Nanotech Pioneer to VCs: You Don’t Get It

7/10/07Follow @gthuang

When Tim Swager talks about the future of nanomaterials, people listen. And when the respected nanotech leader says venture capitalists don’t get it when it comes to nano startups, you can’t help but sit up and take notice.

Swager is the head of MIT’s Department of Chemistry and the winner of this year’s prestigious $500,000 Lemelson-MIT Prize for invention. He has made his name in nanotech developing everything from ultrasensitive “molecular wire” sensors for detecting traces of explosives—currently used by U.S. soldiers in Iraq to screen vehicles—to fluorescent dyes that light up when they bind to amyloid protein molecules, which could enable doctors to make early diagnoses of Alzheimer’s disease using NMR and optical imaging. And Swager is no stranger to the startup process: he is a founder of Cambridge-based Iptyx, a nanomaterials spinoff that develops organic electronics and electro-optical materials for imaging and energy applications, and a technical advisor to Nano-C in Westwood, MA, Plextronics in Pittsburgh, PA, and Rhode Island-based Collegium Pharmaceutical. But these days Swager sees some serious hurdles when it comes to early-stage funding of nanotechnologies.

It wasn’t always like this, he says. Starting in the late 1990s, Swager witnessed an upsurge in nanotech funding that paralleled the dot-com boom, albeit on a smaller scale. “VCs a few years ago were not focused on the technology, only the market,” he says. “In general they were willfully blind to the competition, and I would say it was exactly like the folk tale about ‘The Emperor’s New Clothes.’ Nobody seemed to mind that there was nothing there in terms of the technology as long as they could claim a market.”

Times have clearly changed. “Now VCs seem to be very risk adverse in all areas but the biological sciences,” he says. “I don’t really understand the biological science focus. There is probably more risk there.”

Of course, nanotech companies have never received as much venture funding as biotech, and for good reason—commercially speaking, they remain largely unproven. Which is why most nano companies have relied on government and corporate funding, even during boom times. But Swager’s point is that nanotech has now been around long enough, and has demonstrated enough potential applications, that it should mitigate some of the risk from an investor’s point of view.

Upon further reflection, he adds, “Two problems with materials is that although they can be the enabling technology, they are far upstream from products and therefore do not command as big of a cut in the value chain. 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.”

Given these challenges, what is Swager’s advice for today’s nano entrepreneurs? “If you have something with unique properties, keep pushing forward,” he says. “I suspect in the materials area, you will have to push it farther before getting VC money. However, if it can do something that nothing else can, then you will be successful.”

Some intriguing tech areas to watch, says Swager, are organic light-emitting and -absorbing nanomaterials for imaging devices and solar cells (“huge potential,” he adds), carbon nanotube and graphene-based electronics, and organic polymers for applications in the semiconductor industry. The latter could dramatically enhance the speed of integrated circuits by more effectively insulating one part of a circuit from another, thereby enabling chips to be packed much more densely. Swager is convinced this can be done practically. “The future,” he proclaims, “will be organics.”

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com or call him at 617-252-7323. Follow @gthuang

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  • http://mark-nano.blogspot.com/ Mark Wendman

    Tim,

    You hit the nail on the head, but then ignore it through a good part of your discussion.

    “However, if it can do something that nothing else can, then you will be successful.”

    True you might have the opportunity ….but

    Many if not most proposed nanotech “innovations” are not properly benchmarked for viability or advantage over prior Intellectual Property or existing products. Often times too little review of prior art is done.

    There are and have been far too many me too nano proposals(arrgh not another nano powder!!), materials centric rather then end use, products /businesses proposed.

    By contrast, the nexus of the start of commercial nanotechnology was found in an end use scientific instrument – The Nanoscope Scanning Probe Microscope. The execution of Digital Instruments against competition was astounding, and DI started by licensing their first couple of patents, invented some 40+more, and went on with no outside investment money to generate $60m rev per year at the end of 10 years, ~$450k+ rev / employee, and dominate the world and most notably JAPANESE markets.

    All mostly staffed by students out of school. (counterpoint to a star studded overpaid team)

    So when one proposes a nanotech business to get funded, and has not done one’s homework with respect to benchmarking against conventional and often times far cheaper technologies, whaddya think ?

    Take one firm whose name I won’t mention, that was proposing the use of nanotubes for cryoadsorbtion hydrogen storage, (got funded for this among 1 more device) and the numbers they had were storage capacity = activated charcoal’s SAME specific capacity of hydrogen cryoadsorbtion. (all found from a VOLVO report on the web). And carbon nanotubes were ?500x more expensive than activated charcoal, and nanotubes will come down in price and have somewhat since, but the question is since they had no clue how to cost reduce, where was the business proposition?

    Proposed by some well known folks too, again who I won’t name, and funded ??? Granted their sensor product is ok, but took them quite a few years to figure out how to make it for modest advantage and a whole heck of a lot of development $$.

    The problem is if you don’t do your homework in applications performance benchmarks against competing and often cheaper technology, you also likely don’t known much about the application either. Nano for nano’s sake is dumb, nano for a cost and performance advantage that is real and sufficiently substantive can be smart.

    But also there are cases where nano is proposed, where it is proven and projected to be unsafe(just read). Seeing nano proposals in these high risk applications, is silly. Sometimes science is not worthy of commercialization, and other times it is.

    re OLED’s if you don’t have a strong IP position, and if a new effort is just another way of either violating someone else’s OLED patents, what is the point? Does not matter how prestigious the scientific staff is, if the IP is not blocking and still is infringing?

    OLEDs are big, even soon to be huge, but is every new OLED proposal or startup going to have the (IP) way free and clear?

    The future will be in organics for a given firm if the IP is owned by the respective company one might have invested in, and if the product IP is blocking and technology substantively better than other OLEDS or organic device as may be.

    Same rules for good investment practices as with ANY technology. Copy and you’re toast, or nanotoast as may be. Invent and invent with substantive barrier to entry, and with substantive performance and cost advantage, and nano or no nano, you’ll likely get funded by the right investors if you look hard enough and have a decent team.

    Innovate, properly benchmark and know your application and competitors technology. Nanotech is not an excuse for lack of product or applications expertise. Wimp out on your homework….and well then it is just paperwork or homework, and back to the drawing board…

    fwiw, I have been a microfab engineer for ~25yrs and of this have done nanofabrication for some 8 years, both commercially in volume applications.

  • http://mysiliconvalleystartup.blogspot.com/ Blake Southwood

    I agree the VCs don’t get it.

    http://mysiliconvalleystartup.blogspot.com/