The dozen venture capitalists were easy to spot at the California NanoSystems Institute in Los Angeles last fall. They were the only ones at the 300-person gathering who didn’t rush the buffet.
Clutching a Diet Coke in one hand and a white notepad in the other, Lyndon Lien, a principal with Coastview Capital in Los Angeles, cornered a scientist, firing questions. How far along is the research? What are its broader applications? And, when will it hit the market?
Most of the venture capitalists at the nanotechnology event sounded cautious, but that hasn’t been the case for VCs as a whole. Private equity investors funded 34 nanotech startups to the tune of $427 million last year, up from 19 deals worth $190 million a year earlier, according to Venture Economics and research by Venture Capital Journal. And the number of brand new deals is growing-from three A rounds for $8.9 million in 2001 to eight A rounds and three seed rounds totaling $73.3 million last year. As a whole, the companies that received fresh funding in the past two years have collectively raised more than $1 billion since their inception (see charts, pages 20 to 23). It looks like the Internet and optics bubbles weren’t painful enough to discourage VCs from buying into the next big thing.
Draper Fisher Jurvetson-with a record eight nanotech investments-isn’t the only firm hoping to make millions from tiny technology. Many of the biggest names in venture are betting on the sector, including Advanced Technology Ventures, Apax Partners, ARCH Venture Partners, Kleiner Perkins Caufield & Byers, Menlo Ventures, Morgenthaler Ventures, MPM Capital, New Enterprise Associates, Sequoia Capital, Sevin Rosen Funds and Venrock Associates.
Unfortunately, like the Internet and optics stories, the nanotech story is doomed to have an unhappy ending, industry experts say. It isn’t that nanotech has no future; it’s just going to take a lot longer and a lot more money to actually create commercial products.
Still, the buzz is getting louder and louder. You know something is hyped when angel investors want in on the action. California’s Central Coast Angel Network held a seminar on nanotechnology for its members late in October.
Nanotechnology researchers say investors have been hypnotized by H.G. Wells-type claims about nanotech and are investing too much money in a market where only a few companies will likely produce commercially viable products in the next several years. As one scientist with the California NanoSystems Institute says: “The VCs just don’t get it.” The science is risky, and if the risk is not factored into the price of a company’s equity, if the project goes bust, so will the capital.
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