Annual Principal Investment Conference--nanotechnology

Josh Wolfe and Carmichael Roberts

The Big Story of Tiny Technology

The business plan pitch went something like this: "Imagine if we can cryogenically freeze your head! And bring it back twenty years later and make the body around it!"

Sound far-fetched? It is. But lending an ear to such serious whimsy is all in a day's work, according to young venture capitalists Josh Wolfe and Jason Friedman, two speakers at the student-run Venture Capital and Private Investment conference February 3, at Harvard Business School. As panelists at a session devoted to nanotechnology, they confirmed they had indeed received an identical pitch at a nanotech professional pow-wow in Texas not long ago.

Reported Friedman, an associate at JP Morgan Partners, "You'd almost feel like you were in a Star Trek convention."

"No one was laughing," added Wolfe, co-founder and managing partner of Lux Capital.

Friedman said, recalling his response at the time, "Wow! Okay. That's probably not what I want to be investing in."

But what should venture capitals be investing in? Frozen heads aside, Friedman, Wolfe and other experts agreed that nanotechnology is definitely a field to watch, if not to throw money into right away. None of the panelists have staked their fortune on it, for example. Christoph Westphal, a medical doctor and general partner of Polaris Venture Partners, said his firm has invested $4 million of a $900 million dollar fund into Nanosys, a company developing small IT applications. "That's less than half a percent of our fund. If we invest in more nanotechnology companies, it will be about five percent of our fund. We are a diversified fund."

	It's the first sector of science or technology where there's an international race.
	— Josh Wolfe, Lux Capital

Friedman (HBS MBA '00) did not divulge how much of JP Morgan Partners' $12 billion in direct private equity and venture capital investments go to nanotech, but he said the firm has "four or five" investments to date. Lux's Wolfe said his company has no deals so far, but would be announcing two later in February. (The fourth panelist, Carmichael Roberts, is not an investor; he is president and co-founder of Surface Logix, a company that explores biotechnology and information technology.)

Even so, panelists said, nanotech's possibilities in everything from biosensors to devices that regulate insulin directly in a diabetic's bloodstream may demonstrate that "get small fast" could be the rallying cry of the future. Though disdainful of media "hype" that usually makes nanotech sound like it can fulfill every science fiction fantasy, Wolfe conceded that hype is, in his words, "a lubricant for cash flow."

"Right now governments are spending like crazy," he said. "It's the first sector of technology or science where there's an international race. It is feverish. Japan, Germany, the U.K., the U.S. are all throwing millions of dollars at the space. It's the first time since World War II that the United States does not have a clear advantage in a given technology. It's a very exciting time."

Materials rules
Roughly 200 companies are dipping into nanotechnology, said moderator Steve Crosby, vice president and managing editor of Small Times Media LLC. The next five years should see the development of biosensors for detecting DNA, protein, and anthrax, he said. "There's a huge demand and need [for biosensors], and not a lot there," he said. "So people are going to be willing to take more early-stage prototype things and try to get an edge in drug discovery and diagnostics."

Wolfe predicted that early money will flow into instrumentation: tools such as atomic force microscopes and scanning tunneling microscopes that allow scientists to manipulate and measure matter at the single-atom level. From a venture perspective, however, such companies have limited appeal, he said. "In the past ten years, we've seen that those companies have been acquired in the range of a hundred to two hundred million dollars, with an input of about $50 million in capital. So for later stage VCs, those aren't necessarily compelling returns. In the early stage, you don't have the capital to build up a business that large." Large corporations such as Japan's Mitsubishi, he said, are trying to produce nano-size materials on a mass scale. These materials—including fullerenes, or highly stable crystals named for architect R. Buckminster Fuller—could then conceivably be used to help pharmaceuticals companies with drug discovery.

Investors expect a lot from the emerging technology, added Roberts. In his experience, investors are excited by basic research but they're more excited about concrete applications. The venture capital community, he said, "is very focused on ‘How am I going to get my return in X period of time on something real because I've been burnt by the dot-coms.'"

Mitigating the potential of the field with realistic financial expectations is therefore a big challenge for entrepreneurs going forward. Venture capitalists won't "rush in" until there is the first big success, added Wolfe.

The biggest investment JP Morgan Partners has made so far in a nanotech company is admittedly "kind of goofy," said Friedman. It is an investment in NexTech, a company that makes what Friedman called "nano encapsulated fibers."

"Why is this important? Well, you like it if your khakis wrinkle less and if you're wearing a jacket and water doesn't go into the jacket when it's raining. These are very simple things they're trying to do and there's an actual market for the product that can be developed."

However, he continued, JP Morgan Partners plans to watch the nano field from a safe distance for the time being. "It's not like we're going to suddenly throw 200, 300 million dollars into anything that has nano in the word, because, to be perfectly honest, that's silly."

Summing up the mood of the panelists, Friedman added, "You have to pick the spots and places where you think there are good companies. Is [nanotechnology] an interesting technology? Absolutely. Could it be the next big thing? Maybe."

Photo by Martha Lagace