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Nanotech: Money Pit or Moneymaker?

Kevin Kelleher

Can nanotechnology deliver on its promise, or is it just a black hole in which investors and governments have poured tens of billions of dollars with little in return?

According to Cientifica, a research firm focused on the market, various governments have spent $18 billion in nanotech research and development. Add in the $6 billion budgeted to be spent in 2006, and nanotech research funding will have reached the same amount in absolute dollar terms as the entire Apollo space program.

But after eight years of public funding, nanotechnology has little more to show the markets than stain-free pants. Terrific as this may be for slobs who want their clothes to look nice, it's not exactly the stuff of history. Yes, chemical giants such as BASF (BF Quote) and Dow Chemical are producing nanomaterials in bulk, but they make up a small fragment of their overall sales.

Eight years into the Apollo program, on the other hand, astronauts had achieved majestic goals such as space flights around the moon. Millions of children watched and dreamed they'd one day do the same. Today, it's hard to imagine children finding a role model in the scientist who invented stink-proof socks.

"Whichever way you look at the numbers, the economic effect of nanotech has so far been nano-sized," according to the Cientifica report, titled "Where Has My Money Gone?" "No wonder critics of nanotech are beginning to ask whether it will ever be worth it."

Also wondering if it's worth it are likely Europe, the U.S. and Japan, which have each contributed between 26% and 30% of the $18 billion in government nanotech funding to date. Judging from their plans to increase funding to record levels this year, officials seem to think it is.

So why, if so much money is going in, are so few nanotech products coming out? Cientifica spoke to officials and researchers around the world and found much of the slowdown in the funding process itself. Funding may be awarded, but it can take months or even years for it to wend through the Byzantine bureaucracies and into the accounts of a research program. This may be good for the legal specialists involved, but it delays the actual science.

Even after a project is funded, it takes at least another 18 months to staff up and get the research running, according to Cientifica. All told, a nanotechnology research project that is just starting today is quite possibly running on funds awarded in 2003. Of that $18 billion in funding over the past eight years, $12.4 billion has been allocated in the last three years. Once R&D starts, it usually takes seven years before it yields a marketable product.

"Even the earliest nanotechnology work ... funded from existing scientific budgets, will only now be yielding results," the report says. "As a result, venture capitalists and technology transfer officers dealing with nanotechnologies will find themselves increasingly busy over the coming years."

But if public financing of nanotech has been so slow to implement, wouldn't venture capital step in, sensing an opportunity to profit from governmental inefficiency? Well, actually, no. According to another report, this one from Lux Research, venture financing in nanotech companies has tallied up at $2 billion on 143 start-ups. According to Lux, governments and corporations have together spent 19 times as much in that period.

VCs take a bipolar approach to nanotech. They love the idea but balk at the reality of it. "VCs believe the nanotech vision but haven't found start-ups that can deliver on it," Matthew Nordan, Lux's vice president of research, said in the report. "VCs generally see nanotech as a more attractive field for investment than other domains -- yet VCs that have made nanotech investments see these deals as underperforming others in their portfolios on almost every measure."

Nordan says there are several reasons why nanotech investments are different: Start-ups require expertise in several scientific fields, few offer the short-term exit strategy that VCs look for, and because nanotech products are so novel, it's hard to gauge how buyers will value them.

Like Cientifica, Lux looks at what seem to be discouraging numbers and takes away a cautious sense of optimism that financing activity in nanotech may pick up in the next couple of years. But much will hinge on the success of the next few nanotech IPOs that make it out of the gates.

"In the most likely scenario, we think one or two nanotech start-ups will conduct successful IPOs by mid-2006, driving total VC funding up to $700 million in 2008 with slight declines thereafter," Nordan wrote. "More IPOs next year would amplify this rise and fall, driving nanotech VC to nearly $1 billion [funding] in 2008 with a bigger decline afterward. A continued absence of IPOs will mean single-digit annual percentage increases in nanotech VC, such that it does not exceed $525 million through 2010."

So far, there haven't been many investment opportunities in nanotech, public or private. But it took well over a decade between the rise of the Internet and Netscape, its first big IPO. It's starting to look as though the next few years will be crucial in determining whether nanotechnology can deliver on its promises.