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Home > Nanotechnology Columns > Alan Shalleck-NanoClarity > NOT NOW- MAYBE NEVER

Alan Shalleck
NanoClarity LLC

A new wave of IPO's is on us. But there are no Nanotechnology companies on the docket. Not now - maybe never.

March 18th, 2014


A new wave of IPO's is on us. But there are no Nanotechnology companies on the docket. Not now - maybe never.

Fifteen years ago we thought we were entering a new age … the age of Nanotechnology. Nanotechnology was projected to change the ways in which things were done - new science, new products, revolutionary systems and materials that improved our economies and lifestyles worldwide, new companies, and a new financial boom based on this new but not so new technology. "There is plenty of room at the bottom!"(Feynman 1959). With that vision and of others, the US Government initiated the first 3-year $1.0 billion plus per year National Nanotechnology Initiative - NNI (with a promise of continuing government support for useful nanotech technologies and products). The NNI continues through this administration. Pundits proclaimed the nanotechnology technological era was upon us. Entrepreneurs and Wall Street financiers began to get ‘dollar sign eyeballs" just as they had during the Internet boom in the 90s. There was a new road to riches based on the disruptive technology called "Nanotechnology."

What were brushed under the rug were the facts about Nanotechology. There was no analogy to the coding, application and software based dot com era. Nanotech was materials science. You had to create and make ‘stuff'!" Stuff that was new, was uniquely different, was based on very very small technology and stuff that provided clear advantages over what was in the world. It turns out that "making that stuff" at macro size was exceedingly difficult and expensive if you could achieve it.

Hype was one thing. Reality another. First - all prognosticators tell you that it takes approximately 20 years for fundamental technological breakthroughs and game changing products to permeate through the developed country economies. It's only 15 years since the first NNI. We are not yet two decades into the Nanotech age. Second, - nanotechnology was so small and unkown that fundamental nanoscience had first to be performed before anyone could consider macro level products and economic success. Except for large pharma, most labs knew very little about .1-100 nm world. We had to explore and learn what could be done. That's what we've been doing with the NNI money. What we've basically experienced since the first NNI has been wonderful and truly expansive nanoscience throughout the world but not nanotechnology. Third - nanoscience required major investment in instrumentation and large equipment. One had to see the nanostuff, one had to find ways to measure and manipulate it, and then one had to find ways to reproduce what was found reliably and repetitively so it could be scaled up to macro size. No one knew how expensive and time consuming that process would be. Fourth - nanotechnology required expensive production processes and production equipment to bring the nanoscience discoveries to work at our levels. Still haven't gotten to that point. And fifth - one had to find an economic benefit and business model that would allow nanoscience to scale up to the real world reliably to produce a profitable product or enterprise. Finding the fifth an economic benefit was almost impossible for a nanotech stand alone entity because nanotech was materials science and its creations were at the bottom of the commercial value chain. There was very little profit at that level on which to build an entity that eventually could go public in an IPO. Low profits, as with every material level manufacturer without volume sales, was inherent in the ‘nanotech industry". Ergo, not now- maybe never.

What are the implications for the fifth item above? Well, to build an economic product based enterprise that is profitable and sustainable - to create sustainable value, the nanobusiness has to be able to create a product or service that has value to a customer. However, nanotech is a material science… and materials are at the lowest level of the commercial value chain. E.g. a nanotech sensor has to be incorporated in a system to measure something. That system has to be included in an instrumentation complex… maybe with other sensor systems in the complex. That complex has to be priced and marketed to a customer willing to pay the price of the complex and the pricing of the complex has to fit into a marketplace with many levels of distribution and competitive alternatives which may be lower priced.

In this business model, the end user seller sets the amount of profitability in the value chain complex, far above the nanotech sensor creator and manufacturer. The businesses above the nanotech company need a slice of the final profit spread … leaving very little margin for the nanotech company in which to work and thrive. Clearly, most nanotech companies do not control his ultimate customer, do not set pricing levels, do not control the marketing of its ‘sensor' in any way and has to settle for whatever residual profit, if any, that filters down to the materials level. The nanocompany is left with practically nothing with which to try to earn a profit for its investors. Ergo, to create a profitable company for its investors, the nanocompany has to integrate up the value chain to capture more of the end profit amount. Integrating up costs money, stock, and is uncertain. It is also a requirement so it must be done. . to go as high as possible. Failure or no IPO is the alternative. Or the nanocompany needs to find a way to garner many customers for its sensor in different systems with different proprietary advantages…that is to sell volume. Without control of it's end markets and its pricing a nanotech company finds inducing volume is very very difficult and expensive…. All of which changes the ROI equation for the initial investors. Unfortunately, nanotech is not a friendly technology for forming profitable companies that eventually can go public in an IPO. A bad value chain was not initially analyzed before the NNI but after 15 struggling years, building a profitable nanotech business is not a walk in the park.

However, two promising alternative strategies have arisen. The first is to separate the value of the nanobased system from the cost of materials etc. and the upward integration. You need to find a customer or application that will pay for the "information' provided by the nanotech complex. An example is the molecular diagnostic industry. After doing its nano thing to analyze samples, diagnostics ultimately provides ‘information'. If this information can tell a doctor not to prescribe a particularly expensive process, the nanotech provided information has value to the payer because it can avoid the cost of an expensive process. Finding an "information output" might free the nanocompany to set it's own pricing level… independent of the cost of the diagnostic process. Freeing pricing ultimately creates its own value chain. A typical example is Genomic Health Inc., a public company that provides a way for a breast cancer patient to avoid a $40,000 post surgery radiation course by identifying a set of genes. The $40,000 cost avoidance has been recognized by the payers, insurance co, Medicare, etc. as of great value allowing the cost of the diagnostic to be at the $3,000 -$4,000 per test… much more than the usual $120 per diagnostic test. A cost avoidance information model has allowed the company to go from 0 sales to over $300,000,000 in sales in just a few years and to go public. QED.

The other alternative similarly occurs in the bioscience. It is to make the nanotech diagnostic test systems so unique and valuable that the test's information outputs can be priced at a profitable level - because such lifesaving information can't be produced in another way. Again, information is valued, not the nanotech way of obtaining it.

Those business models break the material science rules stated above. Changing the output … making it not the material stuff. … changes the business model positively. As stated above, the alternative to profitability of a nanotech venture is to integrate upward to get more of the profit in the value chain. And very few nanotech executives or investors are doing that or realize the futility of remaining at the nanotech material or first integration level.

Above are the reasons for no nanotech IPO's this year… and, because of inertia in the nanoscience industry, maybe never.

Alan B. Shalleck Ph.D.
NanoClarity LLC

©2014 - NanoClarity LLC. All rights reserved.

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