Welcome to the 4th issue of our Premium Newsletter

In this issue NanoNews Now Editor Rocky Rawstern and contributing writer Galen Fous cover nanotechnology investments. Join us as we review investing in the tiny.

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Small is Bountiful

Galen Fous, October 2003

Innovations at the nano-scale have reaped giga-scale chunks of investment capital this year. And the innovations aren't just in the technology but in the sources and unique ways investment is being garnered.

Luring investment from a jittery Venture community has been a ponderous task, in the aftermath of the recent dot-bomb bloodbath. To make a tough sell tougher, the IPO market, the favored way for investors to cash out of a venture, has been near extinct and harder to sight than Sasquatch. As a result, in 2002, investors withdrew more principle from Venture Capital firms than they put in, to fund new start-ups or early stage companies. This has had a major impact on the speed of commercialization in all major nanotech sectors.

VC investment may have been further hampered by not clearly understanding the implications of the technologies being developed. To some VC firms, the new nanotech entrepreneurs cropping up out of university science departments were research geeks - albeit PhD level - not seasoned company builders.

NanoNews Now Editor Rocky Rawstern interviews Bo Varga (BV) about the basics in investing.

Bo Varga

Bo Varga, Executive Director, www.nanoSIG.org, Principal, The Strategic Synergy Group

1. Please explain the different types of capitol investor.

BV: Capital investors - angels are private investors, individuals, clubs or groups, VCs raise dollars and invest the pool and are professional investors, Corporate VCs have a strategic agenda first - then usual test for ROI.

2. What types of firms are investing in companies needing funds?

BV: Pretty much the Fortune 2000, e.g Air Products, Engelhardt, etc. have joined Motorola, Intel, etc.

3. What concerns if any do you have about the current investing environment?

BV: Lack of seed round funding - very very hard to get capital except from Asia with tech transfer and other strings.

4. When considering hiring new team members, what skills do VC firms prize above others?

BV: In general "been there, done that." For CEO's and senior business people - proven ability to close joint ventures / strategic alliances with major corporations. For techs - proven ability to get product to market.

5. What types of technology are getting the dollars these days?

BV: Materials, tools, biotech devices are top 3.

6. Why would a company with a new technology seek venture capital over some other form of funding?

BV: Because they cannot get their product or service to market without funding - those who can do that leverage government and corporate contracts and avoid private equity strings.

7. How far along in the development cycle does a product have to be before it typically qualifies for venture capital?

BV: Proven sales to a name customer (which is why seed capital is scarce, as is A-round; there is lots of money but investors are VERY selective).

Alternatively, proven CEO (made money for investors) and Nobel-level scientists can get funding prior to a product idea, ie: Nanosys.

8. Is the rate of oversubscribed financing rounds up or down, as compared to years past?

BV: Way down.

9. What is generally considered a reasonable time-horizon (to liquidity) in early-stage high-technology investing?

BV: 5 years is current mean/median point.

10. Many corporations have a long-term outlook, while most VC's have a much shorter timeframe. Since many of the 'products" of nanotech are years off, are investment firms willing to commit to ideas that may take many years to come to fruition?

BV: Not if they can help it, same for corporations except for very large, (such as) Intel, etc.

"The two key issues investors tell us: (i) lack of qualified entrepreneurs and (ii) lack of deals with sales or JV/strategic alliances with "name" companies or at least solid companies. R&D grants, SBIR grants, government contracts (unless very large, and even then are questionable) do not get VC juices flowing."

"When it comes to nanotechnology, venture-capital firms say they are looking for the usual things: good technology, excellent management, a well-thought-out business plan, near-term products, large markets, and strong intellectual property (IP). Emerging fields offer a rare and short-lived opportunity to build unique IP positions, points out Douglas W. Jamison, vice president at Harris & Harris." Venture Capitalists Are Cautious Toward Nanotech

"Although investors have been cautious of late about funding anything, nanotech companies will rely on venture capitalists and government agencies to spur advances."

"Global nanotechnology R&D investment reported by government organizations has increased approximately five times in the last five years between 1997 and 2002 and now stands at about $4 billion," says Girish Solanki, analyst at Technical Insights, a business unit of Frost & Sullivan. "No less than 30 nations have initiated national activities in this field." Excerpted from a Frost & Sullivan report, as seen at SmallTimes

In the very near future, investments in nano-science, -technology, and -products will increase dramatically, in large part corresponding to our better understanding of material properties at the nanoscale. We are also seeing an unprecedented co-mingling of scientific disciplines, which looks to continue, and should provide us with unique insights, patents, products, and opportunities. That being said, without public discussion of the possible implications of nanotech (good and bad), all our monetary investments won't buy back a failure on our part to plan for the worst, and the best. The way we can best serve our collective future is to start talking, now, as a worldwide community, living together on this single planet....
Rocky Rawstern, Editor NanoNews-Now, October '03.

Responding to our question "how do you expect the nanotech investment environment to change in the next 3 - 5 years?" Peter Hebert had this to say:

"Venture investing in nanotechnology has remained resilient in spite a weak environment for early stage venture financing. As the economic backdrop improves over the next several years and more venture firms flock to the sector, expect to see larger amounts of capital invested in a greater number of nanotech deals."

Peter Hebert, Co-Founder and Managing Partner, Lux Capital
Peter Hebert

"Unlike the dot-com era, nanotech startups are built on physical, chemical and biological science. They have real technology and real assets. And more often than not, they are founded by researchers from universities, government and corporate laboratories." J.P. Morgan executive Alan Marty

"Nanotechnology will affect many industries in the near-term and most in the medium-term. Some of these will experience a multiple-whammy. The number of nanotechnologies rapidly converging on some industries, such as data storage, is staggering, and while it might sometimes be difficult to predict the winners and losers, there's one thing you can be sure of - massive disruption."

Paul Holister. Chief Architect of the Nanotechnology Opportunity ReportTM, and editor of TNT weekly. CIO of CMP Cientifica and Founder and Research Director of the ENA.
Paul Holister

From an Interview with Dr. George Whitesides by Pamela Bailey, for NanoApex (September 20, 2002)

"What are the greatest obstacles that need to be overcome to allow nanotechnology to reach its full potential?"

Whitesides: If I had to say one thing right now, I would say that US style capitalism has become very focused on efficient uses of capital, because that's what capitalism does, and investment in longer term research is an inefficient use of capitalism. You can't capture the returns--generally because they are societal returns. The stuff goes out and anybody can use it. We are at a point where we are very concerned with quarter by quarter results. Right now, the federal support for physical science is actually declining in inflation corrected dollars and support for biological science is rising. Of course, that has the secondary consequence that good students are being attracted to bio. Don't misunderstand, I think they're both terrific, but the practicalities are that the physical sciences create far more jobs and have far greater impact on society right now than bio does. Also, corporations are shutting down long term research. Universities used to do the fundamental research. In industry, companies had labs that did product development, but that also dedicated 5-10% of the lab's resources to a group whose function was to reach back into the invention system, grab interesting things and begin to move them forward. All that's gone. The response in universities has been that you now see a lot of professors who are entrepreneurs, but that's actually not as efficient because there's not very much money available for this. We've had kind of a patch for this. Instead of having an overlap between the universities and industry, they've moved apart and we've put in a third sector, the venture world, which links the two. The trouble with the venture world, though, is that it's not working at all right now because the IPO market has shut it down. The biggest obstacle right now is that this system is actually not working at the moment for a number of reasons.

"It's not a fad. It's integral to technology companies' R&D pipeline, and the sophisticated investors know that," said Josh Wolfe, a co-founder and Managing Partner of Lux Capital, talking about investment capital.

Josh Wolfe agrees that, while eager to invest in nanotechnology in the abstract, some VC firms might be reluctant to invest in specific nanotech companies for a variety of reasons. "The first is a lack of understanding of physical and material sciences, (but) most importantly, they can't invest in nanotech if they don't have the deal flow to work from."

"Part of the excitement comes from a report (1) by the National Science Foundation indicating that nanotechnology had the potential to grow into a $1 trillion-per-year industry. But most of the excitement comes from a growing acceptance in the business community and by the general public that nanotechnology exists here, right now and it's getting smaller all the time." Patrick Di Justo for Wired (1) "Societal Implications Of Nanoscience And Nanotechnology"

"Although in 2002, VC firms returned more principal to their investors than they managed to raise for new funds, nanotech ventures raised $427M in 2002, up from $190M the year before, according to Venture Economics and Venture Capital Journal. One VC firm, MPM Capital, also managed to raise USD 900 million for a biotech fund." Carlo Longino, for "The Feature." See "Searching for a Pulse"

"One of the most difficult challenges for any emerging technology is to bridge the gap between its beginnings in a research lab and creation of a company prepared to bring commercially viable products to market. Along the way, the company's financial backing must evolve through several stages. Discovery and development in labs typically begins with financial backing from universities, foundations or government grants. The entrepreneurial startup phase is where private investment is added to the mix, usually provided by the company's founders and individual angel investors. As the company grows, the amount of money required, sources of capital and types of financial deals grow much more complex. Venture funds and investment bankers lead the way to the next round as the nascent company prepares to sell its first product." Robert F. Dixon, Small Times Correspondent. See "One-man nano investment bank"

NN: How would you describe the current investment environment for nanotech?

Excellent, there is more money than good deals - major lacks are (i) experienced entrepreneurs and (ii) good deals

NN: How do you expect the nanotech investment environment to change in the next 3 - 5 years?

More money available, more deals

NN: What would you say are 3 good examples of nanotech investments and why?

Nano-tex - rapid product release to very large global market, nanosys - acquired global critical mass in IP with an entrepreneur with proven 25 year success at 11 startups, dream team of technical staff, dream team of management staff, nanogram - proven platform for single ALD, very strong technical and management team, application markets ranging from telco to medical.

NN: Which multinationals are likely to be good industrial investors and sources of nanotech acquisitions in the near future?

Materials - Eastman Chemical

NN: What should governments do to improve the investment environment for nanotech? Provide (i) matching service between technology and entrepreneurs (ii) provide initial $250,000 of funding for deals which pass technical and business review boards - a program like this exists via SBIR in US

Adi Mogilevsky, MBA. Managing Director, Israeli NanoBusiness Alliance

NN: How would you describe the current investment environment for nanotech?

A lot of interest by investors, very few real opportunities now, many real opportunities will come soon as we see from academic work.

NN: How do you expect the nanotech investment environment to change in the next 3 - 5 years?

I anticipate it will grow exponentially (or hyper exponentially) in the next 3-5 years, mainly in nano-bio, nano-medical and nano-materials.

Prof. Yosi Shacham-Diamand. Director, Nano-Science and Nano Technology Univ. Res. Inst.

"The next few years could see government funding for nanotechnology research in Japan reach $50 billion or more. Government funding for nanotechnology in the U.S. increased 9.5% to $847 million (for 2004), up from $774 million in 2003. Following closely is the United Kingdom, which recently announced $150 million in funding for nanotechnology research over the next six years." See Nanotechnology Flourishes in Japan

"Venture-capital firms focused specifically on materials or 'small or tiny technology' at the nano- and microscale include Ardesta, Harris & Harris, Lux Capital, Millennium Materials Technologies Fund, and NGEN Partners. Others with many life sciences and information technology firms in their portfolios--such as Apax Partners, ARCH Venture Partners, CMEA Ventures, Draper Fisher Jurvetson, and Venrock Associates--have stepped into nanotech as well." Venture Capitalists Are Cautious Toward Nanotech

"While eager to invest in nanotechnology in the abstract, some VC firms might be reluctant to invest in specific nanotech companies for a variety of reasons. The first is a lack of understanding of physical and material sciences," said Josh Wolfe, a co-founder and Managing Partner of Lux Capital in a recent wired.com article.

Entrepreneurial opportunities for research scientists working under the umbrella of a university came about over the last few decades. With few exceptions, major corporations that formerly had their own labs for basic research had either shut down or cut way back. This opened the door to universities to fill the gap. As the business sector cut back their in-house R&D, a lot of modestly paid science professors saw the opportunity to launch businesses and generated a new crop of budding entrepreneurs.

Funding for early stage innovation in nanotech and other sectors had been hard to come by as the 80's became the 90's. The gap between university research that had commercial potential, and major corporations that had capital, management, production and distribution, needed a bridge. In the early 90's, in stepped the venture world to connect the research to the commercial opportunity and network the deal.

In a September '02 interview with nanoapex.com, Dr. George Whitesides, Mallinckrodt Professor of Chemistry, Harvard University explains, "Instead of having an overlap between the universities and industry, they've moved apart and we've put in a third sector, the venture world, which links the two. The trouble with the venture world, though, is that it's not working at all right now because the IPO market has shut it down."

With the option to cash-in on a successful IPO down to near zero the last few years, the bridge had all but collapsed. Free-wheeling Investors converted to conservative Capitalists, and fled to the safety of higher ground waiting for the flood of red ink of years past to recede from memory as much as from their coffers.

Now, fast-forward to the early 2000's, where a growing number of rising nanotech companies have successfully commercialized products, and numerous others are right at the starting gate. Dormant VC funds, investors and funding sources of every stripe can be heard starting to snort and kick like an anxious thoroughbred before a high-stakes race.

Today, enough successful projects have gotten funded that nanotech is now approaching critical mass. The investment tide is turning in nanotech ventures' favor. Both the amounts of investment rolling in and the sources have been surprising if not creative.

Until this year venture capital investments had suffered quarter to quarter declines since 2001. However, at least in the nanotech sectors, recent quarters show that investors are reaching deeper into their pockets and getting back in the game.

CMP Cient'fica, a business information and consulting firm reported in September '03 that "Venture capitalists invested between $250 million and $300 million in nanotech deals last year." This is up over 35% from the year before. If the continued surge in investments during the first 2 quarters of this year are a barometer, then the growing enthusiasm for nanotech investments may mean the game is on.

The renewed enthusiasm comes in part from a report by the National Science Foundation. They proposed that "nanotechnology had the potential to grow into a $1 trillion-per-year industry." Another aspect supporting investor confidence is the sense that nanotechnology exists here, right now, and is becoming more and more relevant to the commercial marketplace. And nanotech is becoming so over a timeframe investors can be comfortable with.

The US Government through a variety of agencies such as the National Institutes of Health (NIH), the Small Business Innovation Research Grant programs, the SBA, and of course the various branches of the military has also become a significant benefactor of nanotech ventures.

As reported in a recent article in SmallTimes, "The U.S. government is easily the nation's largest investor in nanotechnology. Various agencies will spend $774 million on nanotech research in fiscal 2003, and plan to spend $847 million in fiscal 2004. The House of Representatives in May passed a nano spending bill that would allot $2.4 billion over three years, and the Senate is expected to pass its version early in the fall session."

State governments aren't sitting on the sidelines either. Across the nation, state-funded, university-based nanotech research centers are springing up as states look to attract new business, to shore up sagging employment and tax revenues or hold on to what they've already developed.

For example, this year the state of Illinois awarded a grant of $17 million toward construction of the Center for Nanoscale Materials (CNM) at Argonne National Laboratory.

And Arizona State University in Tempe received $185 million from state lawmakers in part dedicated to creating a center for nanotechnology and high-tech materials

One of the more innovative strategies for pulling in funding for nanotech occurred this summer. The University of Nevada, Reno, in an example of the power of public/private partnerships, received a $300,000 grant from Nevada Ventures, LLC, the state's first VC firm. UNR used those funds to attract $2.1 million in funding from such prestigious sources as the National Science Foundation and NASA, as well as from industry sources such as Altair Nanotechnologies and others. The funding has helped to establish two new cutting-edge nanoscience laboratories: the Nanotube Synthesis Laboratory, and the Nanofabrication Facility.

"The Nevada Ventures Nanoscience initiative has proven itself," said Nevada President John Lilley in an Arizona Republic artice. "This effort was initiated to demonstrate the public/private partnership as a successful educational and research model -- to show that, when working together, Nevada and dedicated private sector partners can develop groundbreaking results on a national scale. It's worked."

On the company side, the star of the show this year may be Nanosys, which has been drawing in cash from every direction. The company was recently awarded an SBIR research grant of $1.6 million for the development and commercialization of a novel biological sensor platform. An April article in the San Jose Business Journal, detailed the company's closing on a second round of funding for $38 million, bringing their total capital raised to $54 million since they started up operations in 2000. The funds in good part will be used to perfect and bring to the global market nanocomposite solar cell technology. That's a liquid form of solar cells that can be applied to rooftop shingles and generate electricity at a low cost. Nanosys is also working with the defense industry to develop biological sensors to detect chemical or biological attacks in advance, according to the article.

"It is clear to us that Nanosys is one of the most advanced true nanotechnology companies in the market today," says Dr. Tai-Sen Soong of CDIB Bioscience Ventures, which led the most recent round of financing.

But for all the scrambling going on domestically to reap the rewards of the innovations and profits promised from nanotech, we are not alone in the race to capitalize on the next Big-small thing.

"Global nanotechnology R&D investment reported by government organizations has increased approximately five times in the last five years between 1997 and 2002 and now stands at about $4 billion," says Girish Solanki, analyst at Technical Insights, a business unit of Frost & Sullivan. "No less than 30 nations have initiated national activities in this field." (Excerpted from a Frost & Sullivan report, as seen at SmallTimes)

With all the turbulence and uncertainty of the market as it stands today, smaller investors may want to sit back and see how things shake out. The big-payoffs and resurgence of IPO's are still projected as 3-5 years away. But if you have a pile of "Adventure capital" and you are ready to dive in to this roiling churn of opportunity, some of these small-fry nano start-ups are sure to grow into big fish.

For the big overview of the emerging nanotech companies, the people, the innovations and where the money is flowing as well as interviews and insights from those keeping a close eye on the action, check out the rest of the NanoNews Now newsletter.

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Interview with
Private Equity Investors

NanoNews Now (NN) Editor Rocky Rawstern interviews private equity investors who have a stake in developments in nanoscience and -technology. Questions developed by Neil Gordon, Rocky Rawstern, and Bo Varga.

Interviewees include:

Peter Leone (PL), Senior Principal, PureTech Ventures
Vinod Khosla (VK), General Partner, Kleiner Perkins Caufield & Byers
Larry Bock (LB), Co-founder, President, CEO and Member of the Board of Directors, Nanosys, and General Partner of CW Group
Doug Jamison (DJ), Vice President Harris & Harris Group
Michael Gamble (MG), Director Scientific Programs, Fidelys

Regarding investing in companies with nanotechnology-driven products and/or services:

1. What initially got you involved in nanotech? What are your long term goals for your area or field? What are some of the compelling reasons that you invest?

PL: PureTech Ventures is an institutional investor and entrepreneurial organization focusing on life sciences. PureTech works with academic researchers and independent investors to build companies around their promising inventions. Founded three years ago, PureTech screens nearly 100 inventions per month and selects 2-3 each year for company formation.

Our long term goals for all our companies are to achieve outstanding returns for our investors, ourselves, and our inventor co-founders. We believe that a focus on life sciences positions us to lead the introduction of important advances to improve human health and further the creation of new knowledge in medicine and biology.

VK: I think the nano property of materials will cause some interesting shifts in markets but this is about new markets for materials science. More than anything I am worried about premature hype around "nanotechnology". Nanotechnology is not a market but rather a technology. Its application to markets is what is important.

DJ: Harris & Harris Group, Inc. made its first investment in nanotechnology in 1994, an investment in Nanophase Technologies. Nanophase was a spin-out from Argonne National Lab. Nanophase went public in 1997, but Harris & Harris Group retained its equity ownership in the company until 2001 in order to allow Nanophase to mature and develop their business. Between 1994 and 2001, we continued to look at business plans that answered to nanotechnology, but the deal flow was scarce and many of the business plans were not ready for commercial success. The deal flow and quality of the business plans steadily increased, and in 2001 Harris & Harris group made its second investment in nanotechnology by investing in the Harvard spin-out, Nantero, Inc. By 2002, we believed the quality of deals was such that we could focus exclusively on what we called "tiny technology," nanotechnology, microsystems and MEMS.

While tiny technology gives us a specific focus, it also provides diversification, because we are exposed to many different industries. Tiny technology provides a value-added focus to our investments without superimposing additional industry sector risk.

MG: In the early 1990's, I was researching advanced composite materials for ultrastable platforms and electronics applications and was fascinated by work at MIT's Materials Sciences labs in 'active' materials (self-damping, acoustic absorbing.) and at Los Alamos National Lab's Mechanical and Electronics Division where their seminal work on MEMS was undertaken. I decided that if the opportunity presented itself, I would like to understand more about nanotechnology. Less than decade later, I was fortunate enough to be able to bring to bear my optics and materials sciences backgrounds and investing experience in contributing to the development of photonic integrated circuits, PICs. It was a poor investment experience, but the eventual productization of PICs will represent an astonishing technological advance.

I am excited by the prospect of bringing the frontiers of science and technology to productization. Observing a technology in its nascence emerge as a fundamental building block of useful, marketable systems keeps me interested in materials science technology developments and early stage opportunities.

In the mid-to-late-nineties, technology investment, particularly communications technology, offered quick, bountiful returns on investment. This was certainly rewarding in several regards, including the validation of ones investment criteria, instincts, and business acumen. As the positive returns turned to losses in 2000, one had to derive some satisfaction from knowing that sound judgments were made and reasonable courses were charted and embarked upon, despite the financial slaughter. Then it was more of a character building exercise and personal growth experience rather than a capital growth experience. I currently draw upon the maturity and insight, developed during that financially dark period, frequently when evaluating new investment opportunities and assessing the performance of portfolio companies.

2. How would you describe the current investment environment for nanotech?

PL: Nanotech is a very broad field and any company positioned in nanotech needs to be evaluated in its competitive space. In life sciences, nanotech is being applied to improve the design of new drugs and biomaterials, to study protein interactions, and to design new minimally invasive devices. Government investments in the past decade are beginning to bear fruit for attracting early stage company formation.

VK: See #1

LB: Cautiously optimistic.

DJ: We have made tiny technology our sole investment focus. We believe there are fundable companies, entering exciting markets with novel, defendable technologies at attractive valuations.

MG: In a word, cautious. That said, The Nanobusiness Alliance optimistically predicts that nanotechnology companies will receive >$1B in venture capital (VC) investment during 2003. Very few nanotech concerns have bucked the VC's mandate to 'show me the products and the revenues.' Nanosys, Inc. and its $30M round earlier this year is a counter example and nanomuscle, who closed a $10M Series C just last month on light revenues but holding valuable contracts from VW who ramrodded the closing, I should add, also stands out in my mind. As more products are introduced into the marketplace and greater demands are experienced and subsequently fulfilled by the nanotech industry, the investment community will embrace it strongly. The risk capital community's dotcom hangover has not completely abated! I claim that Fidelys and I are proceeding with a great deal of optimism, tempered by a healthy skepticism.

3. How many pitches are you seeing today? How does this compare to the past 5 years? How does it compare to what you expect to see in the next five years?

PL: We expect to see growth in the coming years over a very small base of past nanotech opportunities.

VK: Quite a few but not many applied to large markets where the 'other dynamics' are just right.

LB: 5 a week but most only use nano as a label and have nothing to do with nanotechnology.

DJ: Currently in our database we have over 400 companies that we consider tiny technology enabled. Since September 2002 we have seen over 125 business plans that answer to tiny technology. The deal flow continues to be robust, and we expect the number of tiny technology enabled business opportunities to increase.

MG: At Fidelys, we have a steady stream of 'real' and some 'pretend' nanotechnology concerns contacting us. It is disappointing to observe opportunists who are trying to capitalize on the nanotech 'buzz.' Lux The Nanotech Report 2003 claims that the number of articles in all publications mentioning the word 'nanotechnology' has almost doubled in merely 2 years. Fidelys ardently denounces investment hype of all kinds. We do, however, aggressively court middle market companies, those with $5M < revenues < $50M. Of course, emerging nanotechnology firms that survive offer more investment upside, but we are more comfortable dealing with concerns possessing mature managements and balance sheets.

Over the next five years, we expect to see more plans of higher quality, in general. Further, young managements always improve their business techniques or they do not last; so, they, too, will surely improve. One way or the other.

4. How many companies are you currently tracking? How does this compare to the past 5 years? How does it compare to what you expect to see in the next five years?

PL: PureTech has three companies that could be considered nanotech, although this is not their primary market and investor positioning. One is preparing a new proteomics chip for launch that will dramatically accelerate today's 2D gel process, another is creating novel cancer drugs with a nanoengineered chemistry platform that mimics the body's use of carbohydrates, and a third is creating a new treatment for aging and orphan disease associated with mitochondrial dysfunction.

DJ: See #3.

MG: Fidelys is particularly interested in several sectors and tracks multiple companies in each, both competing and complimentary technologies. Thin Films, MEMS, Materials Processing, Photonics, and Renewable Energy are of greatest interest to me. Fidelys has recently developed a Life Sciences Team that will be focused on medical devices, diagnostics, healthcare information systems, and biopharmaceuticals.

Over the next 5 years, we expect the Life Sciences thrust of the Company to grow and equal, if not outpace, the Physical Sciences thrust. Gerry Gallwas, a co-founder of Beckman Instruments and Fidelys, is heavily involved with this aspect of the Company. He and his team will be able to track many companies in multiple sectors going forward. It is an exciting new direction for Fidelys.

5. How many companies have you invested in this year (2003)? How does this compare to the past 5 years? How does it compare to what you expect to see in the next five years?

PL: PureTech has created six companies in the past three years and plans to form 2-3 over each of the next five years.

LB: 3 investments this year. Only one in the past 5 years. Probably two per year going forward.

DJ: Thus far in 2003, we have made three initial investments in tiny technology companies, NanoGram Devices Corporation, Nanosys and Chlorogen. In 2003, we have also made three follow on investments in Nanotechnologies, Inc., Nantero, and NanoOpto. In 2002, we made seven initial investments in tiny technology companies. In 2001 we made one initial investment in a tiny technology company.

MG: We have contracted a relatively small number of companies for representation to international capital markets this year, <20. We have passed on many more opportunities than we have accepted. This is because of limited bandwidth within the Company and because of our desire to interact with credible, mature concerns.

After establishing our technology venture fund, we anticipate expanding Fidelys - we have already expanded into Life Sciences as previously mentioned - and will be able to service more companies in diverse disciplines. Our plan is to remain focused on the middle market, but up- and down-market forays will be more likely once the fund is in place.

6. How do you expect the nanotech investment environment to change in the next 3 - 5 years?

PL: Over the next five years we expect nanotech to achieve more liquidity events as technologies mature and begin to generate significant revenues. This will create opportunism for more public market investment as well as acquisitions by large corporations.

VK: See my concerns above.

LB: Become more instituitonalized. Have a more established set of nano funds. Have a few nano IPOs. Have a Investment Banker conference geared to nano.

DJ: I think we would expect to see more traditional venture capital firms making investments in nanotechnology, not because it is nanotechnology, but because the companies they are investing in address critical end-markets where the traditional VCs have expertise. If one looks at the investors in current tiny technology financings, one sees that this is already happening. We might also venture that valuations will increase as interest from investors increases.

MG: Fidelys expects the banking side to be more competitive in time to come. Many more deals are pitched than will ever be financed currently. Even credible business plans backed by capable managements and brilliant engineering teams cannot secure financing without significant revenues. As the nanotech industry 'proves itself' this will turn upside down. At some point, it will be a sellers market. Personally, I see this inversion coming within 5 years.

7. What would you say are 3 good examples of nanotech investments and why?

PL: New therapeutics - many areas will benefit from improved targeting for safety and efficacy gains
New biomaterials - better matched to unmet needs, less 'gee-whiz' unfocused technology
New life sciences tools - clarifying many poorly understood biological interactions will launch the next wave of therapeutics

VK: Energy, biomaterials, and electronics might be good starting examples but there will be many areas where there is significant impact.

LB: Nanosys, Surface Logx and Semzyme. Three true platform technology companies - not just one-product plays.

MG: Photovoltaics, ultrahigh density information storage, and photonic integrated circuits (PICs). I believe that a triad of conditions are required for emerging, even disruptive, technologies to flourish: Driving markets must exist, entrenched players' markets must be penetrated and adoption rates accelerated, and financing must be available for expansion and product delivery.

Japan and Germany are leading the way in photovoltaic renewable energy, but underdeveloped countries as well as California and the US's Northeast corridor cannot be too far behind. The East coast's recent power outage was more writing on the wall for me that the US is closer to serious renewable energy legislation than ever. The driving markets are there, others countries have been penetrated and the adoption stigma associated with ultralow power density electricity generation modalities is softening as the worldwide resistance to ultrahigh power density technologies, e.g. nuclear fission, increases. Also, companies like Nanosolar, Inc. and Konarka Technologies, Inc. (Let me disclose that Fidelys does not represent either of these and I do not own their stocks, personally) have closed significant capital raising rounds in the past 12 months. Fidelys represents other PV companies whose technology is equivalent, or perhaps superior, to these companies and are currently raising capital.

The rush to displace 'flash' memory, a significant displacing technology of the past decade, is on. When developed, IBM's millipede technology will be excellent (Let me disclose that Fidelys does not represent IBM and I do not own their stocks, personally) except for serious drawbacks in the thermal performance specs and cost departments. Everything from cell phones to the most complicated convergence products are waiting markets for ultrahigh density, very cheap storage. Fidelys represents an ultrahigh density concern whose debut product will include ~2Gb of storage capacity fabricated for ~$10/Gb.

With the inevitable up tick in communications infrastructure improvement, photonic-based network technologies will dominate. Just ask George Gilder- Otherwise, look at the enormous international driving markets and the world's insatiable appetite for communications bandwidth. The next wave of the communications explosion will be leveraged on billions of dollars of investment in technology and infrastructure from the previous wave. The merger earlier this year of NeoPhotonics, Inc. and Lightwave Microwave Systems, Inc. leverages approximately $300M of combined investment in the two companies over the past decade. (Let me disclose that Fidelys does not represent NeoPhotonics, Inc. and I do not own their stocks, personally). Significant amounts of venture capital are available for product development and market introduction. Market adoption of photonic communications hardware is also improving. With technology like semiconductor optical amplifiers available from compound semiconductoirs, truly revolutionary advances toward PICs are being made.

8. Which multinationals are likely to be good industrial investors and sources of nanotech acquisitions in the near future?

PL: Large chemicals companies like Dow and Dupont are moving into pharmaceuticals as suppliers, large device companies like Boston Scientific, Medtronic and J&J expand product offerings in part through acquisition, and major pharmaceutical companies increasingly turn to outsourcing for strategic new technologies.

VK: Hard to say.

LB: Major companies in Japan, Taiwan and Singapore in general.

DJ: I think that 2003 has already seen an increase in interest from mainstream businesses looking for opportunities of nanotechnology. HP and GE have run commercials highlighting nanotechnology. Materials and chemical companies such as Air Products & Chemicals, DSM, Eastman Chemical, Eastman Kodak, H.B. Fuller, Matsushita and others have made either venture investments or joint development investments in nanotechnology companies. From recent announcements, tools and material companies seem to be the most likely acquirers, but I think many large companies have begun to focus their nanotechnology needs. For example, Intel likes to advertise its focus on "silicon nanotechnology."

MG: Fidelys currently represents Summit Specialty Chemicals, LLC, a Sumitomo Group subsidiary, with respect to nanotechnology investment, strategic partnership, licensing, and distribution opportunities in the US. Summit has the capacity to summon enormous international infrastructure on behalf of companies with whom they select to ally themselves.

9. What should governments do to improve the investment environment for nanotech?

PL: Expand programs for translational research via such programs as STTR and SBIR, focusing less on basic and more on applied research.

VK: I think the US govt is being pretty supportive.

LB: More grants available to small companies to fund the applied research necessary to take fundamental research from labs to development. A tax credit for every Ph.D. hired into a nano company.

DJ: Governments have evolved different mechanisms for improving the investment environment based on their historical paradigms. In the United States, we think the research argues that the government has had great success (comparatively at least) funding basic research. Programs to help then bridge the chasm from basic research to commercial prototype have been well received, although the research on the success rate is currently scarce. We haven't seen conclusive research demonstrating that governments have been successful artificially stimulating the investment climate for new technologies.

MG: The US government is proceeding well in this regard, in my opinion. It is consistently fostering R&D, something that the private sector is appropriately not interested in doing, at higher levels each year. During 2003 the US government conveyed $221M to the National Science Foundation that will increase to almost $250M in 2004, approximately a 12% increase. The National Institute of Health's award is projected to be $70M in 2004, a 7.7% increase over 2003. In toto, the US President's National Nanotechnology Initiative funding for 2004 is slated to be almost $850M, nearly a 10% increase over the 2003 award.

The next useful thing governments can do to assist the rapid maturity of nanotechnology is after awarding funds to competent, recognized organizations and academic institutions, stand back and watch it work. With all due respect to R. Buckminster Fuller, namesake of Buckminsterfullerene or Buckyballs - both exploited in carbon-based nanotechnology materials processing - less is more (his theory of dymaxion) applies as aptly to government intervention as matter.

The National Science Foundation conservatively predicts a $1 trillion global market for nanotech in little over a decade. "Nanotechnology is a subject on which there is already broad agreement - on both sides of the aisle, in the Administration, and indeed in the country at large. Nanotechnology can be a key to future economic prosperity and might improve our lives, and the federal government has an important role to play in supporting the basic research that will make this possible. Our legislation does just that, and passage of this bill is a big step for a 'small' science," said Chairman Sherwood Boehlert (R-NY), primary sponsor of the legislation with Rep. Mike Honda (D-CA).

"The NanoBusiness Alliance released a survey ... that projects the global market for the industry will reach $700 billion by 2008. And it said venture capital investments in the field will grow from $100 million in 1999 to more than $1.2 billion in 2003." Nov. '01 Small Times

10. What country outside of the US do you think will be a major source of nanotech investments and why?

PL: Japan has been a major player in development of physical and life science applications.

VK: Hard to say.

LB: Taiwan, Singapore, and Japan.

DJ: We think the Asian countries, Singapore, China, Japan, India, Taiwan, etc., will become major players in the next generation of technological development. They have already become manufacturing centers and low cost labor centers. Their rise may threaten the traditional status quo.

MG: Japan is seeing similar increases in its governmental awards for nanotechnology R&D. The Japanese government may allocate a whopping $1B, or more, for nanotechnology R&D in 2004. The United Kingdom has slated $150M for nanotechnology R&D over the next 6 years, according to Forrester Research, Inc.

11. As many present nanotech investors are currently investing from their IT, Biotech or Materials/Physical Sciences funds, do you think that more specialized nanotech funds will evolve?

PL: I expect that sector investors with expertise in focused areas will add nanotech investments as part of their portfolios as opportunities emerge - our view is that understanding of the current and future competitive arena is crucial to effective early stage investing.

VK: Possibly but I don't think that is the key issue.

LB: Yes.

DJ: We believe opportunism will lead to additional funds specializing in nanotechnology as the field matures, because there are currently so few specialized nanotech funds. However, we also believe that successful companies sell products to markets, and thus knowledge of the end-market is critical. Therefore, as the field develops, we also expect to see a convergence with funds concentrating on promising nanotechnologies within their traditional market or industry specialties, such as IT, biotech, materials, semiconducting, etc.

MG: Certainly. Nanotechnology, on the whole, remains a nascent industry. I envision financial institutions dedicated to ever diminishing facets of nanotechnology to be competent to perform due diligence and to be able to command their investment space. On the other hand, I can imagine the major exchanges having tracking stocks for very broad nanotechnology thrusts, say a MEMS index fund.

12. What are the major challenges for nanotech investors and to what degree do they need to be hands-on with their investments?

Nanotechnology has become one of the hottest areas in scientific research, pulling in billions of dollars in government, corporate and foundation cash. But the scientist who coined the term "nanotechnology" says a lot of what passes for nano is just plain ol' science, gussied up with a fancy name to rake in the bucks.

"'Nanotechnology'" has now become little more than a marketing term," said Eric Drexler, founder of The Foresight Institute, the leading nanotech think tank. "Work that scientists have been doing for decades is now being relabeled nanotechnology." wired.com

"... nanotechnology is already starting to attract significant investment dollars. The NanoBusiness Alliance, an industry association, estimates that US nanotechnology startups will receive US$1 billion in funding this year alone, while the US government will pour US$1.3 billion into nanotechnology research over the next two years. The Japanese government is even keener, assigning US$14 billion for nanotechnology efforts to help bolster its key electronics industries." Practical nanotechnology

PL: All investors that expect to raise several rounds of capital over the life of their companies need to build strong management teams that can react to a changing market - and the technologies underpinning these companies need to have strong intellectual property protection and potential large market applications. Early stage companies need hands-on at their start to augment management team knowledge and business designs with investor and appropriate advisory board perspectives.

VK: These are long term investments. Many of the early markets are smaller niches. If one is to build a $50m -$100m company in a market, we cannot afford to invest $30m to get it to breakeven. Otherwise returns will be limited.

LB: Highly multidisciplinary. Time scales are longer than IT investments, more like biotech investments.

DJ: The number one difficulty is differentiating between technologies that are still science projects and those that have the necessary technology already developed to be commercially successful within traditional venture capital investment time horizons. A second concern is having the proper business management in place to manage what are usually university or federal lab spin-out companies, heavy on science and technology, but not always as skilled in business and sales. A third difficulty is sifting through the intellectual property rights to determine who controls priority rights to certain platform technologies.

MG: Positive ROI is always a good challenge vis a vis emerging technologies. Unlike some nay-sayers, I do not believe that nanotechnology represents another investment bubble. Similar to the dotcom investment debacle, however, there will be some huge winners but many good-looking companies will fall by the wayside. Picking the winners is the thing, you know- My mantra is to temper my optimism with a goodly amount of skepticism. Once invested, though, I believe it behooves the professional and unprofessional investor alike, to believe in your companies and support them as best you can. Sometimes the biggest challenge is not summoning the courage to put your money on the line, but staying the rocky course with the companies you have chosen.

As a professional investor, you must be exceedingly diligent in keeping track of your portfolio companies' achievement of milestones and more particularly the lack thereof. Generally, in a growth-stage company, you insist on occupying a seat on the board of directors or at least be granted observer's rights. Overly optimistic program development usually besets growth-stage companies. Therefore, the investor must be capable of tolerating missed milestones and evaluating the underlying circumstances judiciously, without demonstrating knee-jerk reactions that unsettle management unduly. When things are not goring well for companies, there is a tendency for the managements to screen out everyone who is not intimately involved in the Company's operations. This can easily include screening out their boards of directors, as much as possible. It is in this situation that the hands-on dilemma is rooted.

The classical dynamic tension between CEOs and Presidents and their boards is most vivid when these powerful managers feel insecure or threatened. The board must tread a fine line in supporting their management teams and not 'disincentivising' them while maintaining a firm grasp on reality and executing their fiduciary responsibility on the part of shareholders. While boards hold significant authority in the corporate context, managements, not directors, execute company business. If managements do not perform, releasing them and selecting new team members, with as little disruption to implementing the business plan as possible, is the board's responsibility. This is the closest hands-on direction of the Company that I suggest for investors. It is usually not helpful to interfere with or emasculate the people who are paid to execute the Company's business, while they are employed.

Mr. Peter Leone, Senior Principal, PureTech Ventures
Mr. Peter Leone, Senior Principal, PureTech Ventures

Mr. Leone is an accomplished healthcare executive with a general management track record in biotechnology, pharmaceuticals, medical devices, and healthcare service delivery. He has international hands-on business experience in the U.S., Europe, and Asia. Most recently, he was President and CEO at Phenome Sciences, a recently acquired company that develops metabolic probes to predict drug safety and measure therapeutic response.

Mr. Vinod Khosla, General Partner of Kleiner Perkins Caufield & Byers
Mr. Vinod Khosla, General Partner, Kleiner Perkins Caufield & Byers

Mr. Khosla is a General Partner of Kleiner Perkins Caufield & Byers, and serves on the boards of Centrata, Indian School of Business, Infinera, Juniper Networks, Kovio, OnFiber Communications, QWEST Communications, SEEC, StorAD, and Zaplet. Mr. Khosla was a co-founder of Daisy Systems and founding Chief Executive Officer of Sun Microsystems where he pioneered open systems and commercial RISC processors.

Mr. Larry Bock, President and CEO of Nanosys
Mr. Larry Bock, President and CEO of Nanosys

Mr. Bock is a General Partner of CW Group, where he focuses on seed stage de novo startups in the life and physical sciences. Mr. Bock was the Founder and Initial CEO of ARIAD Pharmaceuticals, Neurocrine Biosciences, Pharmacopeia, GenPharm International (acquired by MedaRx), Argonaut Technologies, Caliper Technologies, Illumina Technologies, IDUN Pharmaceuticals and FASTTRACK Systems. He was a co-founder of Athena Neurosciences (acquired by Elan Pharmaceuticals for $700M), Vertex Pharmaceuticals, and Onyx Pharmaceuticals. He is a Member of the Advisory Board and the Technology Advisory Board of the NanoBusiness Alliance, and was picked by the Forbes/Wolfe NanoReport as one of the "Top Ten Power Brokers In Nanotechnology."

[no photograph available]
Mr. Doug Jamison, Vice President Harris & Harris Group

Prior to joining Harris & Harris Group, Mr. Jamison worked for five years as a senior technology manager at the University of Utah Technology Transfer Office, where he managed intellectual property for the University of Utah. This included assessing technologies in both the biological sciences and the physical sciences, working with patent attorneys to develop patent protection, and developing and marketing these technologies with industry.

Dr. Michael T. Gamble, Director Scientific Programs Fidelys, L.L.C.
Dr. Michael T. Gamble, Director Scientific Programs, Fidelys, L.L.C.

Dr. Gamble is an entrepreneurial technologist whose twenty-year contributions as founder, financier, director, and executive for technology enterprises earned his inductance into International Who's Who of Professional Management for 2003. His contributions to world-class physics experiments led to a Commendation for Exceptional Performance and a Distinguished Project Team award from the Los Alamos National Laboratory as well as a Postdoctoral Fellowship at the Massachusetts Institute of Technology in 1989 and 1990. He co-founded and is a Principal of Fidelys, L.L.C., an investment banking and corporate advisory entity, and remains Managing Member of the private venture fund MC2 Enterprises, L.L.C. During the late 1990's, Gamble was a major investor in and VP of Manufacturing Technology for Nanovation Technologies, Inc., a developmental stage telecom components company dedicated to the deployment of large-scale, integrated optical technologies. From 1995 until the present, he has contributed to the founding, initial capitalization, and management of several technology businesses. Gamble performed postdoctoral study and research at the Massachusetts Institute of Technology in Materials Engineering and holds a Ph.D. in Mechanical Engineering from Columbia Pacific University as well as a Master of Engineering and a Bachelor of Sciences in Nuclear Engineering from the University of Florida.

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In closing, these quotes:

"Until the second quarter of this year, venture-capital investing had gone through two straight years of quarter-to-quarter declines. Investing levels are tied to overall market conditions, especially those for initial public stock offerings. Since IPOs have been almost nonexistent, venture capitalists have been without their favorite route for cashing out. Still, some have been spending cautiously, and nanotech is getting a growing piece of the pie.

Venture capitalists invested between $250 million and $300 million in nanotech deals last year, reports the business information and consulting firm CMP Cient'fica. Overall, the nanotech area accounts for just a few percent of all venture investments. Although the amount invested isn't expected to increase hugely this year, several venture-capital firms are active in the nanotech area."

"'We see about a deal or two per day, and usually do five to six per year,' says Peter S. H. Grubstein, managing partner of NGEN. The firm expects, however, to complete about eight deals this year and find a similar number next year. Each transaction typically involves an investment of $3 million to $4 million by NGEN." ACS article

"The U.S. government is easily the nation's largest investor in nanotechnology. Various agencies will spend $774 million on nanotech research in fiscal 2003, and plan to spend $847 million in fiscal 2004. The House of Representatives in May passed a nano spending bill that would allot $2.4 billion over three years, and the Senate is expected to pass its version early in the fall session." SmallTimes article

"If the year's first quarter is any guide, there will be many more (investments) by quarter's end. A Small Times analysis of the PricewaterhouseCoopers/Thomson Financial Venture Economics/National Venture Capital Association MoneyTree Survey found that venture capitalists invested $162.2 million, or 4.3 percent of dollars spent, in small tech startups in 21 funding events in the first quarter of 2003. Overall, venture capitalists invested $3.8 billion in 623 companies, down from $4.3 billion and 726 companies in the previous quarter.

The bulk of the first quarter's small tech dollars, $108.2 million, went toward expansion stage companies in 11 funding events. Biotechnology snared the most small tech dollars of any industry, with $62 million in eight funding events. California topped the state list, with $108.3 million in nine events." SmallTimes article

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For further research, here are pages we found valuable:


Five Ingredients for Financing Nanotech Ventures Neil Gordon, Sygertech Consulting Group. (PDF)

Making Money At The Molecular Level Matthew Herper.

VC heats up Peter Clarke.

'Nano' Suddenly a Gigantic Label Noah Shachtman for Wired.

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Issue #4 will cover Defense Nanotech. It will land in your mailbox November 3rd, 2003.

Infamous Quotes:

"There is no reason anyone would want a computer in their home." (Ken Olsen, Digital Equipment Corp, 1977)
"Computers in the future may weigh no more than 1.5 tons." (Popular Mechanics, 1949)
"I think there is a world market for maybe five computers." (IBM's Thomas Watson, 1943)
"This 'telephone' has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us." (Western Union internal memo, 1876)

And the lesson is? It's a tough game to call.

Need advice? Check out NanoStrategies

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