KP’s Khosla Pulls No Punches, Slams Plans for Nanosys IPO

Respected tech investor Vinod Khosla has warned of an impending nanotechnology "bubble" and criticized the IPO plans of venture-backed Nanosys Inc.

Vinod Khosla, one of the industry’s most respected technology investors, has warned of an impending nanotechnology “bubble” and criticized plans by venture-backed Nanosys Inc. to become the first publicly traded nanotech company.

Khosla, a general partner at Kleiner Perkins Caufield & Byers, made the comments at the MIT/Stanford/UC Berkeley Nanotechnology Forum at Stanford University on May 27. “It’s a shame [Nanosys is] going public because I don’t think they are in a position to be predictable enough,” he said. “And whether they are doing it knowingly or unknowingly, there is a reasonably high likelihood that they will defraud the public market.”

Nanosys could not reply to Khosla’s comments because it is in a quiet period surrounding its IPO. The Palo Alto, Calif.-based company filed an S-1 statement with the SEC on April 22 declaring its intent to raise $115 million through its public offering (see PE Week, May 3, 2004 issue). The 3-year-old company has not yet set the terms of the offering, but it plans to trade under the Nasdaq symbol NNSY.

If the IPO is successful it would be a boon for the more than 10 venture firms backing Nanosys, four of which own stakes of more than 10% each.

At least one person who attended Khosla’s presentation said that he didn’t take the comments on Nanosys as gospel. John Sakai, who advises Hitachi Chemical Co. Ltd. on new technologies and venture investment strategies, said in a phone interview last Wednesday that Nanosys’s planned IPO appears to be “kind of early,” but he noted that he really doesn’t know enough about the company to have an informed opinion. Also, he wondered whether or not Kleiner Perkins has a startup in its portfolio that competes with Nanosys.

Khosla sits on the boards of two nanotech companies backed by Kleiner Perkins: Kovio, a stealth semiconductor company based in Sunnyvale, Calif.; and ZettaCore, a Denver-based startup that’s developing “molecular memory technology” for semiconductors.

Joel Martin, a nanotech expert and general partner at Forward Ventures in San Diego, declined to say if Nanosys’ planned IPO was a good or bad idea.

“It will depend a lot on what happens to the IPO,” Martin said. “If it gets done and takes off, everyone will be enthusiastic to do the same.” However, Martin noted that Quantum Dot, a nanotech company he co-founded and where he remains chairman, is taking a “quiet, measured approach” and has no plans to file for an IPO. Founded in 1998, Quantum Dot has products on the market and has been approached by investment bankers, but “we feel there is no rush,” Martin said.

Nanosys, in contrast, isn’t developing a specific product. It is a platform technology company developing nanotechnology-enabled systems. It has an ambitious plan to deliver nanotechnology to a variety of large markets, including energy, defense, electronics, life sciences and IT.

For example, it is working with Matsushita to develop nanotechnology-based solar cells for the Asian building materials market. While its approach is different, “it’s equally valid,” Martin said. “They have a lot of very bright people and interesting IP. There is a lot of promise that the company will be successful.”

At the Nanotechnology Forum, Khosla said that Nanosys doesn’t have a predictable business model, leaving too many questions open if it’s going to be a public company.

“I don’t think [securities] analysts are in a position to judge them,” he said, “and I don’t think the public, for sure, is in a position to judge where their technology might go.”

Nanosys’ decision to go public has already caused some investment bankers to approach other nanotech startups with promises of a big payoff.

“Bankers are out to make that 6% commission that they make on the public offering,” Khosla said. “I have companies that have been approached who have been told, We can take you public today.’ My answer to the CEO was, If you’re wasting your time talking to bankers, you’re not the right CEO.'”

Dressed in jeans and an open-collared shirt, Khosla spoke for more than two hours. He started with some brief remarks then took questions from the crowd of about 250 entrepreneurs, investors and students.

“When people ask me if I like to invest in nanotechnology my unequivocal answer is, Absolutely not,'” he said. “And the reason is very simple: Too many people get lost in investing or joining a startup in a [particular] technology. That’s the wrong way to look at it. When you invest you should invest in an application that makes an economic impact. If somebody was using nanotechnology to develop a new application, would I be interested? Absolutely.”

Khosla, who Forbes named the most successful VC last year, cautioned the crowd not to get caught up in the growing hype about nanotech.

“One thing I’m almost certain of is that sometime in the next few years we will go through with nanotechnology the same kind of bubble we went through with the dot-com boom,” he said. “When people start investing in a technology as opposed to investing in an application [and] when people start hyping a technology, you’re sure to have bad things happen.”

That prediction elicited some nervous laughter from the audience.

“That’s not to say many people won’t take advantage of [nanotech] and get extra funding or go public or make money,” Khosla continued. “But if you are fundamentally interested in doing something that has a lasting impact, you should focus on the applications that you’re trying to develop or the research you’re trying to do.”

Asked which market segments he sees becoming commercially viable in the next five to 10 years, Khosla predicted that new kinds of computer memory and batteries based on nanotech would “clearly” happen in the next five years. Nanotech-based fuel cells, textiles, new drugs and biomaterials will “probably” develop into markets in the near term, he said.

Nanotech, much like its biotechnology cousin, requires a greater investment in research over a longer period than most other technology ventures. And the sector, projected by the government to become a $1 trillion industry by 2015, has garnered billions of dollars of federal research support. President George W. Bush last year signed legislation providing $4 billion in federal funding over five years to promote nanotech research.

Supporters of Nanosys’ planned IPO say that the company has a compelling story for Wall Street. It has locked up 200 patents from nanotechnology’s major research centers – such as Cornell University, Harvard University, MIT and UCLA; it has inked development agreements with Intel Corp. and Matsushita Electric Works; it has a grant from the National Institutes of Health to develop nanotechnology-based biosensors; and its CEO, Larry Bock, has a remarkable track record. Of the 16 life sciences companies Bock has seeded, 11 have gone public and two have been acquired, returning billions of dollars to investors.

In its filing with the SEC, Nanosys reported a loss of $9.2 million on revenue of $3 million for 2003, compared with a loss of $7.1 million on revenue of $283,000 a year earlier.

Since its founding, the company has raised $54 million in venture capital, in exchange for about 60% of its equity. The largest shareholders are Bock and venture firm CW Group (where Bock is a general partner). Together, Bock and CW own 15.9% of the company’s shares. The other top shareholders are Arch Venture Partners, which holds 14.7% of the company, Polaris Venture Partners (13.6%) and Venrock Associates (13.6%).

Nanosys’ other investors include CDIB BioScience Venture Management, Chiao Tung Bank, Eastman Kodak Co., Harris & Harris Group, In-Q-Tel, Lux Capital, Prospect Venture Partners and SAIC Venture Capital.

In other news, Lumera, which uses nanotech to develop products from plastics, has filed to go public. It is a majority owned subsidiary of Microvision. Also, Nanofilm, which makes a coating technology, is rumored to be eyeing a public offering.

Email Lawrence.Aragon@ThomsonReuters.com

Additional reporting from Carolina Braunschweig.