Can the VC Model Handle Emerging Technologies?

While researching the new edition of the Nanotechnology Opportunity Report™ I was shocked by the amount of cash that had been poured down the drain by venture capital, almost a billion dollars over the last seven years. At the same time, I have been involved in nanotech related deals  totalling close to a billion dollars in the last eighteen months, and I don’t recall seeing any technology VCs at the table, so what’s going on?

Looking back at the early days of nanotech, many VCs who had been weaned on a diet of quick returns in the late 90’s had just been badly burned by the tech crash. Realising that the Johnny-come-lately’s always suffer while those who get ahead of the curve the combination of fear and greed pushed a number of investors into pouring cash into a number of companies whose business models and methods they did not understand. I have find memories of watching VC’s struggle to explain phenomena such as Van der Waaal’s Forces and watching one prominent cheerleader for nanotechnology get hopelessly muddled over the distinction between an atom and a molecule.

Seven years on, most of those investments have resulted in fire sales and acquisitions in the range of ‘not disclosed’ to “just take it and get it off our books.” The entire IP of one of the brightest nanotech start ups ended up being sold for just $1000 a few years ago, and many companies that are still staggering along are heading for a similar fate.

I think that this exposed a fundamental weakness in the technology VC model, a model which is almost forty years old, and a model which needs to be updated. In order to be a successful VC you have to return money to your investors in an agreed time, usually seven or eight years, and this colours the way that businesses are operated. On the other hand, we can see from numerous examples in biotech, nanotech and just about any other kind of ‘tech including the Internet that seven years is far too short a period to extract any value from a technology. Sure you can charge around attempting to make a fast buck from the most promising application as companies from Nanosys to various nanomaterialscompanies have done. Now I’m a pretty good sailor, but the sight of seeing the management of these companies lurching from one application to another as doors open and shut just to please their investors makes me feel distinctly queasy.

All of the companies were based on pushing a ‘platform technology’ into various market segments, meaning that the management needed to have channels into markets from drug delivery to aerospace, and from cosmetics to sporting goods, and that diversity sealed the fate of  many ‘nanotech companies’ as soon as they were funded. Within a few years  investors were looking for big exits and finding the doors slammed in the their faces, and the business developers of the same companies were finding that no one was clamouring for their ‘nanotech’ – a perfect storm of disinterest by the markets.

To some extent it’s a mess of their own making, but on the other hand it is hard to feel much sympathy for an industry that has spent the past twenty years telling everyone else to be innovative while refusing to change their own models.

So what this tells us is that the technology VC model is inherently unsuitable for investing in early stage companies. Fortunately that model is changing, and the investors seeing better returns are the ones who are not afraid to get their hands dirty in helping start a company, and the ones who are willing to invest in a product, not a technology. However they are still a minority, and for investors who started in the dot.com age where making money was as easy as turning up for work early stage technologies will still be a money pit – and that includes much of “Cleantech!”