical forces that send poor shots slicing or hooking.
No wonder it is hard to find big-business executives who don't know that their business might be affected by the growing ability of researchers to manipulate the very molecules out of which everything is made. The field is known as nanotechnology because the measuring rod of its products is the nanometer, which is a billionth of a meter and the size of the smallest molecules. Nanotechnology has spawned hundreds of companies in the last decade and attracted billions of dollars in government and private investment.
But it is going to take more than the first wave of novel products to convince big businesses that access to the new technology is worth quite as much today as many of its entrepreneurs believe.
That, at least, seems to be the message in a recent survey of nanotechnology start-ups and large multinationals by Lux Research, a New York company that focuses on nanotechnology. Three out of four nanotech start-ups negotiating deals with the big companies think they have the power to set price and other crucial terms, according to Lux's survey of 20 companies averaging 29 employees and $2 million in annual revenue.
But when Lux asked the same questions to materials buyers at 20 multinationals averaging 100,000 employees and $55 billion in annual revenue, 70 percent said it was their company that dictated the terms.
Lux also found other disagreements on what the ideal deal looks like. For instance, 65 percent of the small companies wanted the multinationals to pay them license fees. But only 35 percent of the big companies wanted to take such licenses. Many of them want to handle nanomaterials like the commodities they are often replacing: tell us what the product costs per unit and then ship us as much as we want.
The clashing value assessments and goals have stalemated negotiations and aborted deals, according to David Lackner, author of Lux's report.
No surprise there, according to experts who study entrepreneurial activity across the economy. "Most entrepreneurs overplay their hand," said Steven Rogers, who teaches entrepreneurial finance at the Kellogg School of Management at Northwestern University in Evanston, Ill.
In the long run, getting a good partner is probably more important for a start-up than getting a good price. Take the case of Ecology Coatings, based in Akron, Ohio, which makes proprietary nanoscale and somewhat larger micron-scale particles for blending specialty paints. The resulting paints reduce reliance on dangerous solvents, cure rapidly and produce thin but extremely abrasion-resistant surfaces.
One potentially valuable niche identified two years ago by Ecology is the demand for cleaner and faster ways to recoat the hundreds of millions of propane tanks from home barbecue units that are recycled each year. But the equipment maker that Ecology dealt with to build specialized recoating machines substituted 300-watt ultraviolet lamps for the 600-watt units Ecology had specified for its drying process. That attempt to cut costs led to dismal results when the units were delivered to the tank company, according to Richard D. Stromback, Ecology's chief executive.
To preserve the business, Mr. Stromback this year negotiated an exclusive license for Red Spot Paint and Varnish, a major coatings specialist based in Evansville, Ind., to manage design of the equipment and servicing of the tank refillers. "They have the clout we don't to get this done," Mr. Stromback said.
Mr. Stromback said there had been no risk of similar missteps when Ecology sought to get its materials incorporated in paints for the automotive market. Within a week of acquiring control of Ecology in 2002, Mr. Stromback called on DuPont, the leader in automotive coatings.
"It costs $2 million a minute if you delay an auto production line, the capital equipment you sell them has to pay for itself in 12 months, and they demand that you have full-time employees there servicing them," he said. "It's prohibitive for a small company to introduce new technology into that space."
Some start-ups have decided that the best way to avoid pricing battles is to accept terms in which they are not paid for the materials but get a percentage of the big business's gains from using them.
For example, Mr. Lackner said, Aspen Aerogels, in Northborough, Mass., makes a novel insulating material that allows water pipe manufacturers to reduce the total outer circumference of their products and seeks to be paid a percentage of the production savings. Oxonica, in Kidlington, England, asks for a percentage of the fuel savings that bus fleet operators get from its nanoengineered catalyst.
"They are saying, we won't try to prove the value to you, we'll just take a percentage when you find it," Mr. Lackner said.
Some nanotechnology entrepreneurs have relied on government-financed research contracts to carry them through the long search for commercial partners. "At the end of the day, the Fortune 500 companies are going to call the shots," said David Reisner, president and chief executive of the Nano Group. "They define all the things that come to roost if the deal unravels."
Sometimes intermediaries can bridge the gaps. The Cabot Corporation, a large specialty chemicals company based in Boston, last year set up the Cabot Fine Particles Network to serve as a matchmaker between its customers and nanotech start-ups.
"We do a light due diligence to understand what they do if they want to be in the network," said Jack Reder, new-business project leader at Cabot. "After that we do nothing until we get a request from a customer for something that's somewhat tangential to what we offer. We tell the start-ups what the needs are."
Some nanotechnology executives believe their leverage will increase as more big companies decide that nanotechnology is beginning to deliver on its potential and that they don't want to be left behind. Others say big business will always hold most of the cards.
Still, seeing eye-to-eye may never come naturally. "If an entrepreneur fails, he just does his next start-up," said Vinod Khosla, a leading Silicon Valley venture capitalist who deals with nanotechnology. "If the business executive fails, he gets fired. They have very different cultures."
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