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High IPO Hurdles for Nanotechs

Back in 1989, Scott Rickert had an appointment with the local bankruptcy attorney in a suburb of Cleveland. His small company, Nanofilm, was in the middle of a four-year slog to make a thin, see-through substance as tough and nonstick as Teflon and sell it to someone -- anyone.

He had bootstrapped the company with his partner and other individual investors because venture capitalists wouldn't touch it. And in four years he hadn't made a dollar of revenue. But after a quick consultation the attorney said to him, "Scott, you've got to get out of here," Rickert says, recounting the story. "You love your company too much. You can't allow it to go bankrupt."

It turned out to be good advice. The eyeglass industry was switching from glass lenses to plastic ones, and lensmakers needed something to make them more durable. "When people talk about growth curves, they talk about a hockey stick" with a long flat start, and then a steep climb up, Rickert says. It took his company a good 15 years to get off the flat part of the stick.

A SHORT LIST. Today, Nanofilm's coating is on one of every five pairs of eyeglasses sold in the U.S. It recently introduced two new products to protect car windshields from fog, ice, and the ill effects of pigeons. Nanofilm is generating more than $20 million in revenue a year, according to industry analysts, and it's profitable. It's also on a short list of potential nanotechnology initial public offerings for 2005.

Nanotech refers to the science of manipulating particles on the subatomic level. To say the least, the term itself gets people hot under the collar. Many decry the concept of a nanotech industry saying it's a science that affects many different industries -- not necessarily an industry unto itself. "GM doesn't say, 'I'm the 'bend-the-metal' company,'" says Howard Berke, chairman and chief executive of Konarka Technologies, an up-and-comer that's using nanotech to make flexible solar panels.

There's a difference between a company that happens to use nanotechnology for one application, in say, health-care or computer chips, and a so-called nano-platform company that's applying the science broadly to a variety of products like Nanofilm is doing.

LIKELY CANDIDATES. While several companies using nanotech for a particular application have gone public, such as Immunicon (IMMC), which makes tumor-testing equipment, and Cambridge Display Technology (OLED), which makes components for flat-panel displays, these broader platform companies are riskier, heavy on intellectual property, and light on revenue.

That said, perhaps the time has finally come for the riskier players.ankers and industry researchers are betting that a handful of nanotech companies will go public this year, and at least one will be a platform company. Likely candidates include nano-names like Nanofilm, Nano-Tex, or NanoDynamics, says Matthew Nordan, vice-president for research at Lux Research, a company that specializes in studying nanotech companies.

Each of these is more than a good science fiction tale. They've got revenue, growth, and a pipeline of new products. Nano-Tex makes stain-resistant fabrics, and NanoDynamics has grabbed headlines with a golf ball that can fly straighter, thanks to nanotechnology. It's also working on fuel cells, with plans to start selling them later this year.

SECOND ATTEMPT? Contrast that to the high-profile, venture capital-backed Nanosys, which is developing several products that use nanotech from medical-testing equipment to new-wave memory products for cameras and MP3 players. Last year, the high-concept, low-revenue company tried to go public and pulled its offering. It had been hyped as the Netscape of nanotech companies -- the one that would prove to the skeptics the investor appetite was there. It didn't happen.

This year has been better for Nanosys. It has gotten more than $10 million in government contracts and has announced important partnerships, like one with Sharp Corp., to co-develop fuel cells. It may try going public again, if one of the others has success, Nordan says. Nanosys didn't return calls seeking comment.

But don't expect a Netscape-like moment this year either. In fact, even if all four companies were to go public -- a big "if" since none have filed the necessary papers with the Securities & Exchange Commission -- it would be a symbolic help for small nanotech companies looking for validation and funding, but hardly a seismic event.

SKINNY PIPELINE. For one thing, the companies would likely be small-cap stocks, and investors will watch milestones carefully, analysts say. And even if they all perform well, the bench of good IPO candidates among nanotech outfits is thin. Ask anyone in the industry and they'll say about a dozen solid nanotech companies could go public in the next year -- probably half of which are really ready for it.

With all the nanotech hype and billions invested in research you might expect a fatter pipeline to the public markets. But the bulk of investment in nanotechnology has come from government and university grants, which are usually focused on groundbreaking research, a long way from commercializing products.

And for all their talk, venture capitalists have invested only $1.2 billion in nanotech since 1998. That sounds like a lot until you consider this: Last year, while they invested $20 billion across all startups, nanotech got about $200 million, down from $385 million two years ago. In contrast, government funding for nano-research is almost $5 billion per year worldwide, and corporations invested $3.8 billion in nanotech research, according to Lux.

"MARKETING GAME." And as Nanosys proved last year, taking these companies public can be challenging. Analysts and bankers don't really know what to do with them. Investors understand high tech or life sciences, but nanotech is something different. Typically, these companies are selling products into old, industrial markets like plastics or energy that don't come with the cool cachet of other tech markets.

"It's all a marketing game, and you want to deliver the proper message," says Brent Brown an investment banker at Adams, Harkness & Hill, a boutique investment bank. Like it or not, there's a herd mentality in investing and so far, the herd has no nanotech alpha to follow. Some compare it to where biotech was decades ago. Venture capitalists, once put off by the long and costly clinical trials it takes to get a drug to market, are now pumping billions into biotech investments annually.

Nanotech will probably never be a big industry -- on its own at least -- like biotech. But the promise of these broad platform companies is similar to that of a young Genentech (DNA), and every pair of plastic eyeglass lenses coated with nano materials proves it in real and tangible ways.

Still, as these small companies learned last year, potential isn't enough to get Wall Street enthused. Only tangible results will do the trick. By Sarah Lacy in Silicon Valley

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