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VC Advice for Nanotech Start-ups

By Pamela Bailey
Posted on February 28, 2003

With US patents experiencing exponential growth in the last two decades and hype about nanotech peaking, there are lots of researchers and entrepreneurs out there looking to start up a nanotechnology company and cash in on the "next big thing."

Panelists composed of venture capital and industry professionals at the Nanotech2003 conference this week described what entrepreneurs can expect as they begin to take their companies from the "garage technology" phase through the friend/family investment phase, on to angel and/or VC funding, and then through to liquidity, either through an IPO or by selling the company.

In the early stages, or what is commonly known as the "sweat equity" stage, entrepreneurs should be prepared to make a huge commitment (sometimes as much as 22-24 hours a day) just to make sure that the technology and concept is sound. The technology must be distinctive, game-changing. And the entrepreneur must be able to conceptualize the problem that the technology is trying to solve in the real world and how the technology can be made to do that. Clarity of focus is essential.

A business plan is the next step. The technology is only 10-15% of the business--the entrepreneur must be prepared to demonstrate that there is an application out there and a market for it and that he/she has a way to build that product and get it to that market. It is also extremely important to demonstrate IP security. Only then can the entrepreneur begin to build a team and incorporate so that the company can transfer and scale up the technology. Getting money is always an important milestone, as is getting the first customer or PO. Since venture capital firms usually focus on investments in excess of $1 million, it is sometimes difficult to find that interim funding. If an entrepreneur is having difficulty getting funding from family or friends or from angel investors, there are other sources such as corporate strategic funding or government grants. There are brokers who will act as agents to help a company find VC funds, but tread carefully. In some cases, these individuals will charge as much as 1% of the amount of cash that is raised.

It is important for the leaders to develop a sense of timing for what is really important at each stage and for them to find and recruit a talented team who are good throughout the whole product development cycle, not just in research, and who have leadership skills as well.

Experts say, as a rule of thumb, three out of every 10 early stage investments will fail, while three or four will yield a modest return on investments. Three may be big money makers, but, sometimes, it’s only one out of 10. The number one reason that early stage companies fail is infighting between the company members and/or founders.

One VC firm indicated that at least 50% of the funding deals his company made were as a result of personal relationships with the entrepreneurs or scientists and the other 50% were from referrals from people they knew and trusted. So, networking pays.

Once a company has raised money and is ready to go, it may encounter other issues such as technology transfer, communication channels (or lack thereof), the inability of personnel to take the process through from research to manufacturing, public hostility to nanotech as a result of bad press or an uninformed public, problems with IP and business development, platforms and standards and capital efficiency.

Some of the main hurdles to success are understanding the materials and how to assemble and/or place the materials; the nano to macro interface—how to get signals in and out; how to fit the technology to address the application (solve real world problems) and how to make money doing it; tools to accelerate the integration of nano to macro for a real application, scaleability; and software for imaging, design, simulation, process control and QA.

Hot areas of investment today include molecular imprinting technology, carbon nanotube-based memory devices, energy, microfluidics, and, in life sciences, devices and diagnostics.

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