Guest Writer - Gastautor - Gast Schrijver

Nanosys: To IPO or Not to IPO?
Is That the Question?


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)

However, just 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. Was and biotech bubble 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.

And they still admit it. "To date, we have not successfully developed any commercially available products," the company wrote in the S-1 form it filed with the SEC. "We are currently in the investigation phase of all of our potential products. We do not anticipate that our first products will be commercially available for at least several years, if at all."
The company has licensed dozens of patents from key university researchers -- many of whom have joined the company -- in an attempt to create products across a wide number of industries. Those licensing deals and Nanosys’ own patents have enabled them to strike joint development deals with Intel; several government agencies; DuPont; and IN-Q-Tel, the firm started by the CIA; to name a few. It also has licensing agreements that allow it to try to commercialize intellectual property coming out of labs at Harvard, the Massachusetts Institute of Technology, the Hebrew University of Jerusalem and other institutions. DuPont wants to use nanotechnology to create thin, flexible display screens. Matsushita hopes to create a new kind of solar panel with Nanosys, and Intel is tapping Nanosys to develop new kinds of memory chips that store data permanently.

As a company, Nanosys remains small. It has 34 employees in a small building in Palo Alto that resembles a hospital laboratory. The labs are filled with chemical vials connected by clear plastic tubes and powerful microscopes that can show details of the atoms that the scientists are manipulating.

Nanosys' products include nanowires, nanorods, nanotetrapods and nanodots formed from semiconductor materials. Applications include chemical and biological sensors, high-performance large-area macroelectronics and lightweight high-efficiency conformal photovoltaics. Among the ideas is to create a kind of super-velcro that could allow a person to walk up a glass wall. This all sounds very interesting for a research group but unfocused for a company that is supposed to be in business making money.

For a startup with no product, $70 million over 2 years for a 35 man company, is $1 million per employee per year with no real product but just research revenues. Sounds like Nanosys could be overvalued…extremely overvalued.

Nanosys was started by a team of researchers in July 2001 that included MIT veteran Stephen Empedocles. Executive Chairman of Board of Directors, Larry Bock, a biotech entrepreneur who has started more than a dozen companies, joined Nanosys in October 2001. He and CEO Calvin Chow assembled a star-studded cast of scientists, board members and backers. Several team members are from a successful biotech startup, Calipers Technologies, including CEO Calvin Chow (also ex-Hewlett-Packard), CTO J. Wallace Parce, PhD., VP of IP Michael Murphy.

Nanosys also has an all-star studded Scientific Advisory Board with Harvard’s Professor of Chemistry, Charles Lieber along with Paul Alivisatos, a University of California professor who also directs the Molecular Foundry, a multimillion dollar research effort funded by the Department of Energy. Other Scientific Advisory Board members are professors from MIT, Harvard, CalTech, UC Berkeley, Columbia U, UChicago, etc. with heavyweights on the Advisory Board such as John Young, an ex-CEO of Hewlett-Packard, and Greg Yurek, ex-CEO of American Superconductor Corp. and Christoph Westphal from Polaris Ventures who is an M.D. with a PhD in Genetics and is also an ex-McKinsey consultant. Co-founder and Director of Chemistry, Chunming Niu was a post-doc of Charles Lieber.

Technically speaking, Nanosys seems like a very expensive research incubator with a management team who are very marketing savvy and able to dazzle investors with their vision and pedigrees. They are brilliant at selling themselves even though they’re not selling products.

With its great marketing strategy, Nanosys has also been honest about the fact that they will not have product for several years and that the company may have to contend with larger competitors and other start-ups, regulatory changes, public suspicion of nanotechnology and intellectual property disputes. Typically VC’s don’t fund companies at such early stages with no real product or sales. Have the VC’s finally realized that in their zeal they came in too early and they paid too much for Nanosys? Remember what happened to Perhaps an IPO is their way to recoup their investment and pass on their mistake to the public?

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 and biotech IPO’s did for their industries a few years back. Yet even 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. 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 this one isn’t it. For those who buy Nanosys IPO shares, they will soon realize they’ve been had.

Interestingly enough, the money in nanotech won’t be made from IPO’s. If you look at the many big corporations working in the nanotech sector, such as HP, DuPont, Intel, IBM, etc., the money will be made from M&A (Mergers & Acquisitions) and licensing deals between them and nanotech startup companies.

Science is unpredictable. Expect the unexpected.

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 also Managing General Partner of Seraphima Ventures and CEO of Red Seraphim Consulting where she advises investment firms and 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.

© Pearl Chin 2004


Dr. Pearl Chin