COVER Q&A: ‘Mr. Nanotech’ Steve Jurvetson

It’s fitting that Steve Jurvetson—venture capital’s best-known booster of nanotechnology—titles his personal technology blog the J Curve.

Today, most early stage investors are still waiting for companies pursuing nano-scale innovations to produce macro-scale profits. If one were to plot the universe of nanotechnology startups along the J curve—which demarcates progress from early hype generation to low-profile development to exponential growth—most would be clustered in the second stage.

Jurvetson, who has played a role in close to 20 nanotechnology investments by Draper Fisher Jurvetson, remains optimistic about the prospects for wildfire success. Like most VCs, he’s reluctant to refer to a “nanotechnology industry.” But in areas ranging from memory chips to solar cells to quantum computing, Jurvetson envisions nano-scale science enabling revolutionary new products.

Jurvetson first became interested in the nano realm in the late 1990s, in search of alternatives to the Internet business plans flooding VC inboxes. Since 2000, he estimates that DFJ funds have invested $200 million in companies involved in nanotechnology, novel materials and micromechanical systems (MEMS).

With the bulk of investments made following the burst of the tech bubble, Jurvetson says he isn’t deterred by the slow IPO market. He told VCJ in a recent interview that he plans to continue investing at the seed and later stages in companies with marketable technologies enabled by nano-science.

Q: How would you describe your nanotechnology investment strategy?

A: One of our guiding principles is to invest in something we’ve never seen before. So, there’s been a migration in terms of the kinds of opportunities were seeing. Early on it was primarily molecular electronics. Tools are also the early opportunities, so we would be doing a little bit less of that now and doing more applications. Lately it’s been more energy and materials-related.

One important point to make is that nanotech doesn’t describe a market. It’s a meaningless business term. It really describes a nexus of the sciences. It’s a place where the R&D folks can make some major breakthroughs that they might otherwise not have made.

Q: DFJ has been investing heavily in energy startups recently. What’s going on at the intersection of cleantech and nanotechnology?

A: Historically it’s been batteries and solar cells. That is sort of reaching a point of maturation, at least from our point of view, not from the public market point of view. A lot of the money that’s been made in the public markets has been in the solar arena. That’s not necessarily the best market in which to invest today.

A lot of what appeals to us now is applying lessons in biology to nanoscale processes. Say, engaging microbes directly—like bacteria or algae—to process materials and to produce biofuels more efficiently or to assemble things. For example, we have a company, Greenfuel, that creates a mutant algae to clean up NOx [nitrogen oxide] and Sox [sulfur oxide] emissions. It eats the pollutants and it creates a waste stream itself that’s easily converted to biodiesel and ethanol.

Q: What other nanotech investments are you excited about?

A: We have major breakthroughs percolating in our portfolio in quantum computing, nanoimprint lithography and in the field of new forms of memory. There are some really big revolutions that are percolating and breaking and should have some major impact on the world.

Q: Technology revolutions have a history of taking a long time. Were VCs too early in backing nanotechnology startups?

A: That’s the biggest risk to look out for. You have to not be too enamored of the technology and to look for a real business opportunity. I naturally gravitate to what’s the 20- or 50-year vision for how this is going to revolutionize industry. But there has to be for all these businesses a pragmatic near term business ramp that says: ‘OK, that’s great, but how are you going to make money in the next couple of years?’

In all our investments in nanotech we’ve tried to find both the big, long-term revolution and a near-term revenue opportunity. Some have been faster, some have been slower. You can never be completely right.

Of course, if you‘re trying to obsolete an industry right out the chute, that’s not a good idea. So we avoided those that were trying to reinvent from the ground up the entire electronics industry. What we did instead is invest in three companies going laser-focused after one subset, which is how to take existing chips and make the memory portion improve itself dramatically. You don’t have to change the way wafer fabs work. That’s a much quicker path to market.

Q: Do any examples of fast and slow startups come to mind?

A: It would be a bit inappropriate for me to be playing sideline commentator, saying ‘Company X seems to be a little behind schedule.’ Some of the plays that have come faster are in the field of medicine if you don’t go through the FDA regulatory process.

Q: Where does nanotechnology fall today on the J-Curve?

A: With any new technologies, expectations get raised high. Excitement rises, but the product’s not shipping yet. I think we’re sort of in that transitional period. In molecular electronics, for example, there was a flurry of interest, and now companies in that area are quietly ramping up production to prove this can be a cost-effective technology.

Q: What kinds of nanotechnology companies will be able to go public?

A: It’s not typically the public market function to finance technologies that have not yet become predictable. And there is of course a glaring exception to that rule, and that is biotech.

There was a big debate a few years back about whether nanotech companies would be like the biotech companies: Would they go public when there’s a lot of promise but they’re not yet shipping product? Or, should they be like information technology companies, where you look at the fundamentals and say: ‘Is it a profitable company or not?’ A number of our nanotech companies are pursuing that IT-like approach. They’re going to be going public on fundamentals.

Q: Is it likely early stage nanotechnology investments will find exits in a 10-year period?

A: Oh, yeah. I mean they’ll either go out of business or they’ll find exits. I say that of course with a laugh because it’s important to realize that the majority of early stage investments fail. The ones that succeed wildly—the Googles and the Baidus and the Skypes—they make up for all the ones that don’t from a venture standpoint.

The time frame of the ones that do succeed seems reasonable within a 10-year horizon. I wouldn’t say that’s necessarily different from any other technology investment. It happens where the occasional company takes a long time, but it’s the outlier.

Today we have at least three nanotech companies which bankers are looking at taking public. And there’s a number of companies that are growing revenues substantially, but we’re just not in a hurry to see them go public. We’ve also had some exits—Coatue Systems sold to AMD, and HyperNex [sold to Nova Measuring Instruments].

[HyperNex, which makes microstructure analysis systems for the semiconductor industry, raised a total of $4.28 million over two rounds, in 2001 and 2003, from DFJ, Draper Triangle Ventures, CID Equity Partners and others. The company was bought by Nova Measuring Instruments (Nasdaq: NVMI) in April 2006 for stock valued at about $4.5 million. Coatue, which made molecular memory chips, raised a total of $9.3 million over two rounds, in 2001 and 2002, from Draper Fisher Jurvetson New England, ITU Ventures and others. It was acquired by Advanced Micro Devices (NYSE: AMD) for an undisclosed price in August 2003. —Editor]

Q: Speaking of Google, Baidu and Skype, where are the household names in nanotech?

A: The real innovations of nanotech are deeply embedded within other products and are invisible. Take the [molecular] memory chip example. No one would know even if it is shipping today. It would be deeply embedded in an Intel processor.

Q: So no Cisco of nanotechnology?

A: No. I wouldn’t have expected that. Here we are in 2006 and the majority of our nanotech investments were in the 2002 to 2004 time frame. The household name is usually after the IPO has been wildly successful and the company has had a few years of growth.

Q: Is it likely those wildly successful companies will call themselves nanotechnology companies, or will they use some other label?

A: If you’re doing something that doesn’t squarely fit into one domain, there’s a lot of freedom in defining ‘Oh, it’s a nanotech company. Oh, it’s an energy company.’ The truly interesting breakthroughs cross over. We’re seeing a lot of companies today that we might call energy companies, but maybe two or three years ago we would’ve called them nanotech companies. Who knows? They’re a little bit of both.