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Home > Nanotechnology Columns > Alan Shalleck-NanoClarity > "Nanotech Companies - Consolidate or Die"

Alan Shalleck
President
NanoClarity LLC

Abstract:
At the end of 2007, let's propose a new industry-wide business strategy to make nanotech companies profitable and nanotechnology an investible industry. The current strategies aren't working. This new strategy, derived after much discussion and reflection, involves up-the-value chain focus and consolidation (roll-ups) of nanotechnology products and companies to provide the sales volume for profitable operations. Most of today's nanotech companies will never reach profitability configured as they currently are. My recommendation is a rejection of the sell what you have and the "go-it-alone" strategies.

December 24th, 2007

"Nanotech Companies - Consolidate or Die"

"Nanotech Companies - Consolidate or Die"
By
Alan Shalleck
NanoClarity LLC
November/December 2007



At the end of 2007, let's propose a new industry-wide business strategy to make nanotech companies profitable and nanotechnology an investible industry. The current strategies aren't working. This new strategy, derived after much discussion and reflection, involves up-the-value chain focus and consolidation (roll-ups) of nanotechnology products and companies to provide the sales volume for profitable operations. Most of today's nanotech companies will never reach profitability configured as they currently are. My recommendation is a rejection of the sell what you have and the "go-it-alone" strategies.

If you ask the question "Why are small to medium size nanotechnology companies not growing rapidly in sales and why are they not profitable seven years after the first NNI?" two answers emerge.

First. Even today, most of today's nanotech "product" offerings are too low on the value chain to contribute attractive gross margins making sales volume the vital ingredient for profitable operations. Up to noe, company focus has been on primary materials phenomena and incremental improvements to existing markets. Those foci lead to low value chain nanoproducts. However, realizing high sales volume from low value chain offerings is arduous, dependent in most instances on the marketing efforts of other companies who may have different priorities. The higher on the nanotech value chain a company's offerings are, the more gross margin/unit and the less the dependency for sales volume on other companies. Ergo, nanotech companies need to productize their way up the nanotechnology value chain to gain more gross margin. A company needs to market sensor systems, not just the sensors. Selling the low value chain product is pyrrhic.

Second. A lack of "critical product mass" exists in most nanotechnology companies. There are many small nanotech companies today essentially doing the same thing and addressing the same need with minor differences in approach or results … e.g. sensitive nanotech based sensors detecting CO2, Anthrax, or toxic trace gases. These are low value chain sub products. If a "negative profit" nanotech company's management wishes to stay at the lower levels of the value chain, to insure profits and success it must lose some of its independence (it will be out of business anyway) and merge with other "negative profit" nanotech companies doing similar things in its markets. It must then get rid of the redundancies, and keep merging until the merged combination reaches a critical mass of product offerings … broad enough to generate enough product line sales to become profitable. (The correct strategy for Nanophase, Inc.)

Reality and trend plotting show that we're not going to experience a business or commercial life changing nanotech based product line (like inkjet printers) in the next few year … at least a product line that creates a completely new industry or new dominant application changing technology in an existing market. The reason is obvious. Companies have been formed and privately financed around technical breakthroughs or developments in materials or functions at the nanoscale. The resultant product offerings are less than inspiring. As I have previously discussed in this column, finding the first paying customer for such products is daunting. Selling a single nanoproduct or technology is proving to be uneconomic. The wise management, realizing the problem, should be approaching other companies in similar circumstances to combine forces and build a complete product line of multiple offerings and technologies. Pursuing this merger strategy has a good chance of succeeding. Unfortunately, such a strategy will dilute the existing private investors, including many VC's that have sunk multiple financing rounds into individual companies, hoping for blockbuster breakthroughs … the ones that have not appeared. I say, too bad… you have backed a losing horse but you are only rounding the far turn. You can still whip the horse home a winner in the stretch … but you have to feed the horse the other horses in the race.

So to win financially in 2008, nanocompany boards should look around them for complementary products/companies, view them not as competitive products but as opportunities, and merge with those companies to offer ever broader and more complete nanotech product lines (or up the value chain lines). The companies that most aggressively pursue this new merge-to-win strategy will stand the best chance of attracting an underwriter for an IPO later in the year.


Alan B. Shalleck
NanoClarity LLC
www.nanoclarity.com


©Copyright 2007 NanoClarity LLC


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