The funding landscape for nanotechnology companies
(Nanowerk Spotlight) Alan B. Shalleck writes: Last month I was the first to mention how the planned $100 million Initial Public Offering (IPO) for NanoDynamics, Inc. (ND) might change the funding landscape for nanotechnology companies. It’s a sea change. Research indicates that the NanoDynamics IPO should easily raise its $100 million and the stock should sell at or above offering price, depending upon market conditions, well beyond the restriction period. The reasons for ND’s IPO’s expected success become clear once you dig through the S-1 Prospectus, understand which specific green and nanotechnology markets ND’s new products aim to penetrate and why ND will be profitable in both those markets. “Green and Nanotechnology” is a winning corporate (and Wall Street) strategy for the next decade.
During the last five years, Wall Street has not been active in nanotechnology financing. It has allowed the Venture Capital companies, without competition, to cherry pick the elite nanotechnology investment opportunities while leaving many promising nanotechnology ventures to starve financially. Today, with 400+ nanotechnology products in the domestic marketplace, the industry appears credible and the Street’s focus may be changing. After a successful ND offering, the financing rush will be on and Street should once again become a major player in nanotechnology funding. Note all ye young, cash starved nanotechnology companies – there are public funding opportunities coming this fall.
The ND IPO is not “deja vu” all over again. Four years ago the Street focused on the rising tide of nanotechnology opportunities but it needed a nanotech IPO model on which to build. The test case was Nanosys, Inc. which filed, with heavyweight underwriters, an S-1 looking for $100 million (notice the similarity) but – and here is the considerable difference between today and four years ago – with no nanotech products on the horizon, a non-production royalty based business model, and no royalties in sight for over six years. Nanosys had a portfolio of intellectual property that management claimed was worth the asking price. The Street took one look and said, "No, it’s not. You have no products or positive cash flow anywhere in the foreseeable future. You are the Emperor’s new clothes!" The offering was withdrawn in August of 2004 and the Street went "cold" on nanotechnology IPO’s.
The NanoSys image of no revenue, no prospective cash flow, unsupportable high valuation, and fictional value destroyed public financing for all those nanotechnology companies waiting to ride the successful NanoSys offering to their own IPO debut. It was a disaster for the entire nanotechnology industry. Wall Street IPO financing went elsewhere causing the much-discussed "valley of death" in nanotech.
Today, nanotech company prospects have turned and the timing seems ripe for a successful nanotechnology company underwriting. Why? Well the stock market is high and should remain high. Many "non-nanotech" successful IPO’s have floated during the past few years. Significant 'private' hedge fund and other monies have gone into nanotech and many of these investments are late development cycle C and D rounds aimed at creating production facilities to meet product demand. (E.g. Nanosolar and Konarka). More interestingly, the industry is four years older with many "real" nanotech commercial and industrial products generating sales today with more being introduced monthly. One study says there were about $36 billion in nanotechnology related sales in 2006. That number should impress every greedy underwriter. But more interestingly, Wall Street analysts (and observers like me) have a much better understanding of the up the value chain product oriented business model needed to be profitable in the nanotech market and we can help identify value to prospective investors and underwriters.
During the last few years "Green" (ecologically and socially responsible) investments have become the rage. Investors recognize that billions of government, commercial and consumer dollars will be spent on systems attacking the world’s "global warming problem", "energy deficiencies and conservation needs" and "potable water" requirements worldwide. Most of the best solutions to the world's green problems involve nanotechnology.
Specifically, let’s look at ND. ND has realized over $34 million in development funding losses. It had only $4 million of sales last year and lost over $14 million. Not impressive – until you look at what was developed with the $34 million and where the company is today with its products. ND has developed a market leading line of stackable, multiple fuel input, solid oxide fuel cells (SOFC) for homes, industry, auxiliary power, military, etc. These products are not prototypes. They are field-tested finished products designed for production. ND has a licensee in Japan who will assemble and sell large numbers of ND fuel cells into the Japanese demand created by alternative energy national policies. Japan is becoming a huge alternative energy market because every home and structure is under pressure to install alternatives to imported fuel oil. Licenses in other countries are pending with similar national imperatives. ND’s IPO funds are in part to build the production capability to meet these anticipated fuel cell unit demands. It’s logical to project hundreds of millions of SOFC sales dollars to ND and its licensees within 3-5 years.
The second ND product line of note is a low cost uniquely structured potable water filter that is designed for third world applications. It is built on a non-nanostructure with metallic (iron) nanoparticles affixed inside to eliminate arsenic, lead, and other heavy metal contaminants with a little flow reduction and inexpensive replacement cost. Others clearly have competing designs. But clean water applications have sales potentials in the multibillions with money coming from consumers, governments, NGOs and Foundations worldwide. Getting a share of this burgeoning market with adequate funding and a unique functional design is a high probability for ND.
Last, ND has a proven nanotech and business leader as CEO. Keith Blakely is one of the more experienced nanotech CEOs – having built and sold a manufacturing company earlier in his career. He’s been there, done this. He knows that production and profitable sales of products in a materials business like nanotech are the only things that count. The IPO therefore should do well and rekindle the IPO options for all of Nanotech. (Disclosure: I do not own any shares in ND). Caveat Emptor.
By Alan B. Shalleck, NanoClarity LLC (alan@nanoclarity.com). All rights reserved.
Disclosure: No Nanowerk employee owns stock in NanoDynamics. The above article does not constitute investment advice and represents Alan Shalleck's opinion only.
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