[New York Times] March 15, 2004 Bashful vs. Brash in the New Field of Nanotech By BARNABY J. FEDER
PALO ALTO, Calif. - When it came time to invite a representative company to attend President Bush's signing of a bill last December authorizing $3.7 billion in federal spending on nanotechnology over the next four years, a three-year-old Silicon Valley company named Nanosys got the call. It is easy to see why. Painstakingly assembled by experienced entrepreneurs, famous academic researchers and big-name venture capitalists who know how to dazzle Wall Street, Nanosys is the epitome of a start-up shooting for business glory. It brandishes a portfolio of impressive patents, covering processes like ways to make wires one ten-thousandth the thickness of a human hair, and is pursuing research projects that could affect consumer electronics, energy and communications. But for all its glamour and promise, Nanosys does not expect to sell products commercially until 2006. For actual sales and profits, one needs to look to a more prosaic company, Nanofilm, a developer of optical coatings that is based in an industrial park in Valley View, Ohio, outside of Cleveland. It has been profitable since 2001. "We're the quiet company," said Scott E. Rickert, a 51-year-old former chemistry professor at Case Western University who has been president of Nanofilm since he founded the company in 1983. While Nanosys represents the aspirations of many of the 400 to 500 nanotechnology ventures that analysts say have sprung up in recent years, Nanofilm's story may actually be more relevant to the start-ups in the field struggling to survive. Together, the two companies show the diversity of the nanotechnology business landscape and some of the uncertainties it holds for investors. Nanotechnology, a term based on the nanometer, which is one-billionth of a meter, has attracted investment not only from privately held start-ups, but also from giants like I.B.M., General Electric and DuPont, which are eager to exploit the potentially valuable properties of materials so small that their dimensions can be measured in molecules. The federal government estimates that nanotechnology, a catch-all label for products and processes that operate on the molecular scale, will have a $1 trillion economic impact by 2015. It may take that long to sort out the business models best suited to thrive in the nascent field. Nanosys, based in Palo Alto, Calif., offers a model that is particularly compelling to Wall Street. Its neighborhood is home to Hewlett-Packard, Stanford University and some of Silicon Valley's most prestigious law firms and venture capitalists - the entrepreneur's equivalent of beachfront property. Its scientific advisory board includes luminaries like Dr. Charles M. Lieber of Harvard, a leader in research on how to build nanoscale wires, and Dr. A. Paul Alivisatos, a chemist at the University of California at Berkeley whose research helped found the Quantum Dot Corporation, a start-up company that makes crystalline nanoscale tags that are used in the study of cell behavior. Nanosys's chief architect and chairman, Larry Bock, 45, was already well known as a biotechnology entrepreneur and, by his description, was semiretired when he became interested in nanotechnology in 2000. "I had done reasonably well in biotech," he said, summing up his track record involving 14 start-ups, with 12 of them going public or sold to other companies for a total of more than $1 billion. Dr. Rickert of Nanofilm, by contrast, had no business experience and, he soon discovered, no ability to attract investment from venture capitalists when he formed his company. Instead of having wide-ranging patents from leading university laboratories, he had only his own idea for a new, unusually rapid way to make ultrathin, superrepellent coatings for glass, plastic and metal surfaces. When he changed his company's name to Nanofilm from Flexicrystal in 1985, the "nano" prefix had none of the allure it had when Nanosys was started in 2001. Outside molecular research circles, the name conjured up little except "nanu-nanu," the way Robin Williams's goofy alien on the television show "Mork and Mindy" said goodbye. "I got a lot of grief," Dr. Rickert said in an interview at the company's headquarters. Mr. Bock's track record, the growing interest in nanotechnology in the late 1990's, and his strategic approach produced a much different reception for Nanosys. He tells visitors he spoke to 1,000 researchers over an 18-month period before he and his co-founders, Calvin Y. H. Chow and Steven Empedocles, settled on a name, business plan and financial structure for Nanosys. Nanosys's initial goal is to use its expertise in nanoscale silicon structures and related inorganic materials to build sensors and other simple products that its business partners would manufacture. In time, it hopes those efforts can become the foundation for more complicated devices like silicon solar panels, powerful memory chips and thin films for flexible electronic displays. In essence, the company is creating a miniportfolio of nanotechnology bets that will allow it to pick out the most promising areas as some fall by the wayside and others arise. Nanosys has raised $55 million from venture capitalists like Venrock Associates, the venture arm of the Rockefeller family, and smaller firms like Lux Capital and Harris & Harris that are specializing in nanotechnology and related areas. Nanosys has also raised more than $15 million from government research grants and deals with business development partners like DuPont, Intel, Matsushita Electric Works and In-Q-Tel, the Central Intelligence Agency's investment arm. Strategic alliances with big businesses are fraught with dangers for small companies, but one thing Nanosys and Nanofilm have in common is the belief that they will need such relationships to turn the new technology into profits. With Nanosys's second round of financing, which brought in $15.5 million in 2002, it far surpassed the total invested in Nanofilm over its entire existence. Nanofilm started with capital gathered from a small group of individual investors led by Donald McClusky, who had recently retired as vice chairman of Goodyear when Dr. Rickert set out to commercialize his thin-film technology. Dr. Rickert and Mr. McClusky managed to raise $1 million from friends and family by 1988. That supported enough development work for Dr. Rickert to persuade LensCrafters in 1989 to pay Nanofilm to build two 1.5-ton robots to put its high-strength, protective nanocoating on premium eyeglasses. LensCrafters also agreed to pay a $4 royalty for every pair of glasses sold. Nanofilm became profitable the following year. But Dr. Rickert's reliance on his relationship with LensCrafters backfired in 1991 when the Persian Gulf war broke out, the economy slumped and LensCrafters decided to shut its manufacturing in favor of outsourcing its production. Nanofilm shrank from 17 employees to 5. Dr. Rickert eliminated his salary and the others were cut to 65 percent. "We nearly went bankrupt," Dr. Rickert said. The company survived only because a lens-cleaning solution it had developed turned out to be popular with opticians and grew into a profitable line of products under the Clarity brand name. Today, Nanofilm's films use nanostructured properties to keep rain off binoculars, preserve the shine on expensive faucets and protect display screens on A.T.M.'s and laptop computers. Other films from the company resist fogging or are scratch resistant. "The company we are most like is International Flavors and Fragrances," said Dr. Rickert, referring to the world's largest producer of food flavorings and scents for household products and cosmetics. "We sell very small quantities of our materials at high prices. I can do it anywhere in the world with just a few people." In fact, Nanofilm has become a multinational with a small sales and distribution outpost in the Netherlands. Later this year, Nanofilm will distribute its first consumer product for the auto market - an antistreaking windshield coating that mimics the nanoscale structures on the surface of lotus leaves that repel dirt. A couple of drums of the material's active compound could be made in a month's time and would be enough to treat every windshield in the world, Dr. Rickert said. When a raindrop or a bug hits the coating, which is intended to be applied once a year, the pressure melts the surface molecules for an instant, causing anything on the surface to slip away, Dr. Rickert said. But "it's not perfect," he said, noting that because of its electrical characteristics, the film attracts some dust. Still, such innovations have kept Nanofilm growing and, since 2001, steadily profitable. Revenues topped $15 million last year, Dr. Rickert said. The company began paying dividends to its 40 investors in 2001 and now has 65 employees. Nanofilm's ambitions, though modest compared with those of Nanosys, are expanding. Dr. Rickert said his goals included increasing revenues to $30 million to $50 million over the next five years. If Nanofilm hits an area of research that requires a huge, rapid investment with potentially high returns, the company might try to spin that project off into a company backed by venture capital, he said. Dr. Rickert, however, does not want to expose Nanofilm to venture capitalists and investment bankers who might be impatient for growth and might push to sell the company or take it public. Instead, he said, Nanofilm will borrow money when necessary and continue to pursue joint development agreements with major customers, like its four-year-old partnership with Carl Zeiss Inc., the American subsidiary of the German high-performance optics company. "We're on an exponential growth curve," Dr. Rickert said. "We feel like it's our decade but it's on our schedule." Such caution and focus provide no guarantee against losses. But Nanofilm's approach does prove that profits can be made in nanotechnology. If the field is to become an important economic engine, in all likelihood there will have to be hundreds of small companies like Nanofilm exploiting different niches. Whether those smaller companies will be operating in the shadow of a successful giant called Nanosys - or reminiscing about how sweeping ambitions could not save a well-financed, well-placed start-up - is harder to predict.
