Usually I get a flurry of emails inviting me to IBF’s Nanotechnology Investing Forum in Palm Springs in February, but this year the wire was silent. Perhaps, I thought, because of the talk I gave last year which didn’t go down too well with the assembled nanotech VCs. I was at the first one in 2002 and now it appears the last one in 2008. What began as a two day conference has now become a two hour workshop tacked onto a Clean Tech investing conference.
Anyway, with the current problems besetting the VC industry, I thought it prurient to dig out the article I wrote for an investment publication last February. Perhaps the reason that the VCs were so enraged (one well known figure even refused to return my greeting) was that a lot of them were indeed living in cloud cuckoo land.
Six years ago I gave a keynote speech at the first IBF Nanotechnology Investing Forum in Palm Springs in which I gave my vision for the future of nanotechnology. My message was simple, “there is not, and there never will be a nanotechnology industry.” This was very bad news for all of the people who had staked their career and/or a few million dollars on profiting from the next industrial revolution and there was quite a debate about whether that view was rational or cynical.
In early February I attended the 7th annual NIF, which had shifted a few miles east to Indian Wells to see what had changed. Over dinner the night before the conference I was told by a couple of people not to say anything bad about the state of the nanotech industry “it’s hanging by a thread right now” was one remark that was repeated a few times. The mood in the conference wasn’t much better, with a lot of people putting a brave face on things, while glossing over the fact that there has been no appreciable increase in value of companies that they have been holding positions in for six to eight years. One VC told me that all sub $250m stocks were down and this was just the way the market is, but this is rather disingenuous as, while there has been a trend in that direction over the last few months, my data covered the last few years!
My feeling is the problem isn’t the companies, but the VC model. A look at the history of technology diffusion tells us that it takes seven to ten years from research to mass market applications, and that is a tie scale that doesn’t work for VCs. Most of them have a fund with a limited lifetime, typically seven years, which means that all the companies that were presented at the conference at 2002 will be straining at the end of their tether. Most VCs, and almost all of the lower tier funds with less than a hundred million under management, couldn’t care less whether the company turns a long term profit or not. The over riding concern is for their career and reputation and this can lead to disastrous consequences. In the struggle to return cash to their limited partners some VCs will do anything to realise some value, whether selling it out from under the feet of the founders or breaking it up into anything that makes a buck. The fact that the elusive market might be happening next year, or the year after is of little concern.
This is compounded by the desire to ‘own’ a particular technology, which leads VCs to stampede in the direction of nanotech, and more recently clean tech (by the way – has anybody ever heard a consistent definition of what “clean tech’ is?). With any emerging technology, once you have persuaded investors to provide you with funds you have to spend them. What we saw with nanotech, and more recently with clean tech is too much capital chasing too few good deals, and the result of that is always that the good deals are over valued, and those VCs who don’t manage to get into the good deals have to fund deals that a more rational investor would turn down.
So, six years on we had the usual show of bravado, but my challenge to show me a successful VC funded “nanotech” company went sadly unmet.
So what was good about the conference? Well I personally enjoyed the talk by Steve Jurvetson of Draper Fisher Jurvetson. Steve made his name by funding Hotmail, which was quickly sold to Microsoft, and Skype, which was acquired by eBay, but has also been an active proponent of nanotech.
A lot of the early DFJ nanotech investments have turned out to be science projects, a typical example being Zettacore whose intention was to replace CMOS devices with molecular memory.
The idea behind most attempts at molecular memory is to utilise a molecule which can be flipped between two or more states rather than having a standard silicon memory element. By self-assembling these molecules on a substrate, it is theoretically possible to create far denser memory than is possible with CMOS, although since 2001 the semiconductor industry has decreased feature size by a factor of three, steadily eroding any advantage that Zettacore may have had.
A look at Zettcore’s web site gives an indication of how well they are doing, with practically no news of note since 2004, and this is typical of many of the pure play nanotech companies. While the technology may work fine in the lab, scaling it up and integrating it with existing semiconductor technology has proved to be much harder than anyone ever imagined. In fact the Semiconductor Industry Association’s own roadmap published in 2001 does not see molecular memory being developed before 2010, although it does predict the use of quantum cellular automata buy 2008!
With a few billion in profits, DFJ can afford to take a chance on emerging technology, and Steve’s homily to the emerging field of synthetic biology was just as awe struck and starry eyed as when in 2002 he was talking about nanotechnology resulting in the “digitisation of matter.” My feeling is that while the area has massive potential, it will also take years to yield any returns.
So, after six years we are older, but it seems that many of the VCs are not much wiser, still trying to kick start a business model that only briefly spluttered into life during the dot com era. If I were to take a longer term bet on the types of vehicles that might turn a loner term profit, I would take a look at Arrowhead Research and Harris and Harris. While both are publicly traded, they can afford to take a loner term view of technology than their VC counterparts.
Perhaps that is the most important lesson of the last six years – things always take longer than anyone expects, and that to invest in early stage emerging technologies you need to take a long term, ten to fifteen year view.