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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.
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