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Nanotech's boosters are getting ahead of themselves
Some new statistics on nanotech may be a bit optimistic.
By Stephan Herrera, with additional reporting by Om Malik
March 26, 2002

News is that nanotechnology research is slated to receive one of the largest budget increases in U.S. president George W. Bush's fiscal 2003 science budget. The increase--17 percent to $679 million--is the latest proof that the U.S. government likes what it sees in the novel science of manipulating matter with atomic precision. And now that the respected journal Science has named nanoelectronics as the breakthrough of the year, it appears that the influential science press does, too.

A growing number of investors and entrepreneurs are keen on nanotech as well. And if you buy the statistics recently released by the NanoBusiness Alliance (NBA), an association for the nanotechnology industry, nanotech represents an immediate opportunity, not just a distant target. In a new survey, the NBA asserts that the field is already a $45.5 billion industry that could grow to $700 billion by 2008. The New York-based trade group boasts such advisers as Newt Gingrich, a former U.S. speaker of the House; Steve Jurvetson, a high-profile venture capitalist at the VC firm Draper Fisher Jurvetson; and David Holtzman, a former chief technology officer at Network Solutions. The NBA concludes that VCs will invest more than $1 billion in nanotech this year. How the field has grown--or has it?

At first glance, these numbers would appear to be a thumb in the eye of those who say nanotechnology is just so much nifty science in search of commercial applications and investment. But instead of being real, these numbers might just be wishful thinking, intended to stir up media hype and investor interest.

Nathan Tinker, an NBA cofounder and the survey's author, stands by his numbers. But others hesitate. Rick Snyder, an adviser to the NBA and a former president of Gateway Computer, says the NBA's definition for nanotech is far too broad and the field is far too young to get a proper read. "I'd say there's a whole of lot of stuff in those sales numbers that doesn't belong there," he says, adding that at this point, it's hard to separate nanocomponents from finished products.

But Mr. Tinker says there's no harm in interpreting nanotechnology broadly. "I tried to consider the whole range of nano," he says. In fact, he included sales from products that most nanotech experts would not even consider to be nano, like microelectrical mechanical systems.

The estimated $1 billion of VC investment is even more dreamy. It wasn't culled by surveying VCs themselves, but by asking 150 self-described nanotech companies how much money they expect to raise this year in private and public investment, as well as from their parent corporations' research and development departments.

Some nanotech defenders--for instance, Josh Wolfe, an NBA cofounder and a leading voice in nanotech --have sought to distance themselves from the numbers. But they are quick to point out that even if the methodology that produced the $1 billion estimate is flawed, the figure still could turn out to be true.

"It would be reasonable to approximate that 2 percent of all venture investment activity this year could be in nanotechnology," Mr. Wolfe says. "This would yield a ball-park forecast of $1 billion, a forecast that is demonstrably reasonable." But 2 percent of all VC activity is a huge slice of the VC pie: the computer and peripherals and financial services categories--troubled sectors, but actual markets nonetheless--each claimed 2 percent of venture capital in 2001, or about $1.5 billion combined, according to data from the MoneyTree Survey by PricewaterhouseCoopers and Venture Economics/National Venture Capital Association.

If indeed $1 billion is poured into nanotech and the majority of it is dispersed as first-round investments of, say, $5 million, that would mean 200 new businesses would get funded this year--nearly 4 per week. VCs typically fund 1 out of 100 business plans they read. But let's say VCs are falling over themselves to fund nanotech to the tune of 1 out of 20. Does anybody really believe that there will be 4,000 nanotech business plans forthcoming this year?

Sure, the most promising nanotech companies are commanding the attention of VCs. Nanosys, a Boston-based nanotech startup that counts ethernet inventor Bob Metcalfe as one of its founding investors and VC Larry Bock, who's funded several successful biotech companies, as its CEO, has raised two rounds totaling $16.7 million from venture capitalists. But even though this deal has clout, first-round nanotech investments are typically puny. And precious few deals have the bona fides of Nanosys.

Simon Waddington, a partner at the venture capital firm PolyTechnos Venture-Partners in Munich, is one of many who say nanotech boosters are getting ahead of themselves. "There appears to be a slight disconnect right now between the projections and the reality of nanotech," he says. "You can only define market research when you can define the market. We're not there yet with nanotech. It's a joke to predict market size until then; you can't just aggregate, or you get these wildly inflated estimates that in the end will not help the field."

One only needs to remember the overheated expectations that led to the optics craze of 1996-2000, which created ill-fated companies like Global Crossing, 360networks, and PSINet and cost investors $750 billion. Eventually the good companies suffered the same fate as the bad. What was optics if not elegant science in search of a real-world application and a viable business plan?

The NBA vows to put out a new report on the nanotech market later this spring with the help of Deloitte & Touche. Let's hope this one sticks to the reality rather than merely the perception of nanotechnology's business prospects.

Copyright 2002 Red Herring Magazine