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What is your definition of nanotechnology?
At Alameda Capital, we view nanotechnology as the commercialization of technology that takes advantage of unique phenomena that exist at the atomic and molecular scale, giving rise to new and useful properties at the macro scale. Examples of such phenomena might include surface effects (such as what you get when nanoscale fibers repel liquids by changing the surface tension of a fabric), molecular forces (such as the Van der Waals forces that provide the potential for next generation non-volatile semiconductor memory based on the natural attraction of closely spaced nanowires with one another), thermal vibration (such as selectively directing thermal vibration energy to harmful bacteria to break them down), or quantum effects (which will someday enable high performance quantum computing). Commercialization is the key word that differentiates real nanotechnology from nanoscience (which is basic research at the nanoscale).
Our investments will be in the traditional market sectors of IT, life sciences and energy where the convergence of multiple technologies, including advanced materials, creates an opportunity for new companies that can integrate such multiple disciplines to capture share with a proprietary set of products. We call this "convergent technologies." Many, but not all, of these opportunities will stem from nanotechnology.
By your definition, how many nanotech investments have you made to date?
As we have not yet completed the fundraising for our fund, we have not yet made any investments. We have reviewed over 100 investments that fit our nanotech definition to provide feedback to entrepreneurs and other prospective investors, and to refer entrepreneurs to other sources of capital.
With which companies have you invested, and in which round? (Seed, A, B, C)
None yet, see #2 above.
In a typical investment, are you the Lead Investor, Co-Lead, or part of a Syndicate? How is each role different from the others?
Many if not most companies involved with nanotechnology tend to be early stage, since much of the nanoscience research has taken place in the last few years. Because of the significant operating and entrepreneurial experience of our partner group, we have the ability, interest and expectation to lead a significant percentage of early stage investments we make -- perhaps 30-50%. These might be spinouts from research labs where the founders have very little business or start-up experience, or they may be start-ups initially funded by angel investors that are seeking their first professional venture capital. As a lead investor in an early stage company, we will be very active, helping the management team with many things: recruiting additional members to fill out the team, developing the business strategy and plan, forging alliances with key partners and customers using our global business and research network and corporate limited partner base, supporting operations as necessary or raising additional rounds of financing. We will of course be on the Board.
With companies in which our initial investment comes at a later stage, we may take the lead or be part of the investment syndicate. If a promising company is in a geography where we are not readily accessible to the management team, we will consider being part of a syndicate if that deal is led by an investor with similar experience, values and perspectives as us. In such cases, the Alameda team will continue to offer assistance where needed, but will play a support role to the company and lead investor. We will typically require at least Board observer rights in those cases.
As things stand today, which nanotechnologies will you likely invest within the next five years, and why?
We are currently excited about a number of sensor and imaging technologies for security and medical diagnostics, new display technologies, next generation semiconductor devices (first memory and later logic), and certain alternative energy technologies. Each of these have large existing markets, reasonable capital requirements, good technology maturity, and talented entrepreneurs who have developed a compelling value proposition based on the convergence of nanotechnology with other technologies.
How many new investments do you anticipate in 2005?
We anticipate making 4-6 investments a year, starting approximately mid-2005.
What is the typical initial investment size or range?
Because we are willing to consider investments at an earlier stage than many venture capitalists, we expect our initial investment to be as little as $200 thousand, or as much as $1.5 million. If more is needed at the initial investment stage, then we will typically seek to syndicate the deal.
What is the typical total investment size or range?
Our typical total investment in a company will be on the order of $4 million. In almost every case, we expect there to be multiple investors over multiple rounds, so the total funding for any one of our portfolio companies will be much greater.
What are the typical sources for deals? Outside referrals? Referrals by associates? Conferences & events networking? Blind submissions by Internet or mail? Other
We have an extensive global network of scientists, entrepreneurs, venture capitalists, angel investors, limited partners, consultants, lawyers, accountants and bankers who routinely refer prospective portfolio companies to us for consideration. We also evaluate many opportunities that come to us as a result of our extensive conference speaker schedule and media coverage. We are especially proud of the close relationships we have developed with leading researchers and management at many of the most prestigious universities and national labs on the West Coast including Stanford, Caltech, many of the UC campuses, CNSI, Lawrence Livermore and Berkeley National Labs, and NASA Ames. These relationships often give us an advanced look at some of the most promising start-ups 6 to 9 months before they are ready to spin out of these institutions.
We will also look at unsolicited submissions via the Internet, but because these have not been pre-screened by someone we have a relationship with, we ask that entrepreneurs follow certain guidelines listed on our web site that include a one-page description of the business and an optional Executive Summary.
What is your desired realistic time to liquidity?
Ideally, 3 to 6 years, with many around 5 years. This timeframe is driven by the kinds of returns that limited partners have come to expect over the ten-year life of a typical VC fund. It also gives us an opportunity to work with a management team over a number of years to add enough value to have an attractive liquidity event. There will be, however, some great opportunities we will have to pass on simply because the gestation period is too long.
Regarding due diligence: do you complete it in-house or use outside consultants for technology? Markets? Other?
Primarily in-house, which includes our Advisors. For technical due diligence, we have an extensive Scientific Advisory Board comprised of world-class experts in various nano- and convergent technology disciplines. Their role is to evaluate the competitiveness of the start-up's technology, the strength of their technical team, and the realistic timeframe to commercialization. Most of these advisors are listed on our web site. These advisors also provide access to an even larger network of experts if more specialized technical expertise is required. The Alameda partners will do most of the business and management due diligence, consulting outside experts if and when necessary.
In your opinion, what is the single most important factor in investing? Entrepreneur? Team? Technology? Market? Investors? Other?
Definitely team. Any experienced entrepreneur or investor will tell you it is rare for the technology or the business to evolve according to plan. Management teams that have the passion, intelligence and teamwork to realize their vision will find a way to evolve their technology and adapt their strategies, plans and organization to make it happen.
Typically, what is your contribution to companies with whom you invest? Team Building? Strategic Alliances? Sales? Marketing? Strategic advice? Keep CEO focused? Other?
We help entrepreneurs build great success stories by providing a broad range of support. I've attached a description below of how we do that from our web site.
We are highly experienced in all phases of growing a company -- from concept, seed, and through all growth phases, private and public. We have worked with companies when the challenges appeared almost insurmountable. In some cases, we have faced failure and disappointment. In other situations, we have triumphed over adversity. Everything we have learned makes us more capable of adding value. We have access to a wide network of contacts developed through a century of combined working relationships in many areas of expertise. Our Scientific Advisory Board is made up of world-class academic and business researchers, with experience in start-ups as well as major corporations. Our Limited Partners are also a rich source of referrals to resources that may be helpful to portfolio companies.
Our Principals are dedicated to the premise that they will be proactive, and focused on a small number (maximum of 5-7) portfolio companies where we have a board seat or are a lead investor. We will work closely with portfolio company management, not to look over their shoulders as much as to support them in as many ways as possible. This focused dedication also means that we will be very selective in our investments. Only those opportunities that show the most promise, that target market opportunities with exception growth potential, and that are led by visionary, determined entrepreneurial teams can succeed. Those are the ones in which we will invest money and resources.
Our broad and diverse experience leads us to have a comprehensive and global outlook on the prospects for growth of our portfolio companies. Our awareness of the timing of different opportunities around the world, and our ability to develop strategies to optimize entry into new markets are valuable assets which we share with the portfolio companies. Today, the competition for everything is global in scale - for people, capital, market share, and technology. No country has a monopoly on any of these critical resources. Even small, leading-edge technology companies in Silicon Valley cannot afford to ignore the threats and opportunities of markets as large as China, or as small as some European countries. We have access to resources that can help our portfolio companies develop global strategies that can win.
One approach to globalization, particularly for small, fast growing companies, is through strategic alliances with foreign companies. We believe this is a critical element in the growth plan of most companies that are poised for global leadership. How should these relationships be structured and negotiated? What kinds of partners will be most productive and harmonious? What mechanisms can be designed so that the resulting alliance is truly win-win-win? What processes will work best to build effective partnerships? Especially in this area of strategic planning, our extensive experience is a strong factor clearly differentiating us from other venture firms.
Paradoxically, some of the aspects of a relationship that are most valuable are often intangible. For example, when the young CEO of a portfolio company is faced with a critical decision and a short timing fuse in which the decision must be made, he or she will want to have immediate access and mind-share from his or her board members and trusted advisors. Who will be available when he or she calls for help? Young entrepreneurial teams start off being incomplete. How can a technical team develop the necessary business strategies when the team lacks critical skills and experience, e.g., in marketing? When a young CEO is faced with what appears to be a daunting mountain of challenges, who can he or she turn to for honest, objective assessments? When the ego of a young CEO or management team starts to feed itself with unreality, who is going to be there to question their assumptions and establish a foundation of realistic expectations? The key to success is always balance, which is an on-going challenge. Sometimes we all need some help from the outside to re-establish a productive, dynamic balance for ourselves. Our experience, judgment and tenacious integrity are all critical value elements that support our portfolio companies.
Most start-ups related to nanotechnology need to sell to or sell through major corporations as opposed to end consumers. Alameda's team has extensive connections to major corporations around the world. Alameda can provide credible connections to corporate customers through personal contacts that many start-ups find difficult to penetrate on their own. This can accelerate the revenue curve for the startup and limit the total capital needed.
Overall, what do you like about nanotech as an investment area?
Nanotechnology, if commercialized on a timely basis, has the potential to transform large existing markets. It's usually not about creating new markets, although there is some potential for that too. Nanotechnology also provides a great opportunity for start-ups to capture market share from existing competitors by being smart about how they integrate nano and other technologies to create compelling new properties resulting in such products as low cost/ultra-sensitive medical imaging, low energy high brightness displays, ad hoc wireless sensor networks, high density memory storage, low cost photovoltaics and more.
Because there is a strong multidisciplinary science and technology component, nanotechnology is an area that will not necessarily be dominated by large companies. In fact, most of the nanoscience research is being conducted in leading universities and national labs. This presents a great opportunity for early stage venture capitalists who have the patience and operating experience to work hand-in-hand with these researchers to spin-out very successful companies, often with the strategic support of more mature manufacturing or distribution companies.
Big markets, opportunity to capture market share, opportunity to really add value. That's what makes this an exciting investment area!
What advice do you give to individuals regarding investing in nanotech?
I assume we are talking about active investors in start-ups. Make sure you have access to the broad range of technology and commercialization experts who are needed to separate hype from reality and who can help predict true commercialization timeframe and capital needs. Make sure you have the patience and skill set to work with groups of technology-centric entrepreneurs inexperienced with business building. Make sure your global network includes prospective partners and customers who can help accelerate success by co-development, sourcing, manufacturing, distribution, purchasing or other alliances since there will be a natural focus on capturing share in large global markets in a timely and capital-efficient manner.
What are some of the worst bits of misinformation when it comes to nanotech investing? Who perpetrates it, and why?
"Nanotechnology is too far out there to be interesting from an investment perspective." - this is too much of a generalization. Many areas of nanoscience research are indeed too early for venture investors with a limited time horizon. Quantum computing. Molecular electronics. Nanodevices for targeted drug delivery. Yet there are many areas where nanotechnology is producing revenues today, or will be in the short term. Coatings for scratch resistant glasses. Smart fabrics. Advanced thin film photovoltaics on polymer substrates. Low power, organic silicon displays. Investors who lack the knowledge, resources or time to differentiate the various areas or stages of nanotechnology and separate the attractive from the unattractive investments perpetrate this myth.
"Tools are where the short-term investment opportunities are, you can always make money off the 'picks and shovels' of the industry." - the opportunities for tools may be shorter term, but the market may be restricted to the small research community. Unless the company can parlay its success with nanotechnology research instruments into a production environment (e.g. semiconductor manufacturing), it may be hard for a venture capitalist to generate a large enough financial return on the investment to justify his or her time investment. The overly simplistic view of tools investing is spread by folks who simply haven't taken the time to do due diligence on specific deals.
"Nanomaterials will be commodities." - I've heard that the company receiving the largest number of nanotech patents is L'Oreal, not IBM. Looking at the prices of L'Oreal's cosmetics, it's hard to view their products as commodities. This misinformation is simply an overgeneralization, perpetuated by the fact that very few VCs focus on materials per se.
Norm Wu is the Managing Director of Alameda Capital.
Alameda Capital provides value-added venture capital to promising young companies that are commercializing innovative products based on the convergence of advanced materials, information technology and/or life sciences.
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