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The next technology wave?

Venture capital and technology are not quite flavour of the month at present. Following the bursting of the TMT bubble in 2000, many are keeping away from investing in high-tech altogether. But with regard to nanotechnology this would be a mistake, argues Tim Bliamptis of Knightsbridge Advisors. Nanotechnology may be the next big thing – and those who invest early will reap the rewards.

Technological innovation comes in waves, and it is those waves that drive the venture capital industry.  The birth of the personal computer, network connectivity, biotech, and the Internet drove prior venture capital cycles. Although several new waves may loom on the horizon, it's not yet obvious what technology or market need will drive the next cycle.  The astute venture investor deals with such uncertainty by investing relatively modest amounts of capital in nascent areas.  If the nascent area takes off, the investor is in on the ground floor and can become a bright beacon in a new space.  If the area proves uneconomic, the investor treats the modest losses as he would a tuition expense, reasoning that the upside in becoming a bright beacon more than compensates for the risk of weak returns from an area that fizzles.  Given this model, of course, it behooves us to select venture capitalists who possess great judgment, and, quite frankly, to ensure that our portfolio has exposure to venture capitalists who are willing to take some risk on unproven areas.  As the 1999 vintage year has so brutally reminded us, the sure thing was a chimera all along.

Nanotechnology

Nanotechnology is defined as creating structures or systems from building blocks no larger than 100 nanometers, or 100 billionths of a meter.  Given this simple definition, nanotechnology can and will find application in almost every sector of today's economy.

Many of the applications will be prosaic, providing evolutionary improvements to mundane products such as suntan lotions, eyeglass coatings and paint additives.  The appeal to venture capitalists is in the more glamorous applications, notably those which fundamentally change the way something is done or make possible the previously impossible. Particularly attractive are those disruptive applications where the addressable market is measured in the billions.  Of course, predicting how technologies yet to be invented will be applied to solve billion-dollar problems is extraordinarily difficult.  To complicate matters, those future innovations will likely be predicated on insights developed by practitioners who currently work on more prosaic applications. 

Many of the tools of nanotechnology are still being developed in the non-profit sector.  Research comes from university laboratories, government-funded  projects and large corporate efforts.  Worldwide government spending on nanotechnology topped $1 billion in 2001 and is projected to at least double in 2002.. 

Commercial successes have emerged, albeit in relatively prosaic applications, which still could prove to be enormous successes.  For example, laptop batteries made from carbon nanotubes and ultrathin lithium particles could store higher energy densities, last twice as long and recharge faster.  A dramatic increase in energy density is the key technical enhancement needed to make electric cars economically viable. 

The greatest excitement, however, lies in an area so new it has yet to gain a catchy buzzword.  The convergence of molecular biology, nanotechnology and information technology may well yield stunning inventions in the years to come.  Because nano size is consistent with the sizes of molecules, nanomachines may someday manipulate directly the molecules of the organic soup inside each and every one of us.  Nanotechnology will provide biologists and biochemists tools that will allow more subtle measurements of biological processes.  The seemingly inexorable advance of computing power will facilitate better and more detailed understanding of those processes.  The ability to create molecule by molecule will provide the opportunity to apply these expanded insights through exquisitely crafted devices tailored to the application.  Viewed from the perspective of an individual, many of the scourges of mortal men: cancer, heart disease, even old age might be alleviated.  Viewed from the perspective of an established pharmaceutical company, no category of drug will be safe from being superseded by a nanoengineered solution.  Barring obstacles unforeseen, we should expect waves of disruptive change in the life sciences.  Such disruptive innovations are just the kinds of waves of change on which the venture industry thrives.

The question is, when will the exciting, paradigm-shifting, world-changing events begin to happen?  The answer is, no one knows. 

In the long run, nanotechnology will likely change the world in multiple dimensions.  In the next five years, however, nanotechnology may produce little opportunity for profitable venture investments.  The term nanotechnology has been around for more than a decade with few epochal breakthroughs and even fewer commercial applications.  Naysayers call the area over-hyped and a convenient way for venture capitalists to focus attention away from their Internet failures.  The naysayers' position rests on at least a kernel of truth. 

The appropriate response to this kind of uncertainty is to hedge one's bets. The opportunity for venture-backed nanotechnology-based companies may become big quickly, as thousands of researchers suddenly see opportunity outside of their corporate laboratories and research contracts.  Those investors who are prepared will reap the benefits.  In the meantime, it is prudent for investors to keep a hand in the game, gain experience and develop their networks. That cautious patience may eventually be rewarded with overnight success.

Tim Bliamptis is a managing principal with Knightsbridge Advisers, a US early stage venture capital and post-venture fund of funds. Tim's expertise in post-venture builds on his career at Brinson, where he was co-head of their $10bn venture programme and on his four years of managing venture investments for MIT. For more information about Tim, Rich and the twenty-person team at Knightsbridge please contact www.knightsbridgeusa.com.

Copyright © 2002 Knightsbridge Advisors