Financing a nanotech company can be as challenging as attaining
milestones in nanoscience research. Without a sufficient input
of resources and creativity in either task, the corresponding
output will likely lead to disappointing results. While there
is no doubt of the potential from nanotechnology, fledgling
nanotech ventures must overcome some severe structural and communications
hurdles to convince investors to buy their shares.
Financers such as Venture Capitalists (VCs) raise money from
institutional and private sources by promising to increase the
value of their holdings. To do so, they invest in companies
that have a considerable potential to increase in value then
sell the shares at a later date for a higher price. Simply stated,
buy low - sell high, assuming that someone (anyone) will want
to buy the shares.
Nanotech companies face an uphill battle since the number of
well-known commercial nanotechnology successes can fit on the
head of a molecule. Recent financial horror stories from tumbling
share prices of previously solid blue chip technology stocks
and the dot.bom fiascos have scared many money men away from
On the other hand leading business sources are helping to create
a buzz around the upside potential of nanotechnology. One of
the first such stories was featured on Forbes magazine's July
23, 2001 cover and described nanotechnology as the "Next
Big Idea" (see http://www.forbes.com/forbes/2001/0723/096.html).
While the number of dedicated nanotech venture capitalists are
scarce, there appears to be more traditional VC's making investments
in nanotech companies. Those VCs who have already tested the
nanotech waters seem to be increasing the number and size of
their investments. This trend is good news for nanotech entrepreneurs.
While there is no way of knowing for sure if a prospective nanotech
investment will be a dud or a Dow (Chemical), there are clues
that help financiers evaluate the potential of a venture before
making their decision to invest. Knowing in advance the valuation
criteria on which your nanotech venture will be measured can
help you better prepare and subsequently increase your chances
of getting funded.
Ingredient #1: The Story
Exploring the surfaces of fullerenes, making molecules rotate
like propellers, and understanding how monolayers can self-assemble
are fascinating concepts. However unless there is a convincing
story of how your specific research will transform into a
revenue-generating venture by adding investment dollars, there
will be hesitation for an investor to proceed.
Investors want to know the story of how your innovation will
evolve into a company that will appreciate in market value.
As part of their evaluation, they seek to uncover this story
by directly and indirectly asking a series of questions that
uncover its potential, including the market opportunity, competitive
situation, management team, business strategy, financial projections
and exit strategy.
In no particular order, investors want to know what is the
commercial opportunity from your research. Will you be developing
a product that substitutes an existing industry standard in
an established market, or will you be creating a new market
that doesn't currently exist? What are the products and services
that you will make and what is the value they offer to potential
customers (e.g. lower cost, better performance, ability to
meet new industry guidelines)?
Who will buy or license your products? How much will they
pay? Who are the principal competitors of bulk products that
your technology will replace? How will competitors react to
a new company in this field? How will potential customers
hear about your products? How will customers buy your products?
How will your products be distributed? Who are the best-suited
strategic partners who can help your business succeed? Who
will be your first customer, and why?
What's the value of your technology in terms of its originality,
its innovative aspects, its positioning and its competitive
advantages compared to existing technologies and those under
development? What are the risk factors related to R&D,
technical difficulties to pass the production from lab scale
to industrial scale, time to market, cost control, quality
assurance and other potential challenges such as regulations,
environmental standards, retaining key people, access to raw
materials, machinery and equipment, etc?
At the completion of your research will be some intellectual
property. Will your venture own the IP? Can the IP be adequately
protected and defended through patents, and non-legal means?
Are there any claims on the IP by individuals, universities
or research centers for joint ownership and/or royalties?
Who will be heading up your nanotech venture? Is there sufficient
expertise working full time for the venture to make it a commercial
success? Who are the non-researchers on your team with competencies
in production, marketing, finance and management?
Universities, professors, companies and government agencies
often have pre-existing strategic alliances for collaboration
on research, jobs for graduates, funding and other joint activities.
Many universities also have mature mechanisms in place for
spinning-off ventures and licensing technologies. Good stories
will build upon these relationships and provide the best scenario
A Sample Story
While each story is unique and applies to the situation at
hand, and without breaching any non-disclosure agreements,
here's a sample nanotech venture story described in terms
that a VC might best comprehend. After seven years of research
our team has developed a new nanomaterial which offers improved
performance in electrical, optical, catalytic and thermal
properties. Derivative products can be made for dozens of
industrial applications. Customers in the first market being
targeted bought $750 million of similar bulk products last
year just in the US. Our nanomaterials will match or exceed
the performance of the industry leader while costing us less
than 1/10th of the price to manufacture. Users will buy from
us because the existing bulk materials are more expensive,
in short supply, and have raw materials produced in politically
unstable countries. Furthermore, new US government regulations
will mandate more stringent performance levels that will increase
the quantity of bulk materials required in the target application,
further increasing the cost spread between us and the leading
suppliers. Letters of interest have been provided to us by
4 of the top 10 users who will convert their pilot orders
into more significant volumes once they validate our test
results. We expect to enter into strategic alliances with
2 of these users for distribution arrangements into the European
and Asian markets.
property is covered by a series of patents on the nanomaterials
and production process, and is entirely owned by our company.
Our university partner has zero ownership on the patents,
but has a 10% royalty on our first $100 million of sales.
Our team comprises the 5 principal researchers plus a CEO
from the industry with proven sales and management experience.
A production VP and CFO have been identified and will be brought
on-board within 6 months of the investment. We are seeking
$5 million that will be used for productization and commercialization
Ingredient #2: The Numbers
your story might illustrate how your nanotech venture will
make money for the investor, assumptions and corresponding
numbers are needed to quantify how value in the venture will
be created. Estimates do not need high precision to be acceptable,
however you do need to demonstrate solid thinking behind the
The starting point for assessing nanotech ventures is usually
the ability to generate revenue. More specifically, investors
are primarily interested in seeing real nanoproduct and MEMS
device revenue streams beyond R&D contracts, lab equipment
and nano-powders shipped in sample volumes. What's important
is the entrepreneur's perception of when and how much money
will be generated through the sale of products.
Revenue projections are usually decomposed into the following
* Units shipped - For the next 3 to 5 years, you might want
to estimate the number of units to be shipped whether in absolute
number, weight or volume. Units shipped are expected to increase
over time as more customers become familiar with your products.
* Price per Unit - This is the corresponding price your customers
will pay. The unit price is likely to decrease over time with
competitive products hitting the market in future years.
By multiplying the units shipped by the price per unit, the
result is a revenue projection which enhances the overall
story. For example, suppose your company estimated that it
could sell 1,000 devices in 5 years time at an average price
of $10.00 per unit. The total sales potential of $10,000 would
be a clearly unrealistic target for an investment of $5 million.
With a $10 unit price, the sales potential should be in the
millions or else the chance of getting funded would be virtually
and Calibrating the Financial Model
can be further elaborated by developing a complete financial
model containing income statement, balance sheet and cash
flow. These statements can be derived by a financial specialist
or a pre-programmed spreadsheet by making a series of additional
assumptions by year on the cost of raw materials, direct labor
for producing each unit, royalties, manpower, equipment costs,
depreciation rates, marketing expenses, etc.
value of the numbers comes from calibrating your story and
the corresponding assumptions to create a financial return
on the requested investment that meets the investor's expectations
for both the investment amount and associated risks. Different
scenarios can be generated to show variations of the possible
outcomes. For example, what would be the financial impact
if you were to speed up marketing with an additional $1 million?
important point is calculating when the venture is expected
to breakeven (i.e. earn back as much money from operations
as the proposed investment). The sooner this can happen, the
more attractive a nanotech venture will be assessed. A target
payback period should be 2 to 3 years.
Ingredient #3: The Package
Your story and numbers are assembled in a package comprising
a series of documents and interfaces with the investors, and
conveys a certain image of your company. This package offers
additional clues on how your company might be perceived by
prospective customers and business partners who are critical
to your commercial success.
Picture your banker as someone with the same background as
the VC who is also evaluating your potential as a financial
investment when you are seeking a home or auto loan. With
your banker, you may help your cause by supplying documents
communicating what you are buying and how much you need, providing
evidence that you are a good commercial risk, supplying credit
references who could be contacted to validate your financial
stability, and even dressing appropriately to give a professional
and responsible image.
The same is true when seeking financing for a nanotech venture.
Here are some points to consider:
a) Provide an easy to read "Reader's Digest" version
of your story as a quick introduction with limited scientific
b) Present a well written business plan which provides 1)
your story with a business and non-technical focus, 2) corresponding
numbers and assumptions, and 3) supplementary materials in
the appendix that support your claims (e.g. market study,
magazine articles, scientific papers, patents, third party
testimonials, independent lab results, etc).
c) Convey your materials with an appropriate image which may
position your products and the target applications.
d) Complete your team with strong and complementary scientific
and management personnel, strengthened by an outside scientific
committee and business people on the board of directors.
e) Supply a list of third party references including potential
customers who can be called upon by the VC to validate your
Your image is also reflected in each exchange with the VC
- from the appearance of your personnel and your web site,
to a courteous and rapid response to phone calls. VCs expect
to be treated as your partners who contribute to the success
of your company with money, contacts and know-how. Their expectations
need to be addressed in the image you convey.
Ingredient #4: The Target
As VC's tend to specialize, the most likely VC sources for
near term nanotech investments are traditional VC's having
technology portfolios that are evolving into nanotechnology.
For example, a VC that focuses on the electronics industry
can invest in nanolithography without going beyond its investment
charter. The same goes for advanced materials VCs into nanomaterial
ventures, industrial products VCs into MEMS startups, and
biotech investors in biosensors and nanomedicine.
Once you identify the most likely financial sources for your
venture, you also need to be aware that different VCs have
varying investment objectives and preferences. Some VCs are
early stage while most prefer to see some commercial activity
such as minimum revenue before they invest. Some VCs will
only invest in companies that are within a two-hour flight.
Still others prefer a certain size of investment - too small
is overly expensive to administer while too big may exceed
their tolerance for risk. Most VCs prefer to invest with other
investors to diversify their portfolio over a wider range
of potential investments. Also important is timing, as the
VC has to have available funds to make new investments at
the time of your request.
Wise entrepreneurs will seek other avenues of financing in
addition to the VCs to maximize their chances of getting funding
and ultimately striking the best possible deal. This is particularly
important for early stage companies seeking seed money. Some
of the likely alternative sources of financing include government
(see www.nanoledge.com as an example), corporate investors
including potential customers of your venture's products,
and angel investors who are successful entrepreneurs that
have previously built successful companies and can add business
savvy as members of your board of directors.
Other important criteria include the personal chemistry between
the personnel of the investor and the nanotech venture (as
people invest in people), and a clear vision of how the investor
will ultimately get its money back. "Exit strategies"
can include selling its shares to a later stage investor or
multinational company, merging your company with another company
in its portfolio, or selling its shares on the stock market
through an initial public offering (IPO). In all of the above
cases, nanotech ventures are likely to be considered along
side of all other investment opportunities without any special
consideration for the nanoscience involved.
Ingredient #5: The Connection
Gates was introducing a software venture to potential investors
with a personal endorsement as the next Microsoft, one can
envision sparks coming off the pens of prospective investors
as they race to sign their checks. Contrast this with the
same software company sending its business plan in the mail
unsolicited. Obviously the right connection, message and influence
with the money people will help your case.
Many investors have dozens or hundreds of business plans routinely
pass their desks. Having a credible connection particularly
with a history of delivering successful ventures to the investor
may leverage your nanotech investment opportunity into a priority
Having the right connection to well suited target investors
with an effective story, attainable numbers and appropriate
package, are five ingredients that can increase your chances
of getting funded. And if you don't have all of these ingredients,
you may be wise to devote the resources and creativity to
develop them if you are serious about building a commercial
nanotech venture. While there are never any guarantees in
closing financing deals, it is clearly in your best interest
to do everything you can to improve your chances.
the Author: Neil Gordon
is the President of the Canadian NanoBusiness Alliance and
specializes in the commercialization of nanotechnology and
MEMS. As a nanotechnology business consultant he works with
nanotechnology investors, early stage ventures, business units
in large companies, and government agencies in assessing investment
opportunities, establishing strategies, developing business
plans, obtaining financing, defining sales opportunities and
tactics, launching new technologies, and developing marketing
campaigns. He developed the InfoCast Executive Seminars "Developing
a Winning Nanotechnology Business Case" and "Bringing
Nanotech Products to Market".
the Commercialization Committee for CANEUS, which is defining
micro and nanotechnology standards for the aerospace industry.
He is also on the Advisory Boards of the Nanotechnology Opportunity
Report and the World NanoEconomic Congress, was Judge for
the annual SmallTimes Awards, and is regularly interviewed
as a nanotechnology industry analyst. Neil was a Runner-up
as Nanotechnology Advocate in Nanotech-Now.com`s “Best of
Nanotechnology 2003” Awards.
a Bachelor's Degree in Engineering from McGill University,
an MBA from the University of Western Ontario, and 20 years
of business experience, including as co-founder of two technology
be reached at firstname.lastname@example.org
© 2004 Neil Gordon