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Guest Writer - Gastautor - Gast Schrijver
www.nanoTsunami.com

 

What Is Happening to the Funding for Commercializing Nanotechnology?

 

 

Within the past few weeks I have heard two pieces of very disturbing news from the investment industry that could negatively impact commercialization of nanotechnology in the United States.

The first piece of disturbing news is that there is an initiative by the Bush Administration to cut funding to the National Institute of Standards & Technology (NIST) (formerly known as the National Bureau of Standards (NBS)). Since I have done some research work at and with NIST, I admit I do have a personal interest in this excellent lab’s welfare. NIST, since it is overseen by the Department of Commerce, is never quite perceived as the technical powerhouse of a government lab that it is, mainly due to misconceptions of what type of research it does. There are excellent scientists there who do research at this government lab that in many cases have very little to do with Standards and more to do with Technology and much of it is nanotechnology. Many do not perceive Commerce as having to do with technology and that may be because NIST does not have the word “laboratory” in its name like Sandia, Oak Ridge, Argonne, Fermi, Jet Propulsion, or Brookhaven. Hence it suffers from not being recognized as a heavyweight contender in government labs. Forgive me if I have left out a few government labs in this list because there are certainly others but I am just making a point here. Many do not even realize that NIST has a neutron reactor on site that is visited by scientists all over the world who collaborate with the NIST scientists. Of course, scientists all over the world also collaborate with the non-reactor scientists as well. I beg the environmentalist please do not go up in arms against NIST now because there is a reactor on the grounds. NIST has never hidden this fact from the public and it goes out of its way to meet government safety standards in shielding and safe operating protocols.

However, my bigger concern with this first piece of disturbing news is that the funding is also going to be cut from Advanced Technology Program (ATP), another underrated and under-marketed program in the federal government, that is overseen by NIST and headquartered on its grounds in Gaithersburg, Maryland. Few know that the ATP is one of the only federal government programs that exist to fund commercialization of early stage technology. Most federal funding programs, such as the 21st Century Nanotechnology Act, fund early stage research and development at the university and government lab levels at pre-commercialization stage. However, ATP is a program that bridges that funding gap between seed and early stage and VC funding to commercialize the technology. Most people do not even know about ATP besides that it also stands for an important molecule (adenosine triphosphate) in the energy conversion cycle in the human body.

NIST is part of the government agencies on the list for federal nanotechnology funding and ATP is under NIST’s umbrella.

So, the Bush Administration signs on December 3rd, 2003 into law The 21st Century Nanotechnology Act to fund research and development of nanotechnology on the university and government lab levels but then begins initiatives to cut off the legs of the very programs that can help commercialize these technologies? Does this make sense? I understand that we need to allocate funding to military and Homeland Security initiatives, but what about the nanotechnologies that have military and Homeland Security applications such as sensors for biological and chemical agents and weapons, one of our biggest security fears? How are we going to commercialize these technologies coming out of our labs and ingenious scientists but can now never make these inventions for our soldiers and citizens to protect them?

Wait… It gets worse.

The second piece of disturbing news is that the Small Business Investment Company (SBIC) program under the Small Business Adminstration (SBA) is going under some major changes. Typically the SBIC program offers two options for funding: Participating Securities and Debentures. The Participating Securities, as opposed to the more traditional Debentures or debt based funding, has been stalled. The Debentures option is still active. Funding by debentures require companies to make semi-annual interest payments, much like balloon type mortgages. No new licenses for Participating Securities SBIC’s will be issued as of end of September 30, 2004. For the past 12 months, steps have been being taken to curtail the Participating Securities part of the SBIC program. Strangely enough, this started around the same time the 21st Century Nanotechnology Act was signed into law.

The SBIC program was created by the Small Business Investment Act of 1958 to bridge the gap between entrepreneurs’ need for capital and traditional financing sources. This act was designed to stimulate and supplement the flow of private equity capital and long term funds which small business concerns need for sound financing of the business operations and for their growth, expansion, and modernization. The SBA (Small Business Administration) administers this program to provide capital to growing business by licensing SBIC and combining investment professional with capital and leveraging minimum existing capital as a stipulation with capital provided by the SBA.

Since 1979, roughly 2/3 of the financing for VC funds comes from institutional investors, such as pension funds, insurance companies and university endowments. This was because in 1979, the Labor Department liberalized the interpretation of the “prudent man” rule under ERISA (the Employee Retirement Income Security Act) which changed the composition of investors in the venture capital industry and increased the total flow of funds into the industry. This act sparked the venture capital industry in the U.S. which has made us the haven for small businesses giving them the chance to succeed like in no other country and making it possible for many to achieve their dreams.

In 1991 the SBA appointed an Advisory Commission to review SBIC industry performance. The Advisory Commission determined that SBIC’s had a significant role to play in building the U.S. economy and the principle features of their outlined program changes were embodied in legislation called the “Small Business Equity Enhancement Act of 1992”. This created a new form of SBA leverage known as “Participating Securities”. This act increased the mount of leverage available to an SBIC to $90 million and introduced the idea of the SBA taking an equity stake in a SBIC investment firm as opposed to offering more traditional Debentures or debt in the past as leverage.

From 1994-2002, according to the SBA, SBIC’s provided 8%of all venture financing dollars (which comes to $23.7 Billion out of $280.5 Billion total), 64% of all seed financing dollars and 62% of all venture financings by actual number. In 2002, over 27% of those funds were allocated to low and moderate income areas. Well known successful companies that SBIC’s have helped fund are Amgen, Apple Computer, FedEx, DoubleClick, Staples, Jenny Craig, Intel, Sun Microsystems, to name a few.

Since then, the SBIC program is looked upon by the rest of the world with envy because the U.S. government has enough money to invest in its own businesses through SBIC’s to help stimulate its own economy. So much so that the UK Government has implemented its own SBIC program as of end of 2003, called the Equity Capital Fund (ECF) modeled after the U.S. SBIC program.

The Participating Securities program is an ideal program for early stage companies with no significant revenues yet, such as would be the case for nanotechnology startups. Debentures are not appropriate for early stage technology investing because these types of companies do not produce significant revenues right away to enable payment of those semi-annual interest payments. The Participating Securities program is rumored to have intentions of being overhauled by late 2006 or early 2007 to take a much larger equity stake in return for funds. In the meantime, there is no program appropriate for investing in early stage nanotechnology startups while Participating Securities program has been stopped.

It is true that the SBIC program has lost much money in the past decade due to bad investments and economy causing many approved SBIC to fail… so what VC or Investment Bank hasn’t? However, why does the current Participating Securities program have to be curtailed until its overhaul without a stop-gap solution in the interim? Do we really know how long it will take to overhaul the current Participating Securities program? What are aspiring nanotech SBIC’s to do in the meantime? Why does it seem that funding commercialization of nanotechnology versus research and development of nanotechnology is not as important? If the federal government believes that commercialization of nanotechnology is not yet important and that nanotechnology is still in its very nascent stages, it just has to look around for confirmation that is not true.

In addition, if the U.S. VC firms are not given anymore access to cheap government money, they will not invest in commercializing nanotechnology and someone else will. Did you know Japanese banking firms like Sumitomo are already in our backyard on the West Coast looking for nanotechnology to invest in.

We will have much good research funded by the $3.7 Billion 21st Century Nanotechnology Act but other countries, not the U.S., will fund the commercialization of that research and make the money from it. In effect, the U.S. will become the nanotechnology incubator for the rest of the world. If we slow down our investment in nanotechnology, the U.S. will surely lose its slim lead in technology in the world and its status as the richest country in the world. In the long run, the U.S. may lose economic and political influence while other countries copy our successful investment models to beat us at our own game.

If you have a passion for nanotechnology, I strongly suggest you contact your nearest Congressman and find out if there is anything you and they can do to provide a stop-gap solution for NIST and ATP funding, for obtaining SBIC licenses and somehow continue to provide a form Participating Securities funding, even if in a somewhat limited form, while they overhaul the current program instead of stopping it altogether while they figure it all out. It would be a terrible thing to watch nanotechnology research flourish in the U.S. with our taxpayer money but then have to watch some other country make the money from it because we, as a country, cannot afford right now to invest in the commercialization of it. I think it is time to bring in another Advisory Commission and this overhaul needs to be done quickly.



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
www.seraphimaventures.com

 

Dr. Pearl Chin
PhD, MBA

 


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