It's no surprise that science of the tiniest materials is making a big splash on Wall Street. It's a field that holds the promise of changing this century the way computer chips and biotechnology changed the last one. But investors still licking fresh wounds from the last "Next Big Thing" are justified in wondering if this latest innovation will turn out to be just another big way to lose money.
One of the first problems faced by investors and businesses -– or anyone else trying to grasp the potential impact of the field -– is an understanding of just what nanotechnology is. The generally accepted definition is the manufacturing of materials and mechanisms that are less than 100 nanometers in size. A nanometer is one billionth of a meter, often referred to as about a thousandth of the width of a human hair. Put another way, if the earth were measured in nanometers instead of meters, it would fit comfortably in a shot glass. Think really small.
What makes nanotechnology so exciting is what happens to things when they get that small: materials with otherwise common properties take on powerful new characteristics. Much the way the development of plastics offered new ways to make better and cheaper products, materials manufactured on a sub-microscopic scale can take on entirely new properties.
“Suddenly materials can be ‘tuned,’—almost like a radio dial,” said Josh Wolfe, a co-founder of Lux Capital, an early-stage venture capital firm that specializes in nanotechnology companies. “So that every aspect of material can be controlled -- from its electrical properties, its optical properties, its thermal and magnetic properties -– basically any property that a material gives off you can alter and rationally control.”
Nanotechnology has been around for decades in the computer industry as everyone from chipmakers to disk drive designers continually try to shrink those devices further. More recently, nanotechnology has produced useful breakthroughs that are showing up a variety of products. Dentists are using a compound made of microscopic particles as a filler that is stronger and more durable than conventional materials. Clothing manufacturers from Eddie Bauer to Brooks Brothers are using tiny particles to stain-proof fabrics.
As a result, Wall Street has begun to take notice of a field that a few years ago was largely known only to corporate scientists and university researchers. Venture capital funding for nanotechnology companies –- still a fraction of the total technology investment -- jumped more than 40 percent last year, according to Research and Markets, a market research firm. Some of these are now going public. In April, Merrill Lynch created a Nanotechnology Index of two dozen public companies; those stocks were up sharply last year but the index has been choppy in 2004.
There’s also more money flowing for nanotechnology research from federal grants. Last year, Congress authorized $3.7 billion over four years for nanotechnology research, expanding the National Nanotechnology Initiative established by the Clinton administration. The bulk of the $960 million spent this fiscal year is being doled out by the National Science Foundation and the Departments of Defense and Energy.
But if nanotechnology is a revolution, it is expected to proceed relatively slowly compared to other technological watersheds. The computer industry was revolutionized by the integrated circuit; biotechnology by the discovery of recombinant DNA. But because each tiny material or device presents its own unique hurdles -– both in the initial creation and large scale manufacturing -– nanotechnology will likely play out as a series of discrete breakthroughs over time.
So how do you make things that are too small to see without a microscope? So far, there are two basic approaches -- so-called “top down” methods that take a larger chunk of a material and make it smaller –- and “bottom up” techniques that involve building materials more or less atom by atom.
“There are lot of ‘top down’ techniques to create nanoscale structures,” said Glenn Fishbine author of theInvestor's Guide to Nanotechnology and Micromachines. “There are almost no techniques -- there are a couple -- that build from the bottom up.”
Semiconductor makers have been using “top-down” methods for decades. Some materials are made small by the simple process of grinding them up or suspending them in liquid to create super-thin films.
But even once a method is devised for making nanoscale objects in volume, it’s not clear exactly who the biggest beneficiaries of these breakthroughs will be. Just as the manufacture of computer chips spawned whole new industries like hand-held computing and digital photography, the creation of nanomaterials will likely be just the beginning of new categories of products based on the technology. Makers of nanomaterials could enjoy big profits early on but soon find themselves making a low-margin, commodity product.
“Historically, you only have a window of time where that (profit advantage) will last," said Wolfe. "The real value add will be in its integration into end products."
Take the case of carbon fibers, which are showing up in so-called "composite materials" that are many times lighter, and yet many times stronger, than steel. These materials are also virtually invisible to radar, which has allowed the aerospace industry to develop stealth aircraft. Researchers are working to make textiles out of carbon fiber that would create clothing with entirely new capabilities.
“It’s about 60 to 70 times stronger than steel,” said Fishbine. “Not only could it be body armor, you could change the color of the suit on demand. It could be electrically conductive; you could make wearable computer technology. There’s a lot of things you can do once you have the ability to mass produce that (carbon fiber).”
Big pharmaceutical companies are also keenly interested in nanotechnologies that provide them with new ways of delivering drugs to the body more efficiently -– in part because of the potential for extending expiring drug patents by re-engineering the way those drugs are administered. Flamel Technologies and SkyePharma are two companies working on those drug delivery techniques.
Winners and losers
But investors also need to consider the indirect consequences of the application of nanoscale technology. Use of these materials by one industry, like the advanced stain proofing now being applied to clothing, could also have major, unpredicted business impacts on others.
“I know from experience wearing these (stainproof) pants that I don’t wash them as often,” said Wolfe. “If my wardrobe is comprised of a large portion of these types of clothing, I’m going to use less Spray 'n Wash or detergent in general."
All of which makes investing in this field (it’s too diffuse to even call it an industry) that much more difficult. Big companies like IBM, Intel and 3M are investing heavily in nanotechnology, but it’s not likely that discoveries will significantly affect their bottom lines any time soon. That’s one reason companies involved almost exclusively in nanotechnology are getting the most attention on Wall Street.
One of the most widely watched nantoechnology companies, Nanosys, recently has been touted as a “bellwether” for the field. The company is involved in a wide array of nanotechnology research partnerships, says it holds over 250 patents and applications, and plans to be a kind of one-stop shop for development of nanoscale materials and devices.
The company recently announced plans to go public, pricing its initial public offering at between $15 and $17 a share. But parts of the company’s prospectus reads like an Internet start-up from the late 1990s.
For starters, Nanosys has never made money. Last year it lost $9.2 million on revenues of $3 million, which were largely derived from grants and research partnerships. That has some in the field worried that if the offering generates too much hype, the company’s lack of marketable products may discourage other, longer-term investment in the field.
“They haven’t fundamentally done the hard work of making something,” said Scott Mize, CEO of AngstroVision, a private company developing a device to create 3D imagines of nanoscale objects.
But there's one important difference between the Internet mania and current fascination with nanotechnology, according David Menlow, President of IPO Financial Network.
"(Now) there are battle-scarred investors on the sidelines fielding question about what exactly this technology is going to do," he said.
And even those companies that develop patentable products may stumble before they make a profit, said Wolfe.
“I would predict that 90 percent to the companies that will be founded in the next five years in nanotechnology won’t exist,” he said. “But the ten percent that do will go on to change the world.”
Lacking a crystal ball to determine which companies will be left standing, some investors are pursuing the familiar “picks and shovels” strategy popular in the early days of the biotech boom or the Internet bubble. The theory is that, in any gold rush, the companies selling supplies have always prospered. Those include companies that make the equipment for nanotechnology research like Veco Instruments or FEI Company.