Do VCs Get Nanotech?

Startup media site Xconomy (led by my friend Bob Buderi) has an interesting post based on an interview with nanotech pioneer Tim Swager from MIT. Tim’s observations are that, initially, VCs invested in a nano bubble without having a clue about what they were getting into which led to a backlash and now VCs are shying away from potentially very interesting nanotech platform companies.

The frustration I have with the VC community is that new materials can find many applications and are really a platform technology. There are many ways to get inventions to market. Biotech has bigger potential payoffs but often—not always—has much more narrow focus.

Tim’s observations are, in general, correct but I don’t fully agree with some of the conclusions he draws from them.

There was a nano mini-bubble. Some VCs invested in great platform companies backed by world-class scientists and great IP (for example, Polaris did Nanosys). Other VCs invested in “momentum” deals, hoping to get quick liquidity. Nothing new under the sun.

The nano bubble made it easier to fund platform companies because the cost of capital was lower. After exits didn’t pan out, VCs became more conservative. Cost of capital went up which makes it more difficult to fund platform companies, which often take a lot more money to mature. The “many ways to get inventions to market” are a both blessing and a curse. There is opportunity in the larger addressable market. There is also a ton of execution risk in targeting many markets at the same time and timing risk in going after them sequentially.

I particularly disagree with the comments regarding biotech. I know very little about biotech but Polaris Venture Partners is full of biotech experts and we frequently reflect on the similarities and differences between tech & life-sciences investing. I did a post on this a while back after a great conversation with Polaris venture partner Alan Crane. One of our observations was that, if a company’s offerings “work”, it is often much easier to go to market in the LS space due to the size and stability of LS markets.

The target markets for LS companies, generally speaking, are the flora and fauna. They change very slowly. If you are developing a cure for cancer you can be confident that if you succeed in creating one, there will be a big market, even many years into the future, even if one of your competitors has beaten you to market by some years. In the high-tech world, markets are rarely stable over time. By the time you are ready to deliver your solution, it could be obsolete. Some examples: great client-server products that were made irrelevant by the Web, supercomputers whose target markets were overtaken by Linux clusters, etc.

Materials-related markets may be less fickle than IT markets but, at least for a number of the nano platform companies I’ve seen, the target markets have tended to be (a) more in number, (b) quite diverse in terms of domains and (c) smaller individually than the biotech markets. This makes go-to-market focus difficult. It also makes building an executive team with the right go-to-market skills difficult.

In other words, the problem with nano platform companies right now is two fold:

  • Cost of capital is somewhat higher
  • The platform enables too many “applications”, none of which is a “killer app”

Does this mean that nanotech inventors with big platform ideas should think smaller? Absolutely not. It does, however, mean that they need to think about the business and go-to-market models (and hence the funding requirements) of their companies much sooner. This often means getting business-focused talent involved earlier in the process.

About Simeon Simeonov

Entrepreneur. Investor. Trusted advisor.
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