INTRODUCTION

The screen lights up, and it’s Mr. Robinson from The Graduate. “Benjamin, can I have a word with you?” The college graduate nervously consents and walks down the hall with Mr. Robinson.

“Benjamin, I just want to say one word . . . are you listening?”
“Yes sir.”
“Nanotechnology . . .”

* * *
Venture capitalists are starting to listen to this “updated” Mr. Robinson. In the 1967 movie The Graduate, Mr. Robinson advised Benjamin to look to plastics for the future. The advent of plastics (polymer technology) allowed the rational control of the structural properties of a material and consequently revolutionized virtually every major industry.

Nanotechnology allows not only the rational control of the structural properties of a material but also its electronic, optical, and magnetic properties. Thus, it should revolutionize virtually every major industry.

A journey through Silicon Valley reveals that some venture capitalists are already proclaiming nanotechnology to be the “next big thing.” This article will explore the state of venture investment in nanotechnology. Specifically, it will tell the story of Nanosys, and why it has been so successful in securing venture financing.

I. VENTURE INVESTMENT IN NANOTECHNOLOGY

The venture capital industry experienced tremendous success in the late 1990s through 2000. The collapse of the Internet bubble has dampened the industry. In late 2003, despite some resurgence, venture investment in start-up companies remains extremely sluggish. Nevertheless, some venture capitalists are proclaiming nanotechnology to be the “next great technological wave.” Here in Silicon Valley, investors are attending conferences and seeking to form relationships with pioneering scientists at Stanford, UC Berkeley, MIT, Harvard, and other major research centers. Indeed, in 2003, the Venture Capital Journal declared that investors are “hypnotized” by nanotechnology and the “buzz is getting louder and louder.”

The rhetoric is complemented by some real investments. For example, in September 2003, Nantero closed a $10.5 million series B round of funding to develop a non-volatile random access memory chip using carbon nanotubes. NanoOpto, an optical components maker, closed a $7 million round in the same week. Thomson Venture Economics estimates that private equity investors invested more than $400 million into 34 nanotech startups in 2002.

Notwithstanding the increasing attention that investors are devoting to the field, many start-up companies are unable to obtain venture financing. Most nanotechnology start-ups have less than $5 million in capital. As Mark Modzelewski, director of the NanoBusiness Alliance, testified to Congress, many startup companies are “falling into what investors term ‘Death Valley.’”

Despite a general reluctance to invest in early stage companies in the current economic environment, a handful of VCs have poured $55 million into Nanosys since its founding in 2001. Why has Nanosys been so successful in attracting financing? The remainder of this article will explain why investors have been eager to invest in Nanosys.

II. ABOUT NANOSYS

Nanosys is a rapidly growing advanced technology company, leading the burgeoning nanotechnology industry through the development of nano-enabled systems. Nanosys’ applications development platform is based on three fundamental core technologies. First, Nanosys’ technology enables the rational design and fabrication of high-quality, inorganic semiconductor nanostructures. These nanostructures include nanowires, nanorods, nanotetrapods, and nanodots formed from all of the industrially important semiconductor materials. Second, Nanosys seeks to assemble high-performance nanostructures into functional structures, composites, and devices. In some cases, this assembly is as simple as incorporating the nanostructures into a polymer host-matrix and printing the nanocomposite into functional units such as LEDs, solar cells, or electronic circuits. In other cases, specific structural phases can be generated with the nanostructures to provide additional functionality such as highly polarized absorption in nanocomposite optical detectors. Third, Nanosys seeks to precisely engineer “quantum properties.” Inorganic semiconductor nanostructures have a variety of new and unique electronic, optical, magnetic, interface, and integration properties. These properties can be precisely controlled and tuned during fabrication. By developing these three core technologies, Nanosys develops nanotechnology-enabled systems addressing a wide range of applications in a broad range of industries. Nanosys is currently focusing on developing chemical and biological sensors, high performance large area macroelectronics, and lightweight high-efficiency conformal photovoltaics.

III. FINANCING

Nanosys has been extremely successful in securing financing. In April 2003, a handful of investors were willing to put $39 million into the company. Previously, it had raised $16.5 million in February 2000 and $1.7 million in 2001. Nanosys’ equity financing comes from leading high technology venture capital funds. Nanosys has also been granted government contracts and grants to support its core technology development from agencies such as the Defense Advanced Research Projects Agency (DARPA), the National Institutes of Health (NIH), and the National Science Foundation (NSF). This has been accomplished through successfully teaming with other commercial organizations such as SAIC, Sciperio, Matrics, Affymetrix, and Orincon.

IV. WHY NANOSYS HAS BEEN SO SUCCESSFUL

There are several reasons why Nanosys has been successful in obtaining financing while other nanotechnology start-ups have struggled. Nanosys’ success is primarily based upon five factors: (1) technology; (2) scientific talent; (3) intellectual property; (4) management; and (5) business strategy. Each of these factors will be explored in detail.

1. Technology
Despite the enormous potential of exploring and engineering at the nano realm, the field is still in its infancy. Most start-up companies have spun out of basic research projects at universities. Researchers at these companies are still struggling to obtain control over the synthesis of nanostructures. In short, venture capitalists do not expect many of these companies to have commercial success within the required investment life cycle.

A comparison of the nanostructures being developed at Nanosys and carbon nanotubes, for example, reveals why investors have been more willing to bet on Nanosys than other companies in the field. While researchers struggle to obtain control over the synthesis of carbon nanotubes, Nanosys has demonstrated the ability to control the synthesis and properties of inorganic semiconductor nanostructures. There is no rational way to control the electronic properties of carbon nanotubes. When synthesized, all different carbon nanotube types are produced at the same time, including metallic, semi-metallic, and semiconducting nanotubes. While the fundamental physics of nanotubes is well understood (as it is for the inorganic semiconductor nanostructures), allowing for precise modeling of what materials characteristics would be most desirable for a particular application, there is currently no practical way to synthesize a specific material that the model predicts. The inorganic semiconductor nanostructures being developed at Nanosys are the only class of nanomaterials available today that allows not only the prediction of a structure based on computer models, but also the prediction of a precise synthetic recipe that produces the exact structure in high-purity and high-yield, with every particle identical to every other particle.

Even if precise synthetic control was possible with carbon nanotubes, there are only three major parameters that can be controlled: diameter, length, and chirality. Inorganic semiconductor nanocrystals have far more variables to control (as well as methods to control them), including length, diameter, crystallinity, doping density, heterojunction formation, and most importantly, composition.

Additionally, carbon nanotubes only come in one flavor—carbon. Inorganic semiconductor nanocrystals can be fabricated from all of the industrially important semiconductor materials, including all of the Group III-V, Group II-VI, and Group IV materials and their alloys, as well as the transition metal oxides. Furthermore, the inorganic semiconductor nanostructures can be fabricated such that material characteristics change controllably throughout the nanostructure (i.e. heterostructures) to engineer additional functionality and complexity into the nanostructure.

Further, the uniqueness of carbon nanotubes is limited to their electronic and structural properties. In contrast, due to the large range of materials available for inorganic semiconductor nanostructures, as well as the ability to create heterostructures, these materials have a larger range of functional properties that can be accessed to address a much broader range of applications than carbon nanotubes. Inorganic semiconductor nanostructures have unique optical, electronic, thermoelectronic, ferroelectric, piezoelectric, and magnetic properties, and can address virtually all areas of technology and industry.

Finally, for the inorganic semiconductor nanostructures, Nanosys leverages off of more than 40 years of processing know-how, infrastructure and equipment developed for the electronics and semiconductor industries to address technical issues such as electrical interfacing, composite formation, doping/processing and surface functionalization. In the case of carbon nanotubes, every technical issue requires a new research project.

2. Scientific Talent

While all nanotechnology start-up companies are comprised of excellent scientists and engineers, the Scientific Founders of Nanosys represent an international “Dream Team” of technical visionaries in the field of nanotechnology. The illustrious founding team includes legendary scientists Paul Alivisatos, Moungi Bawendi, Louis Brus, James Heath, Charles Lieber, and Peidong Yang. A survey of the literature reveals that these scientists are pioneers in nanotechnology. The founders are active participants in technology development at Nanosys, working directly with Nanosys’ scientists and meeting with the company’s management on a weekly basis to ensure continued access to the most recent developments and cutting edge research from these world-class laboratories.

Perhaps the extraordinary scientific talent at Nanosys was best illustrated in September 2003, when two Nanosys employees, Dr. Stephen Empedocles and Dr. Xiangfeng Duan, and one member of its exclusive Scientific Advisory Board, Dr. Peidong Yang, were named to the prestigious 2003 TR list of the world’s 100 Top Young Innovators by MIT’s Technology Review.

3. Intellectual Property

Patents are critical in the burgeoning nanotechnology industry. Venture capitalists are reluctant to invest in companies that can become embroiled in intellectual property battles. If a company attempts to market a product that infringes a patent held by another, the patent holder can enjoin a company from marketing its product. Even if the patent holder is willing to license the patent, it is likely to demand exorbitant royalties.

Nanosys has assembled a comprehensive intellectual property portfolio of over 150 patent and patent applications covering fundamental discoveries in inorganic semiconductor nanostructures. Nanosys has signed broad exclusive licensing agreements with leading technology centers, including Columbia University, Harvard University, Hebrew University, Lawrence Berkeley National Laboratories, MIT, UCLA, and UC-Berkeley. Thus, all of the important intellectual property in inorganic semiconductor nanostructures is consolidated in one place—Nanosys—enabling the creation of a single, industry-dominant position. The intellectual property landscapes in other areas of nanotechnology are fragmented. For example, because carbon nanotubes are widely available to the research community, critical patents in materials, compositions, devices and applications are scattered across academic institutions and industrial companies (both large and small). For example, while many companies are pursuing materials, devices, and systems based on single walled carbon nanotubes, IBM owns the fundamental patent on the composition of matter of single-walled carbon nanotubes.

4. Management

The ability to obtain financing often turns on the credibility of a company’s management. Venture capitalists are reluctant to invest in companies with inexperienced managers. There is a venture capital dictum that VCs like to “invest in people that have successfully done it once before on someone else’s money.” The business founders of Nanosys are highly successful serial entrepreneurs who have launched and grown numerous major platform technology companies in fields ranging from rational drug design to genomics to combinatorial chemistry to computer networking to biosensors to lab-on-a-chip technologies. In their prior endeavors, they have successfully built the multidisciplinary teams necessary to commercialize new fundamental technologies and executed the business models required to make Nanosys a success.

5. Business Strategy

As explained earlier, investors are weary of investing in nanotechnology start-ups, because much of the R&D is still in its early stages. However, even if companies can demonstrate functional products, investors are uncertain whether these companies can scale up for large-scale production.

Rather than attempting to develop and market its own products, Nanosys’ mission is to become the leading platform technology company in the field of nanotechnology. Its business strategy is to commercialize products through strategic partnerships with leading companies in a variety of industries. These partnerships take the form of joint development agreements where Nanosys provides nano-enabled modules based on its core technology platform that include all of the real-world interfaces that allow its partners to seamlessly integrate the technology into their respective technology platforms. Through these relationships, Nanosys leverages the market expertise and complementary technologies of its strategic partners, while its partners leverage the unique technical and market opportunities enabled by nanotechnology without having to become nanotechnology experts themselves. The first business partnerships are targeted in the areas of photovoltaics, high-performance macroelectronics, and nanostructured surfaces.

This proven business model has been successfully implemented by the Nanosys team multiple times in previous business endeavors. Nanosys has already completed three multi-million dollar, multi-year strategic partnerships with Matsushita Electric Works (a major Japanese multinational corporation and Japan’s market leader in integrated solar building materials), SAIC (the government’s largest systems integrator), and In-Q-Tel (the venture capital arm of the CIA).

V. CONCLUSION

Investors are beginning to take Mr. Robinson’s advice seriously. Despite the nanotech buzz, however, only a small number of start-up companies have received substantial equity financing. Nanosys is one of the few companies that has attracted significant venture capital investment. Nanosys’ success can be attributed to its superior technology, extraordinary scientific talent, dominant intellectual property portfolio, experienced management, and proven business strategy.