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The Signal and The Noise

Nanosys Continues Its Private Affair

Kevin Kelleher

11/23/05 - 07:09 AM EST

Is it OK to invest in nanotech again?

With the Internet getting red-hot again and other emerging technologies, such as the next generation of robotics represented by iRobot (IRBT), receiving warm welcomes in the markets, nanotech is technology's ugly duckling that is taking forever to mature into a big fat swan.

Public nanotech plays remain as volatile as ever, with Nanophase (NANX) down 41% from its 2005 high and Altair Nanotech (ALTR) down 65%. Meanwhile, Punk Ziegel's Nanotech Index is down 17% this year.

But in some ways the bellwether nanotech stock is one that isn't a stock at all: Nanosys, a company that once came close to creating a nanotech stock boom.

Nanosys drew a lot of attention last year when the Palo Alto, Calif., company filed for an initial public offering that was to take place earlier this year. All Nanosys wanted was $115 a share and some of the credibility an IPO can bring. Coinciding with the buzz that nanotech was the next big thing, the company's offering was widely seen as an acid test for Wall Street's interest in the emerging technology.

Then Nanosys pulled the plug on its IPO a few months later, telling the Securities and Exchange Commission that the move was "due to the volatility of the public capital markets." Nanosys' filing noted that it had the option of undertaking a subsequent private offering if it decided another stab at the public markets wasn't in the cards.

And sure enough, earlier this month Nanosys announced a $40 million round of private investment. That's much smaller than what it sought in its failed IPO, but added to the $54 million in private investment that it has raised to date, it makes for a significant chunk of private equity. The new investment, led by El Dorado Ventures, included the participation of new and existing investors such as Wasatch Advisors, Lux Capital, Harris & Harris, In-Q-Tel, Intel Capital and Polaris.

"This will help us scale up commercial manufacturing opportunities and pursue new opportunities," says Peter Garcia, Nanosys' CFO, who noted that the round was raised after it signed an agreement with Japanese electronics maker Sharp to develop display systems.

In many ways, news of the fresh investment was very good for Nanosys itself. But for the broader market -- and going back to that lingering image perception of Nanosys as a bellwether of nanotech itself -- it raised a different question: Why didn't Nanosys just try to go public again? After all, the markets are hardly volatile with regard to technology companies -- especially those with a track record of profits.

"A private round was easier to do in a relatively short period of time," says Garcia. "It doesn't preclude us from thinking about a public offering later on."

When Nanosys scrapped its IPO last year, many observers saw factors beyond market volatility at play. Nanosys may have had a dozen Ph.D.s on staff and more than 400 patents in hand, but its prospectus warned that its first product wouldn't be "commercially available for at least several years, if at all." Beneath the paranoid tone that shades all language concering risk factors, there was a cold reality that violated the simple, harsh rule of thumb that Wall Street is sticking to these days: No products, no revenue. No revenue, no profits. No profits, no IPO.

"It looks like a very risky bet to me," says Tim Harper, CEO of Cientifica, a market research firm focusing on nanotechnology. "Nanosys doesn't seem to be in any different position to where they were before last year's aborted IPO. If they were, then they would have tried again."

It's not entirely fair to say that Nanosys has no revenue whatsoever. Its prospectus last year showed $3 million in revenue and a loss of $9.2 million and 2004 Q1 revenue of $1.2 million and a loss of $4 million. Most of that money came from development contracts from Uncle Sam and others. Since then, Nanosys has announced more than $10 million in myriad federal contracts, but no viable products to market.

Nanosys is working on a lot of potential applications that could find demand once they reach the market: fuel cells for laptops, memory for MP3 players, low-cost solar cells, etc. One of the company's founders, Larry Bock, has a stellar track record of investing in or founding biotech startups such as Ariad Pharmaceuticals, Athena Neurosciences and Neurocrine Biosciences.

"Many of the initial investors got sucked into this as a result of Larry Bock's success in the biotech world and believed that this could be replicated in nanotech," says Harper. "So four years in, they are being asked to pony up again in order to keep the company afloat long enough for them to hit pay dirt somewhere"

Charles Harris, CEO of venture firm Harris and Harris (TINY), which has participated in multiple rounds of private funding for Nanosys, says the nanotech issue is beside the point. First off, investors still labor under the misperception that nanotech is an industry rather than a field of innovation that will affect many industries. Also, Wall Street has been lukewarm toward venture-backed IPOs of all types in the past few years.

"When the Nanosys IPO was pulled, people attributed it to nanotech per se," says Harris, who adds he saw a silver lining in having Nanosys remain private. "It gave us an opportunity to put more money into the company."

What Nanosys' latest round of funding, with a broader array of private funds involved, suggests is that nanotech investment appears to be slowly attracting the interest of private investors. Whether you put the blame on Wall Street or Nanosys, the public markets remain lukewarm to nanotech.


Brokerage Partners