Will nanotech live up to the hype?
The chief executive of Nano-Tex LLC warned about the mounting hype around his company and other nanotechnology startups at a recent investor conference. But the first question from the audience showed how his message had been digested. "When is your IPO?"
Nanotechnology, or science at the atomic level, has become the latest fad on Wall Street as the stock market shakes off its dot-com funk. Bankers and venture capitalists are pushing for initial public offerings of nanotech startups. Everyone, from day traders to fund managers, seems eager to get in early on what they hope will be the next big thing.
The subject has captured investors' imagination as nanotech begins to find its way into commercial products and pop culture, everything from Steven Spielberg's movie "Minority Report" to Michael Crichton's novel "Prey." The US government gave the industry a boost in December when it earmarked $3.7 billion for nanotech research over four years. Lastly, a closely watched startup, Nanosys Inc., is expected to go public this year. Nanotechnology involves manipulating matter smaller than 100 nanometers and taking advantages of properties that are present only at that level, such as conductivity. A nanometer is one-billionth of a meter, or about one-millionth the size of a pin head. The prefix comes from "nanos," the Greek word for dwarf.
Nanotech research has been going on for several decades at university labs and large corporations, such as International Business Machines Corp. There are also startups, such as Nanophase Technologies Corp. and Nanogen Inc., that have been public for several years.
To date, nanotech advances have been more mundane than magical, like stain-resistant khakis, anti-glare windshields and tennis balls that bounce longer. Its promoters say within 10 years the research will lead to sugar-cube-sized supercomputers, cancer tagging molecules and solar cells in roofing tiles.
Skeptics say such ideas are either science fiction or decades away. They caution that nanotech research faces many potential risks, including increased regulation, environmental and health concerns and patent disputes.
Earlier this year, Merrill Lynch issued a 47-page report that heralded nanotech as "the next major step in the technology space." Although the brokerage warned nanotech could suffer from Internet-like hype, it introduced an index of nano stocks and explained how nanotech would have broad applications in medicine, materials and computers. The report fired up the investment community and prompted some, including venture capitalist Vinod Khosla, to warn of a bubble.
"There is hype ... Hype helps this sector to function and to be successful" by attracting smart people and money, says Juan Sanchez, a nanotech analyst at Punk Ziegel & Co., which also keeps a nano stock index. "The risk with hype is the timing of it. Overhype at the wrong moment can bring black clouds."
Much of the recent excitement has been sparked by Nanosys. The Palo Alto, California, company filed in April for an IPO that could value the startup at roughly $500 million. The 3-year-old firm has no products or profits. In 2003, Nanosys had a net loss of $9.2 million and revenue of $3 million, which came mostly from research pacts.
Nanosys boasts elite backers and has raised more than $50 million from venture capitalists. Its founder and executive chairman, Lawrence Bock, has helped take several biotech companies public. The results have been mixed. Some of his startups, like Neurocrine Biosciences Inc., have soared since their IPO, while others, like Argonaut Technologies Inc., have tumbled since their debut. At Nanosys, Bock has assembled a team of top scientists and has acquired rights to more than 200 patents from Harvard, MIT and other universities. The company's business plan is to license these patents to partners, such as DuPont Co. and Intel Corp., and collect royalties if they create commercial products.
Rightly or wrongly, the Nanosys IPO will be a litmus test for the sector and set the tone for those that follow, says Edward Moran, who heads the nanotech consulting practice at Deloitte & Touche. That has some venture capitalists and nanotech CEOs worried. They argue the company is not the best yardstick given its early stage and plan to license patents rather than build products. A spokeswoman for Nanosys said the company would not comment, citing a standard "quiet period" ahead of its IPO. But Nanosys warns in its IPO documents that it doesn't expect to have a commercial product for several years, if at all. "So-called bellwethers are almost always overdone. Markets don't get defined just on one player," says Daniel Colbert, chief technology officer at NGEN Partners, a venture capital firm with several nanotech investments. "It's just too early to know how much and how good" Nanosys' patents are, he adds.