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Nanotech Research Shows No Signs Of Shrinking, Despite Setbacks
Monday August 16, 7:00 pm ET
J. Bonasia
Investor interest in all things nano was tempered this month by the withdrawal of a nanotech initial public offering and new calls for regulatory oversight.
In spite of the recent setbacks, global funding for nanotech is stronger than ever, according to a report released Monday by Lux Research, a spinoff of the nano-focused venture firm Lux Capital.
Governments, companies and venture capitalists worldwide will pour $8.6 billion into nanotech research in 2004, the report says. That marks a 10% gain over last year.
Next year, private-sector nanotech research will surpass government research for the first time, the report finds.
"We've reached a new high point in nanotech funding this year," said Matthew Nordan, vice president of research for Lux Research.
However, venture capital funds for nanotech firms have dipped from a high of $386 million in 2002 to just $75 million in the first half of this year, due mostly to a tough climate for new stock issues. Nanosys, a bellwether nanotech startup, withdrew from its stock debut on Aug. 4.
Nanotech involves the creation of lighter, stronger materials and devices built on the atomic scale. Nanotech products now on the market include sunscreens, computer chips and stain-resistent pants.
One nanometer equals one-billionth of a meter. Materials at that scale are expected to yield huge breakthroughs for manufacturing, health care and energy.
President Bush last December signed the 21st Century Nanotech Research Act, which devotes $3.7 billion to the study of nanotech over four years.
Many big companies also are lavishing money on nanotech research. One major auto maker will spend 30% of its 2004 research budget on nanotech projects, Nordan says.
Corporate giants -- including General Electric (NYSE:GE - News), IBM (NYSE:IBM - News) and Motorola (NYSE:MOT - News) -- are developing new commercial products such as carbon nanotubes, flat panel displays and semiconductors. That's helping commercial nanotech research eclipse government-funded programs.
"That's the big shift this year," Nordan said.
Many nanotech firms have had to do without venture funding.
Of some 1,200 nanotech startups, just 109 have received venture funds, according to Lux Research. Experts expect a wave of mergers among the smaller nano firms next year, Nordan says. He thinks the field needs some weeding out, much as the dot-com bubble did away with countless low-value e-commerce firms.
"The success or failure of startups has little to do with the secular trend of real innovation on the nano scale," Nordan said.
Investors should realize that nanotech is not really an industry unto itself so much as a science that can be applied to diverse sectors, says Scott Mize, president of the Foresight Institute, a nonprofit think tank in Palo Alto, Calif.
Each nano investment should be weighed for the value it can add in any given application, he says.
"Nanotech is not an industry; it is an enabling technology," Mize said.
Nanosys, also of Palo Alto, cited "adverse market conditions" in calling off its IPO this month. That deal, backed by Lux Capital, was widely seen as a litmus test for the nanotech industry. Nanosys holds some 250 patents, but the company has lost more than $17 million in recent years.
The withdrawal of the Nanosys IPO was probably helpful for the nanotech field, Mize says. Companies such as Nanosys with "virtually no sales or products" are not ready to go public, he said.
"This cools things down a bit," Mize said. "In the long run, this will be very positive for the field."
A week before Nanosys pulled out of its IPO, the British Royal Society called for greater oversight of health issues related to nanotech. The group asked for more study of free-roaming nanomaterials that can be inhaled, absorbed through the skin, or those that build up in nature.
The Lux Research report found that public awareness of nanotech is rising, based on news coverage. The authors expect 12,000 mentions of "nanotechnology" in the popular press this year. That compares with just 190 in 1995.
Despite the growing recognition, many nanotech stocks have slumped this year. Lumera (NasdaqNM:LMRA - News), a maker of nano-based polymers, debuted its stock at $7 on July 23. The share price has since dropped 19%, to 5.66.
Merrill Lynch launched an index of 25 nano-focused stocks in April. That group, listed as NNZ on the American Stock Exchange, lost 26% in value from July 1 through Aug. 8. The three largest holdings in the portfolio include Headwaters (NasdaqNM:HDWR - News), Amcol International (NYSE:ACO - News) and NVE (NasdaqSC:NVEC - News).
Harris & Harris Group (NasdaqNM:TINY - News) is a publicly traded venture capital firm that invests in small, early-stage nanotech startups.
The stock is down 64% since early April -- though it rose 14% Monday to 8.24
