Public Markets and Nanotechnology Companies

R. Douglas Moffat

Historically, public equity markets have provided capital for rapidly expanding firms having established products and seeking growth capital. Periodically, new technology or corporate growth models, combined with unusually heavy money flows into the stock market, fuel speculative demand for shares in new companies. Biotechnology investing has run in such cycles for more than 20 years. The Internet boom of the late 1990s reached unprecedented levels of irrational expectations and speculation. Other examples include the fuel cell boom of 20002001.

The public market's appetite for initial public offerings (IPOs) in a sector also is heavily influenced by the business model characteristics and the track record of the model for success. Biotech has achieved success in part because of the appetite for these firms by big pharmaceutical firms. Software stocks have proven to be fast growers without heavy capital investment.

Nanotech probably will be a big hit on Wall Street, but the timing will depend on progress achieved in moving products closer to market acceptance. Many of the nanoscience-enabled products being commercialized now are coming out of large companies. Examples include nanotube-based plasma televisions and personal care products. A limited number of smaller firms are introducing nanotech products in the short term. Most companies, however, are still refining the science behind paradigm-shifting technologies having massive potential. Commercialization issues include interfacing nanodevices with the macro environment, scalable manufacturing, and, in the health-care world, long FDA approval cycles.

Wall Street investors typically have preferred focused business models concentrated on growth from a narrowly defined technology or product group. Management focus historically has produced better execution and shareholder returns.

At this stage of nanotechnology development, however, intellectual property platforms based on broad patents (often coming from academia) are the main assets behind many companies. The applicability of this IP could cut across many markets and applications. Some firms have amassed broad IP by taking a portfolio approach to early-stage commercialization, an approach most stock investors do not favor. Such diversification, however, makes sense not only from a scientific point of view but also to lessen risks associated with potential patent litigation. The patent landscape in nanotech might be likened to the gold rush days, with overlapping claims.

Nanotechnology is different from other tech waves. First, the technology is often paradigm shifting, either creating new markets or providing quantum improvement in performance at a low cost. The enabling science probably is applicable to a wide variety of applications. In time, stock market investors may come to appreciate the power of a new nanotech business model, one with core IP at its center and with the prospects to spin off many companies with varied new products. The evolution of acceptable nanotech business models in public markets will depend in part on VC investors' willingness to extend funding horizons to allow firms to develop products.

There is significant buzz on Wall Street around nanotechnology. Leading Wall Street firms are beginning to commit resources to research and fund nanotechnology. A favorable environment is emerging for a successful nanotech début on the street.

Since the Internet bubble deflation in 2000, public equity markets have taken on a more risk-averse character. IPO investors have preferred to fund companies with established products, revenues, and profits as well as large companies restructured by private equity firms. A limited number of nanotechnology-enabled firms have been able to tap public equity markets. Public equity access likely will improve as nanotechnology firms move closer to the introduction of novel products having a clear path to revenue and profits. Equity issuance by nanotech firms likely will grow slowly over the next five years, gathering potentially explosive momentum thereafter.