Small is poised to make it big in Europe

Over the past two years many investors looking for the next big thing have turned their attention to nanotechnology. The hopes and expectations pinned on the field are illustrated by a recent statement from leading chemist and Nobel laureate Richard Smalley, who has said that ?to the extent that there are solutions to practical problems like disease, feeding the world, and reconciling scarce energy resources with increasing consumption, a remarkable number of them can only be solved through nanotechnology.?

Public money has been pouring into nanotechnology, and the governments of the US, the EU, Japan and several other Asian countries are expected to spend over $1.5bn on nanotechnology research this year. However, despite the widespread excitement, the response from the investment community has been relatively subdued so far. Only a handful of investments were made during 2001, and there are sceptics questioning nanotechnology's commercial viability. Philip Cooper, who manages a $10bn portfolio of private equity investments for Goldman Sachs in the US, recently declared that he ?would run in the other direction from anything with the word ?nano? appended to it.?

Such caution, referring both to timing and the commercial appeal of nanotechnology businesses, will strike others as exaggerated, especially with regard to Europe. Bruno Steis, investment partner at Siemens Venture Capital, which has started to invest in nanotechnology, sees ?a lot going on in European nanotechnology and real investment opportunities emerging.? Similarly Burkhard Brinkmann, a Germany-based director at 3i, thinks that if anything, ?deal flow is the problem. We would like to see more nanotechnology deals coming our way.? 3i has made four nanotechnology investments in Europe to date.

Size matters
Nanotechnology is the analysis and manipulation of matter at the scale of nanometres. A nanometre (nm) is a billionth of a metre, which corresponds to about ten hydrogen atoms lined up next to one another. To put this into perspective: a nanometre is as small to a metre as a football is to the earth.

The computer industry has been working at slightly larger dimensions for a while (currently down to 180nm design rules), but existing technologies for the manipulation of matter cannot be downsized much beyond the current state. Due to physical limits to optical lithography, integrated circuits will soon require completely different production tools in order to maintain the exponential growth of computing power. This calls for nanotechnology and offers significant rewards for successful companies.

Nanotechnology is not only quantitatively, but also qualitatively different from working at larger dimensions. Upon reaching the molecular level, the qualitative properties of matter tend to change in two fundamental ways.

First, the substantial increase in surface area (the smaller a particle, the larger its relative surface area) offers radically new prospects for catalysis and other surface phenomena. For example, the geometrical arrangement of some metal atoms changes fundamentally when the particle size reaches the nanoscale. This is illustrated by gold, which can only catalyse certain reactions as a nanopowder, but not as a bulk metal.

Companies aiming to exploit this phenomenon include NanoBio in the US, which has developed anti-microbal emulsions containing nanoscale droplets. Their tiny size induces such a high surface tension, that the droplets literally explode upon contact with viruses, bacteria, and spores, thus killing these microbes. These anti-microbal features are solely based on the physical properties of the nanoscale droplets alone and not on any toxic substances.

Second, and perhaps more importantly, the small size of nanoparticles leads to the predominance of quantum phenomena. This allows scientists to control the fundamental properties of matter (e.g. colour, hardness, crack-resistance, strength, magnetisation, and charge capacity) without changing its chemical composition. Quantum Dot, another US-based company, has made this the basis for producing markers made of nanosized metal particles, which change colour depending on their diameter and therefore allow easy identification of marked macromolecules.

In the long run, the most revolutionary aspect of nanotechnology may be that it allows for the design of matter at the level where the fundamental processes constituting living matter take place. This would open the way to nanobiotechnology and dramatically improved in vivo diagnostics, point-of-care drug delivery, et cetera.

Europe has strong nanotechnology research
Nanotechnology involves researchers from a large number of disciplines, including physics, chemistry, biology, engineering, material and computer sciences. This makes it a truly enabling technology, where one technical breakthrough can impact on a large number of hitherto separate fields. It will further accelerate the convergence of IT, biotechnology, material science and manufacturing, thus raising the need for interdisciplinary understanding. This complicates the picture for investors, since advances in one field may depend on progress made in a totally different area.

Contrary to the early phases of the semiconductor and biotechnology revolutions, European and Japanese research provides strong competition to the US. Whilst the latter are particularly strong in bionanotechnology, Japan leads the way in nanoelectronics, with Europe enjoying a strong position in nanomaterials. Andrew Jones, analyst at London-based investment bank Evolution Capital, says that ?fundamental research in nanotechnology in Europe is at the same level as in the US.? Giuseppe Curatolo, general partner at TLcom Capital Partners adds that ?the traditional European strength in precision engineering and process technology puts the continent in a very strong position for exploiting nanotechnology.? This applies particularly to the chemical, metal, and engineering industries.

Time to market Tools and equipment for Material sciences Healthcare and Lifesciences Energy and environment IT and communications nanotechnology Current commercial surface analysis tools, large- catalysis, self-cleaning or cosmetics, sunscreen, drug delivery products scale production of scratch-proof surfaces, through increased bioavailability, nanopowders improved pigments biochips, lab-on-a chip (i.e. micro-and nanofluidics) Short term (1-5 years) improved simulation of harder and tougher cutting molecule-specific markers, advanced batteries, fuel flat panel displays (carbon nanoparticles, large-scale tools, composite materials for improved drug discovery and additives, low-energy nanotubes), hard disk data production of nanoparticles specialist applications (mili- diagnostics desalination and water storage, non-volatile (e.g. carbon nanotubes) tary, aerospace, automotive) purification magnetic RAM Mid term (6-10 years) computer-based design of large-scale production of advanced biocompatible compos- nanosensors for environmental next generation litography nanomaterials composite materials based on ites, targeted drug delivery, single monitoring and military nanoscale photonics, silicon- nanoparticles (e.g. for aircraft, molecule in-vivo diagnostics applications, fuel cells based optoelectronics automotive, and construction industries) Long term (11-20 years) self-assembly and bottom-up intelligent materials micropumps for medical nanoelectromechanical nanoelectronics, quantum fabrication applications systems (NEMS) for energy computers, silicon-vivo generation, transmission, interfaces and storage

What investors should look out for
In essence, investors should approach nanotechnology deals just like any other enabling technology deal. However, the fundamental characteristics of the industry require a somewhat different set of answers to some questions.

Is the commercial management strong?
The principal problem for many early-stage nanotechnoogy companies lies in the lack of experienced commercial management. Since the technology can serve many different markets, managing such a company can be a daunting. In contrast to biotechnology, where much of the talent came from large pharmaceutical companies, there is no single industry that can serve nanotechnology start-ups in a similar way. Investors with a broad industrial contact base can provide valuable services to their portfolio companies.

How strong is the company's access to scientific expertise?
Nanotechnology requires outstanding and well-managed scientific experts. It is also a relatively young discipline and several areas are dominated by few scientists. This creates the opportunity to bind a large share of the world's specialist know-how into companies ? either through direct employment or advisory board positions. That way companies can set up significant barriers to entry.

Is there near-term potential for deployment with a strong revenue stream?
The capital requirements for mounting a nanotechnology company can be substantial and the time to market may be long. This requires successful companies to focus on near-term revenue opportunities, whilst continuing to build their IP portfolio. Examples where such a strategy has attracted major investment can be found in the nanomaterials area, where Nanogate of Germany and Ireland-based Ntera have won funding on such a basis.

Does the invention have broad applications across a range of markets?
The beauty of nanotechnology lies in its disruptive nature and its broad appeal to a large number of different applications. Hence successful companies should focus on capabilities that can be deployed across a range of industries. Typically, investors will need to assist the company in its prioritisation, which requires in-depth understanding of the target markets.

Is the core IP defensible and how can it grow?
During 2001 a large number of patents were issued in the area of nanotechnology. A successful patenting strategy will follow the example of the electronics industry and focus on building sizeable patent families. Investors need to ensure that their portfolio companies' patents cannot be undermined by minor modifications to the technology.

What about the manufacturing process?
Large-scale bottom-up manufacturing processes will take time to emerge. Most advances in this area will be piecemeal and require a lot of time and resources. Here large companies with significant expertise in process engineering have an advantage. An example is carbon nanotube manufacturing, where established players like Mitsui and Mitsubishi are attempting to corner the market, which will push a number of start-ups to the brink.

What exit opportunities exist?
To date only very few pure-play nanotechnology companies have listed and no large acquisitions have been made. Hence investors need to ponder the question of an eventual exit very carefully ? particularly since some of the industries that nanotechnology services do not have a long history of expanding their technology base through acquisitions. In the near term, most companies should focus on the public markets as their exit route.

Investing in nanotechnology is a challenging undertaking, and investors must be well prepared before they put money to work in the field. The timing now is right for investors to develop the necessary expertise to invest in nanotechnology, says TLcom's Curatolo: ?Now is the time to consider making the first strategic investments in this space, which may not generate the highest returns, but will position investors well to exploit its potential once nanotechnology really takes off.?

Guido Schmidt-Traub works as an independent advisor for technology companies with a particular focus on material sciences.