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Nanosys: To IPO or Not to IPO? Is That the Question?
By Pearl Chin - Managing General Partner, Seraphima Ventures
On April 23rd, 2004, Nanosys announced their plans to raise up to $115 million in an IPO so that it can further expand its research across a range of nanotechnology businesses, according to the filing with the Securities and Exchange Commission. Nanosys said it had applied to list on Nasdaq under the symbol "NNSY" (Nasdaq:NNSY").
This and Nanosys does not even have revenues or a product yet even though they do have IP. Yet if the company manages a successful listing, its strategy is a high-risk, high-reward one that will pay off only if the technology and resulting building blocks are adopted as an industry standard in certain niches. Nanosys will make some money in the future but not nearly as much as hoped. News of disappointed investors in Nanosys's stock performance will make it all the more difficult for more viable nanotech startups to raise funding or go IPO. That is not to say there will not be any lucrative nanotech IPO's but Nanosys isn't it.
For those who buy Nanosys IPO shares, they will soon realize they've been had, but by whom? Was too much funding given to an overvalued Nanosys? Might current investors be unloading it onto the unsuspecting public via an IPO in order to recoup their investment? These are some hard questions that need to be asked so let's take a look at some numbers and at their current situation with a critical eye.
Nanotechnology has been a hot sector among venture capitalists. "It's been very eagerly awaited by the nanotech business community,'' said David Forman, a staff writer at Small Times magazine, a nanotechnology journal in Ann Arbor, Mich. "They are looked at as the poster child of nanotechnology, and people are looking to them to legitimize the field on Wall Street.''
The Nanosys IPO will not legitimize the field on Wall St as many in the nanotech industry hope. What it will do is what the failed dot.com and biotech IPO's did for their industries a few years back which is cause many VC's to lose a lot of money due to unrealized returns.
This past June 3, 2003, Nanosys led most nanotech startups in capturing venture capital investments, closing $38 million in financing for a total of $70 million in equity and non-equity funding since its founding two years before. That fundraising event garnered much publicity as Nanosys closed its second round first at $30 million on April 24th, 2003, almost exactly a year before the IPO announcement, before opening that second round back up for an additional $8 million that closed on June 3rd, 2003.
Investors ARCH Venture Partners, CW Group, Polaris Venture Partners, Venrock Associates, Prospect Venture Partners and Alexandria Real Estate Equities also participated in the last financing round; they are joined in this round by CDIB BioScience Ventures, Chiao Tung Bank, China Development Industrial Bank, Harris & Harris, Lux Capital, Quanta Computer and SAIC Venture Capital Corp. Existing investors that also participated included ARCH Venture Partners, CW Group, Polaris Venture Partners, Venrock Associates, Prospect Venture Partners, and Alexandria Real Estate Equities.
Chief Executive Larry Bock confirmed that the additional $8 million comes from new investors UOB Hermes Asia Technology Fund, UOB Venture Technology Investments Ltd., Healthcare Focus Fund L.P., Eastman Kodak Co, H.B. Fuller Co. and others. The UOB funds are managed by UOB Venture Management Pte Ltd., a subsidiary of United Overseas Bank of Singapore. The Healthcare Focus Fund is managed by Arch Venture Partners for the California Public Employees Retirement System (CalPERS) . Kodak and Fuller participated as strategic investors.
According to several of the investors who managed to win a spot in syndicate, no fewer than 65 investors lined up for a piece of the company. According to an article by Tyson Freeman in May 2003, "The competition helped bid the company's valuation up nearly 75%, says Nanosys CEO Larry Bock."
Company valuations shouldn't be based on something as subjective as competition between investors and in this case, perceived value or desperation to get in on a lucrative deal lead by high profile VC's. I don't think anywhere in a valuation course is investor competition a variable. Were the dot.com and biotech bubbles so long ago?
In July 2004, Nanosys will be about 3 years old. A year before its IPO announcement, Nanosys President and CEO Larry Bock said the new $38 million second round investment would enhance Nanosys' development and marketing efforts for its portfolio of nanotechnology-enabled products in chemical and biological sensing, photovoltaic and high-performance macroelectronics. The $115 million IPO is so that it can further expand its research across a range of nanotechnology businesses.
What happened during that year after raising $38 million for a total of $70 million in financing that justifies another $115 million? Are we actually going to see some product and sales? As of Dec. 31, 2003, Nanosys had $39 million in cash. Do they really need more money?
Since its founding in July of 2001, Nanosys has lost $17 million. In 2003, Nanosys had a loss of $9.2 million on revenues of $3 million, compared with a loss of $7.1 million a year earlier on revenues of $283,000 in 2002, according to its regulatory filing. However, most of the revenue currently derives from conducting research. In-Q-Tel, for instance, has agreed to pay Nanosys up to $3 million for research, while Intel has made a similar commitment for $1.9 million.
Plus, the company is not selling products yet and they admit it. Designing commercially viable molecules takes years, and the company will probably have to contend with larger competitors and other start-ups, regulatory changes, public suspicion of nanotechnology and intellectual property disputes, according to Nanosys.
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Dr. Pearl Chin has an MBA from Cornell, a Ph.D. in Materials Science and Engineering from University of Delaware's Center for Composite Materials and B.E. in Chemical Engineering from The Cooper Union.
Dr. Chin specializes in advising on nanotechnology investment opportunities. She is Founder and Managing General Partner of Seraphima Ventures, focusing on investing in nanotechnology. She is also CEO of Red Seraphim Consulting where she advises investment firms and startup firms on the business strategy of nanotechnology investments. She was Managing Director of the US offices and co-Managing Director of the London offices of Cientifica. Prior to that, she was a Management Consultant with Pittiglio Rabin Todd & McGrath (PRTM)'s Chemicals, Engineered Materials and Packaged Goods group.
Dr. Chin will be advising the Cornell University JGSM's student run VC fund, Big Red Venture Fund (BRVF), on investing in nanotechnology.
She is a Senior Associate of The Foresight Institute in the US and was the US Representative of the Institute of Nanotechnology in the UK. She was an alternate finalist for a Congressional Fellowship with the Materials Research Society.
She was also a Guest Scientist collaborating with the National Institute of Standards & Technology (NIST) Polymer Division's Electronic Materials Group under the US Department of Commerce.
Dr. Chin is a US Citizen born and raised in New York City.
This is another monthly column contributed by Dr. Chin to Nanotechnology Now. The full article appears in our June 2004 Premium Newsletter, along with other outstanding pieces by leaders in the field.
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