Like a whirlwind romance, the public’s love affair with nanotechnology was over almost as soon as it began.
Days before it was set to go public, Nanosys Inc. withdrew its IPO, quashing hopes that a positive public reception would spark a flood of venture capital and boost the struggling nanotech sector. The scuttled IPO was just another kick in the ribs for a sector that is already bruised. One nanotech startup, NeoPhotonics Corp., was recapitalized in May, meaning its original backers lost most of their equity. Another, Genicon Life Sciences, was liquidated and its technology was sold to Invitrogen in July 2003 for $2 million-after venture capitalists had poured nearly $50 million into it.
VCs have backed relatively few new companies since they made a flurry of initial investments in the space in 2000 and 2001. Most of their investments have been in follow-on deals.
Three-year-old Nanosys cited “volatile market conditions” in withdrawing its IPO, but others said the startup just wasn’t ready to go public. “Nanosys was light years away from going public,” says IPO analyst John Fitzgibbon. “It would have been a great stock in the insanity of the dot-com era when any idea went and revenue and losses didn’t matter.”
The company was dogged by two questions: “Where’s your product?” And, “Where’s your revenue?” While it has 200 patents and is developing nanotechnology-enabled systems with broad applications in the defense, life sciences, IT and solar energy industries, Nanosys doesn’t have a product on the market. And it isn’t entirely clear when it will, something that spooked potential investors.
The company reported a loss of $9.2 million on revenue of $3 million last year and it reported an $8.8 million loss during the first six months of this year.
“The stock market is in a risk-averse mode,” says Joel Martin, a partner with San Diego-based Forward Ventures and founder of Quantum Dot, a nanotech-based biotech startup. “There’s still a big hangover from the Internet bubble. People are not keen on smoke and mirrors. People are looking for concrete products and revenue.”
Nanosys had planned to raise $100 million by selling 6.25 million shares at a range of between $15 and $17 a share. It formally withdrew its IPO plans on Aug. 4.
The scuttled IPO was bad news for those who invested $54 million in the company: ARCH Venture Partners, Polaris Venture Partners, Venrock Associates, and a host of others, including Larry Bock, the company’s CEO, and CW Group, a venture firm where Bock is a general partner.
The IPO was expected to draw venture interest into the sector by showing investors that nanotech startups had a clear exit horizon, says Vijay Vasista, COO at NanoSphere, a Chicago-area startup that’s building a nanotech-enabled molecular testing system.
The failed IPO may be part of a larger retrenchment in the public markets. Although the number of IPOs rose this year, their aftermarket performance has been flat, according to Renaissance Capital, an IPO research firm. In July, 28 companies launched IPOs, but just 15 of them are trading above their offering prices.
Also, of the 30 venture-backed companies that launched IPOs during the first six months of the year, only five were able to raise more money than they sought. The rest came in under target, including five drug companies that were seeking to raise $86 million, but managed to raise only $35 million each in their respective offerings.
It is unclear whether comments by Vinod Khosla, a general partner at Kleiner Perkins Caufield & Byers, hurt Nanosys’s chances at going public. Khosla, one of the industry’s most respected technology investors, had warned of an impending nanotechnology “bubble” and criticized plans by Nanosys to become the first publicly traded nanotech company. As first reported by VCJ sister publication Private Equity Week, Khosla told a crowd at the Nanotechnology Forum meeting at Stanford University on May 27 that, “It’s a shame [Nanosys is] going public because I don’t think they are in a position to be predictable enough. And whether they are doing it knowingly or unknowingly, there is a reasonably high likelihood that they will defraud the public market.”
Khosla later apologized for his remark in an email, saying, in part: “There is one very important clarification to your recent article [in the June 7 issue of PE Week], all of the concerns I expressed were intended to articulate my opinions about the nanotechnology’ industry generally, and not about any specific company. … I certainly did not intend to imply that Nanosys or any particular company might deliberately mislead or defraud the public market.”
Nanosys executives declined to comment immediately after the company yanked its IPO.
It is altogether possible that Nanosys will return to the public markets if conditions change. And, phones on the desk of nanotech industry CEOs are likely to ring again. “Oh, the bankers will keep calling,” IPO analyst Fitzgibbon says. “Remember, this market is cyclical.”