...read the wave
Guest Writer - Gastautor - Gast Schrijver


P-O’d At IPO’s
‘Why the Nanosys IPO now would
have been bad for Nanotech’


Many were upset when Nanosys withdrew their IPO in early August 2004 after announcing their IPO end of April 2004, least of all CEO Larry Bock. However, it remains clear that market conditions were not ready for an IPO of a company at that stage of progress. Nanosys was without actual product and sales and did not promise them any time soon. Many consider Nanosys the poster child of successful nanotechnology startup companies. However, there are many other nanotechnology startups, some with similar business models and some even with sales revenues that may have just as good technology and potential but not as good press.

The market was and still is P-O’d at IPO’s for companies without real product and sales revenues. This was because the market was too soon out of an economic downturn due to overvalued dot.com and biotech companies, some of which spent money like there was no tomorrow, and some of which also did not have real sales yet. The aftermath of those bubbles bursting was exacerbated by the 9-11 tragedy. Only a few of those companies such as Yahoo actually succeeded while the rest fell by the wayside as casualties of dot.com and biotech.

Nanosys would not have seen any revenues soon after this IPO. If Nanosys had succeeded in going IPO, its stock price would have dropped significantly soon afterwards. There would have been many a disappointed public shareholder feeling they had been had and selling off their shares a year into ownership. Public shareholders have much shorter term investment horizons and shortsighted views these days in terms of making money from stock of publicly held companies. The public is less risk adverse than angels and VC’s. The only people who would have made any money on the IPO were the early VC investors selling off their shares at the IPO.

As Nanosys was being positioned as the great nanotech hope that would pave the way for nanotechology’s legitimacy on Wall Street, Nanosys’ failure on the stock market would have burst a perceived nanotech bubble. The problem here for nanotechnology and companies in this space is bad news travels fast and goes away even slower. This would have poisoned the market mentality for any other upcoming and perhaps more promising and better positioned nanotech companies that should be going public in an IPO or for other nanotech startup companies trying to raise funding for the next few years. Nanosys would have left a bad taste in the mouth of the public for future nanotech deals. It would then become even more difficult than it was lately to raise the most simplest of funding for any other nanotech startup. Timing is just as important in the startup world and having to wait another few years for appropriate funding could kill many companies with potentially disruptive technology. With the withdrawal of the Nanosys IPO, the hype bubble then deflated to the more reasonable and manageable proportions of the fledgling industry that it is.

Here is where I start to digress from my original point of this piece but bear with me. Over time, in the VC’s mind, an exit strategy is successful as long as they recoup their investment and make money from it and then go on to invest in the next venture. However, this is not considered a success for the person who bought their shares and then watched their value drop because the company’s potential was overhyped and overvalued when they bought it. In some people’s mind in the more extreme case, this could constitute fraud. Some might even argue there is a fine line between overvaluing and overhyping company performance and potential considering we’ve heard the Enron, Worldcom and Tyco stories to make us just uneasy enough to lean that way. What makes us uneasy is how easy it is to do that and allowed to do that because such practices are so ingrained in the corporate culture. Every investment deal that comes across investors’ desks is assuredly labeled as “overvalued”.

From a big picture perspective, a successful entrepreneur and/or CEO is one who creates, leads and manages a company whose value holds through the good and bad times because he is a good leader and strategist for the company. Is a CEO successful just because he was able to bring a company to a successful IPO? What if the company tanks afterwards?

Some believe that being able to make money on the IPO even though the company in the long term fails still makes for a success story and a successful CEO. A CEO is considered successful if he makes a lot of money for its investors via an IPO even though the company tanks in the long run? Is there something wrong with this logic?

Somewhere along the line, the other half of the equation that got lost in the strive for excess is that the company should actually be expected to maintain its projected value after the IPO. Of course, on the other hand, as investors, we all have to do our own due diligence before buying shares in anything. We also must shoulder some responsibility as investors. An IPO should not be used to recoup investment in a bad opportunity for investors by passing on the bad news to the public. An IPO should be used to cash in a successful investment.

Nanosys may be the poster child of nanotech, but it needs to grow up a little more, perhaps reach adolescence first by proving it can make some real product and sales, before moving out on its own into the public domain. It is a good company but it’s just not ready to go public. Their marketing team is very good and they have very good network and lots of funding. However, Nanosys’ legs are still taking its first steps. If its legs are not strong enough to support itself, it could fall and hurt itself. With the current market mentality, for nanotech and for any other industry for that matter, we should take the cue from Orson Wells’ famous line for Paul Masson wines in their commercials where there should not be an IPO before its time.

Seraphima Ventures
90 John St., 6th Fl.
New York, NY 10038

US: +1-212-861-3298
US: +1-212-656-1481 Fax

UK: +44(0)7986 807 580
UK: +44 (0)20 76812390 Fax

Dr. Pearl Chin


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