Invest in Nanotech?

February / March 2005 By: Clinton Bybee Volume 3 Number 1

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ARCH Venture Partners made its first investment in a nanotechnology company long before nanotechnology became the field that it is today and the subject of so much popular press. In 1989, ARCH founded Nanophase Technologies Corp., out of research work at Argonne National Laboratory and took it public in 1994.

Since the late 1980s, several things have happened to make nanotechnology the important area of scientific study it is today. First, analytical tools and processing capabilities available to researchers have vastly improved and that has enabled them to make, analyze and manipulate smaller and smaller materials.
Second, nanoscale science cuts across a wide range of scientific disciplines.
Today it is not uncommon to find physicists, chemists, chemical engineers, electrical engineers, material scientists, computer scientists, mathematicians and biologists working together under the auspices of nanotechnology research. This convergence of disciplines has led to an explosive growth in new understandings and new possibilities. Third, the federal government has made significant funding for nanotechnology research available.

As a venture capital firm, our interest in advanced materials is based on the impact the materials innovations can have on novel structures, devices, subsystems and systems and their impact in the marketplace. Nanotechnology is the current state of the art in advanced materials. But what makes nanotechnology so promising is that interesting things occur at the nanometer scale in the materials because of a range of quantum effects and large surface-area to volume ratio. Furthermore, because the scale is on a similar size order as molecules, there is an obvious potential biological fit.

To give an example, silicon has proven to be a notoriously poor emitter of light and so historically other more exotic materials have been used to produce light-emitting devices such as LEDs and lasers. However, at the nanometer scale silicon turns out to be a very efficient light-emitting material. In 2002, ARCH formed a company called Innovalight with a leading researcher at the University of Texas to take advantage of this property of silicon and exploit it for commercial solid state lighting applications. The company has assembled key intellectual property, experts in the process and synthesis and a strong financial syndicate of leading venture capital firms. The economic promise of a silicon solution to solid-state lighting is enormous.

Another of our nanotechnology investments is in a company called Nanosys.
Founded around the research of Charles Lieber of Harvard, Paul Alivisatos of the University of California at Berkeley, Moungi Bowendi of MIT and other leading academic researchers, Nanosys has built a broad platform of technology around inorganic nanomaterials that now includes an estate of over 200 patents and patent filings. These cover aspects of material composition, making, assembling and modeling the materials, as well as their uses in applications. Nanosys has announced research and product development collaborations with a number of companies including Intel, DuPont, Matsushita and others for applications including thin film solar cells, memory chips and thin film electronics. Each of the applications has large commercial promise and is uniquely enabled by the company's novel nanomaterials. Nanosys expects to have products based on its materials in 2006.

When evaluating investment opportunities in the nanotechnology area, we believe it is important to stake out completely novel territory. The number of patents and patent filings in the nanotechnology area has grown exponentially in the last five years, numbering now in the thousands. Some nanotechnology application areas are now sure to be patent minefields.

One of our more recent investments has been in a company called Cambrios Technologies, which we co-founded in 2003 with Professor Angela Belcher of MIT and her collaborator, Professor Evelyn Hu of the University of California at Santa Barbara. Dr. Belcher's pioneering research has clearly staked out novel territory—€”she uses tools biology has evolved over billions of years, and applies them to make and assemble inorganic nanomaterials. Using Dr. Belcher's inventions, Cambrios employs genetic engineering to create small artificial proteins that can make and assemble highly important commercial materials such as semiconductors, magnetic materials, optically active materials, ceramics, metals, and other interesting compounds. As Cambrios succeeds, the future will include devices that are assembled with biological proteins.

Big challenges still exist in making useful, cost-effective products from nanoscale materials including scalability, reliability, and integration into existing systems. However, the materials are telling us all something—€”there are important properties and capabilities at the nanoscale. Not every nanotech discovery or innovation will lead to a meaningful commercial market opportunity, but some will lead to large, outsized returns to the investors. Therein lies the challenge for the investor.

Clinton Bybee is a managing director of ARCH Venture Partners. ARCH was formed in 1986 at the University of Chicago and Argonne National Laboratory to organize companies around research emanating from the two research institutions. Today ARCH Venture Partners manages over $1 billion in capital.