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How does a nanotechnology or any technology startup attract venture capital (VC) money? The need to exit is the end goal of any venture capital firm. However, what exactly does all this mean? We will look at some questions that should be asked before embarking on the VC path.
May 19th, 2007
Does Nanotechnology need Venture Capital to be Successful?
To exit in venture capital (VC) means to sell the business with sufficient return on capital invested. Typically this can be done by an initial public offering (IPO) or through an acquisition by a company that needs and can afford to pay for the business. Their return is expected from the exit in cash or some other liquid or saleable shares, but not stock. So cash flow, per se, is not that important to VC's with regard to business revenues. However, what is important to them is the value of the company because that is for what they can sell the business. The value of the business is calculated based on future or forecasted revenues or cash flow (see previous article on January 2006 on how to value a company).
The typical venture capital fund is a limited partnership (LP) of investors, investing over a fixed period. Those investors or limited partners (LP's) commit to putting up into the fund a defined amount of capital, which is drawn down when needed and requested and invested. This period is typically seven to ten years with options for extension for a few more years. The capital is invested and controlled by a management company. This management company is usually organized as a limited liability company (LLC), and is the general partner (GP) of the LP. Each of the 15-25 venture investments made within a fund is usually in a private company. The LP's expect their money back with a healthy return before the end of the investment period. Usually this return is 10 times the invested capital. GP, LP, and LLC are different types of business legal structures such as a corporation (Corp or Inc).
Corporate VC is a little different in the sense they fund companies they may acquire or from whom they may license out their technology. Hence, a corporate VC is not only the funder but possibly the exit vehicle too.
A good return expected on an exit is 10 times on invested capital over 7-10 years which sounds fantastic. However, the problem is that return also has to make up for so-so or bad deals that have lesser return, or that lose the invested capital entirely. VC investment monies tend to be quite large else the returns on their investments may not be big enough relative to their fund size. This way they also only need to manage fewer companies in the portfolio.
Will you know how to strategically position your company in the market to be attractive to VC's and successful in the big money sense? Even if your company could exit, you have to ask yourself, could you exit big enough to be attractive to the VC's? VC's tend to take a very large equity stake. Could you deal with the management conflicts that invariably happen between large VC investors and owners who want to maintain control? The other question is, if you are a startup company, does your company need VC money or can it get by with private money or angel money? Would your business be considered successful with a steady income stream with lots of licensing deals instead of many millions of dollars from a VC exit? Do nanotech companies need to have a VC exit to be successful? Maybe and maybe not and it probably depends on what your product is and where it is in the value chain (e.g. Is your product used to produce other products or is your product the finished product?) to determine whether or not you will make loads of money and require significant VC financing or mainly private angel monies and traditional debt financing. So you have to ask yourself, "How do you/your company define success?"
How does VC assess if you can exit? The easiest way is that you are in an industry segment where exits are happening or where there are large companies that are known to grow by acquisition. This approach for those VC's is to jump on the bandwagon of an ongoing exit trend. This trend will continue until the market saturates. Right now, the public's appetite for IPO's is a bit weak and there are only so many large companies in an industry that have enough money to acquire others. Those large companies do not usually need more than one acquisition for a new trend. Raising money for an acquisition is another type of investment opportunity. The more difficult approach would be to be in an industry segment for exits first before everyone else knows it is hot. First mover advantage is usually a good thing but this approach takes a bit more vision and understanding of the markets and the consumer and requires some luck in terms of timing.
Could nanotechnology be the next industry segment? Nippon Sheet Glass acquired UK nanoparticle coated self-cleaning window company, Pilkington, in June 2006. Or is it already here?
Some other useful nanotech breakthroughs are offered here and their links below. Nanotex has been collaborating with Burlington since 1998 introducing its first product in 2000 of stain resistant pants and has many textile licensing deals. Nanoparticle coatings in Wilson tennis balls help keep their "bounce" longer. Nanoparticle paint developed by Italian firm Global Engineering, is being used commercially on sidewalks or paving stones in London's Southampton Row and in to reduce emissions. Global Engineering carried out a study in 2003 on a 250-meter stretch of road in Milan with an average daily transit of 15,000 vehicles and showed a reduction of pollution by 60% to 70% during rush hour. Nanosized silver particles are being used in washing machines to kill bacteria and reduce the frequency of washing clothes. How about gold nanoshells that heat up and kill cancer cells without destroying surrounding tissue? These are just a few examples of nanotech becoming mainstream and attractive to investors already. With the exception of the nano-shells anti-cancer treatment, the nanotechnology examples above are mostly being used to augment existing product.
From a VC and private investor perspective, there is a slow fuse burning, everyone's waiting for the killer application for nanotechnology, the trick is to identify and invest in it before the next guy.
• Nanotex: http://www.nano-tex.com
• Metallic nano-shells which can detect and destroy cancer and tumor cells with fewer side effects.
• Wilson tennis balls that hold their "bounce" longer
• Nanoparticle titanium oxide emissions reduction coatings
• Pilkington self cleaning glass
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