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2.4 Venture Capital Funding of Nanotechnology

The Overall Picture

Historically VC investment in nanotechnology in Europe has lagged behind that of the United States. Over the middle part of the decade, global venture capital investment in nanotechnology was averaging around € 900 million per year (figure 3).

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Figure 4: Global Venture Capital Investment in Nanotechnology, Source: Thomson VentureXpert database, analysed by Markku Maula (Helsinki University of Technology)

However, this investment was heavily focused on the United States. Whilst Europe performed better than the rest of the world, it received just € 34 million in 2006, representing 3.6% of the global total. This proportion of the total was reasonably consistent over the period 2002-2006 (figure 4).

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Figure 4: Global Venture capital investment divided by target country, Source: Thomson VentureXpert database, analysed by Markku Maula (Helsinki University of Technology)

Lux Research has identified investments valued at 792 MUSD in 2009, 42% off their 2008 figure. The largest share of funding (51%) went to Healthcare and life sciences, followed by energy and environment (23%) and electronics and IT (17%). This funding was spread across 91 deals, with an average investment size of 8.6million.

This links to an earlier finding from Lux Research which noted that nanotechnology investments in healthcare had proven to be the most successful, having account for a majority of IPO value – USD 1.68 billion, with the total of  nanotechnology IPO values at USD 2.57 billion.

Disproportionate shares of funding between countries

Venture capital investments in nanotechnology also demonstrate a ‘power law' effect, with few companies dominating total funding. Three US companies; Nanosolar, A123 Systems, Neophotonics had collectively received around three quarters of a billion dollars in investment.

Nanosolar has a case for being one of the best funded companies in any sector, let alone nanotechnology. Total investment received by the company is USD 500 million, including a round of USD 300 million in August 2008. Partners for this funding round included strategic investments from energy companies AES Corporation and EDF, in addition to the Carlyle Group and a number of other investors.

Investments in Europe

Funding of European nanotechnology firms kept pace with previous years during 2008, with four large deals alone accounting for €24 million in investment. There were weak signals of a shift in focus away from material-focused companies towards electronics and biomedical companies in that year; the four deals cover MRAM (Crocus), wafer inspection (Nanda), fiber-optic transceiver modules and optical links (Nanotech Semiconductor) and DNA Analysis (Genomic Vision).

Despite the discouraging signs in fundraising, 2009 has already seen a number of nanotechnology-related investments:

Exits and Divestments

One of the primary factors which have made VCs reluctant to invest in nanotechnology companies is the perceived lack of an exit market. VCs seek to exit investments by selling their shareholding to the public –via an initial public offering (IPO) or through acquisition by another firm. Companies had been unable to achieve sufficient size to justify an IPO, or had pursued too broad a portfolio of technologies to justify an acquisition by a larger company.

The IPO challenge is not limited to nanotechnology; the US saw only six venture-backed companies IPO in 2008 raising USD 470 million. This was a small fraction of the 2007 figure; 86 flotations had then raised over USD 10 billion.

In 2009, the situation has improved somewhat. A123 Systems recorded the largest IPO of 2008, raising $370 million and seeing a 50% increase in its share price during the first day of trading. The company develops lithium-ion batters that use nanophosphate materials, which have the effect of improving energy density. A123 Systems had previously been one of the largest recipients of venture capital in nanotechnology.

2009 also brought news of the first nanotechnology IPO in Europe for some time. UK-based Nanoco Technologies plans to list on the Alternative Investment Market via a reserve takeover of Evolutec Group. Evolutec Group was originally a bioscience firm which had planned to develop novel therapeutic products. However, following results from clinical trial, the company decided to suspend its activities. The largest shareholder in Evolutec then established the following strategy; it would maintain its listing, with the intention of purchasing a company and reversing it into the Evolutec.

This strategy was carried out with the February 2009 initiation of the acquisition of Nanoco Technologies. Nanoco is a bulk manufacturer of a range of functionalised quantum dots, with applications in lighting, displays, solar power, and biological imaging. Post merger, the company will be known as Nanoco Group plc. The company is expected to have a market capitalisation of around GBP 38.6 million.

Investor Views of Nanotechnology

Discussion with investors has generated a somewhat mixed picture of nanotechnology. The first important item to note is that the term does not have a great deal of relevance for investors; "It makes no sense to talk about nanotechnology as a separate investment class - we look at companies, industries and markets [not technologies] " commented one German investor. This is basically a labelling issue, which makes it difficult to measure nanotechnology venture capital, but which doesn't affect its amount.

Investors have also noted a shift in the strategies employed by companies seeking investment. In the early-to-mid part of the decade, these were predominantly materials vendors, but over the last couple of years they have become application specialists, focusing on specific uses of their technology.

An investment class is more often defined by the market - or in the case of clean tech - the ultimate need. In this sense the perception is of nanotechnology as one of a spectrum of enabling technologies, affecting different markets in different ways. This may also be the reason why 2008 did not see the introduction of any new nanotechnology-specific venture funds, along the lines of Nanostart and Nanodimension.

The positive converse to this is that there are not nanotechnology specific issues which dissuade investors from involvement in this sector. The complexity of achieving reliable production of nanotechnology-based materials or equipment is often thought to be a factor which hampers development, yet investors reported that this did not tend to be a critical issue for their portfolio companies - market acceptance being the primary consideration. Investors did not cite health and safety concerns as a factor which caused hesitation when making an investment decision.

One of the drawbacks that investors see in companies which approach them is too narrow a focus on the technology possibilities, rather than the business opportunities which their technology creates. Investors consider technologies which are more likely to gain market acceptance, which ideally should be proven by having customer feedback (and best of all, orders).

Finally the primary concern for investors in all sectors, not just nanotechnology, is ensuring that their portfolio companies are able to withstand the current economic downturn. Materials companies - which typically have higher costs that the equivalent IT company - need a strong cash position to withstand a period in which sales slow or cease altogether.

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