Industry Study: Nanotechnology

Note 1: This is an update of an article that I wrote on a whim in December 2006, while I was on a break from business school at NYU Stern. It was published without update at Tekedia in July, 2011. The announcement by IBM about its new 7nm chip prompted me to dig it up from my archives and update it to reflect more recent developments.

Note 2: KEC Ventures does not specifically invest in nanotech startups, although in the past we have examined startups developing quantum crystals and other nanomaterials.

Introduction

I became exposed to nanotechnology during my days as an undergraduate student at Connecticut College, in New London, Connecticut. I pursued a double major in Physics and Mathematics, and had the good fortune of working as a research laboratory assistant in the Tunable Semiconductor Diode-Laser Spectroscopy lab, which was run by Professor Arlan W. Mantz, Oakes Ames Professor of Physics, and erstwhile chair of the Physics Department. My involvement with the lab spanned three years, and that experience played a critical role in my education.¹

What Is It?

The term nanotechnology refers to a group of scientific processes that enable products to be manufactured by the manipulation of matter at the molecular level – at the nanoscale. One nanometer represents a length of 10^-9 meters – one billionth of a meter.² Nanotechnology enables the manipulation of matter at or below dimensions of 100 nanometers. Nanotechnology draws from a multitude of scientific disciplines – physics, chemistry, materials science, computer science, biology, electrical engineering, environmental science, radiology and other areas of applied science and technology.

There are two major approaches to manufacturing at the nanoscale;

• In the “bottom-up” approach, nanoscale materials and devices assemble themselves from molecular components through molecular recognition – small devices are assembled from small components.
• In the “top-down” approach materials and devices are developed without the manipulation of individual molecules – small devices are assembled from larger components.

Where is Activity Concentrated?

Research into nanotechnology and its applications is growing rapidly around the world, and many emerging market economies are sparing no effort in developing their own research capacity in nanotechnology.

• Naturally, the U.S., Japan, Western Europe, Australia and Canada hold an advantage, in the short term.
• China and India have made significant progress in establishing a foundation on which to build further capability in nanotechnology – A 2004 listing puts them among the top 10 nations worldwide for peer-reviewed articles in nanotechnology.³
• South Africa, Chile, Mexico, Argentina, The Philippines, Thailand, Taiwan, The Czech Republic, Costa Rica, Romania, Russia and Saudi Arabia have each committed relatively significant resources to developing self-sufficient local nanotechnology industries.

Why Should Investors Care?

Fundamentally, investors should pay attention to nanotechnology because of its high potential to spawn numerous “disruptive technologies.” Nanoscale materials and devices promise to be;

• Cheaper to produce,
• Higher performing,
• Longer lasting, and
• More convenient to use in a broad array of applications.

This means that processes that fail to provide results comparable to those available through nanotechnology will become obsolete rather quickly, once an alternative nanoscale process has been perfected. In addition, companies that fail to embrace and apply nanotechnology could face rapid decline if their competitors adopt the technology successfully.

The United States Government has maintained its commitment to fostering U.S. leadership and dominance in the emerging fields of nanoscale science. In its 2006 budget, the National Nanotechnology Initiative, a multi-agency U.S. Government program, requested $1.05 Billion for nanotechnology R&D across the Federal Government.⁴ That amount reflects an increase from the $464 Million spent on nanotechnology by the Federal Government in 2001.

Applications of Nanotechnology

Nanotechnology’s promise to revolutionize the world we live in spans almost every aspect of human endeavor. Today, nanotechnology is applied in as many as 800 commercial products.⁵

• IBM’s new chip “could result in the ability to place more than 20 billion tiny switches – transistors – on the fingernail-sized chips that power everything from smartphones to spacecraft. To achieve the higher performance, lower power and scaling benefits promised by 7nm technology, researchers had to bypass conventional semiconductor manufacturing approaches. Among the novel processes and techniques pioneered by the IBM Research alliance were a number of industry-first innovations, most notably Silicon Germanium (SiGe) channel transistors and Extreme Ultraviolet (EUV) lithography integration at multiple levels.”⁶
• Carbon nanotubes and other nanomaterial additives can be used to fabricate stronger, lighter materials for use in automobile bodies, helmets, sports equipment and other products in which stiffness and durability are important features.
• Researchers at Stanford University have killed cancer cells using heated nanotubes, while EndoBionics, a US firm, developed the MicroSyringe for injecting drugs into the heart. MagForce Technologies, a Berlin based company developed iron-oxide particles that it coats with a compound that is a nutrient for tumor cells. Once the tumor cells ingest these particles, an external magnetic field causes the iron-oxide particles to vibrate rapidly. The vibrations kill the tumor cells, which the body then eliminates naturally. Other applications in medicine and biotechnology exist.
• Cosmetics companies are actively engaged in the exploration of nanotechnology as a source of enhanced products. For example, to produce cosmetics that can be absorbed more easily through human skin and that exhibit longer lasting properties.
• Thebreakthrough by IBM will only acceleratethe development ofnanoscale technologies for computing platforms. According to the National Nanotechnology Initiative:”Nanotechnology is already in use in many computing, communications, and other electronics applications toprovide faster, smaller, and more portable systems that can manage and store larger and larger amounts of information. These continuously evolving applications include:
  • Nanoscale transistors that are faster, more powerful, and increasingly energy-efficient; soon your computer’s entire memory may be stored on a single tiny chip.
  • Magnetic random access memory (MRAM) enabled by nanometer?scale magnetic tunnel junctions that can quickly and effectively save even encrypted data during a system shutdown or crash, enable resume?play features, and gather vehicle accident data.
  • Displays for many new TVs, laptop computers, cell phones, digital cameras, and other devices incorporate nanostructured polymer films known as organic light-emitting diodes, or OLEDs. OLED screens offer brighter images in a flat format, as well as wider viewing angles, lighter weight, better picture density, lower power consumption, and longer lifetimes.
  • Other computing and electronic products include Flash memory chips for iPod nanos; ultraresponsive hearing aids; antimicrobial/antibacterial coatings on mouse/keyboard/cell phone casings; conductive inks for printed electronics for RFID/smart cards/smart packaging; more life-like video games; and flexible displays for e-book readers.”
• Nanotechnology is applied in the garment industry to produce stain resistant fabrics, for example.
• Nanotechnology companies in the developing world are pursuing solutions to problems peculiar to the developing world – for example, an Indian company is working on a prototype kit for diagnosing tuberculosis. There is great potential for the application of nanotechnology to agriculture.

A more complete listing of the benefits and applications of nanotechnology is available here: US National Nanotechnology Initiative

Threats

In spite of its promise, nanotechnology faces threats that could investors ought to be aware of. Among these;

• It is not yet clear how nanotechnology will affect the health of workers in industries in which it is applied. For example, how should we assess exposure to nanomaterials? How should we measure the toxicity of nanomaterials?
• Public agencies and private organizations do not have a clear sense of how further progress in nanotechnology will affect the environment, or of the public safety issues that will accompany an expanded use of nanotechnology in industrial, medical and consumer applications. For example, what factors should risk-focused research be based on, and how should we go about creating prediction models to gauge the potential impact of nanomaterials?
• The complexity of the science that is integral to nanotechnology makes it a very difficult area to regulate. It is likely that firms involved in the pursuit of nanoscale applications in medicine and pharmaceutics will face long delays in obtaining regulatory approval for the wide scale use of their products.
• The complexity of nanotech-related patents could lead to delays in obtaining intellectual property protection for nanotech-enabled products.
• It is not yet clear how society can protect itself from the abuse of nanotechnology. The public sector needs to collaborate with the private sector in developing protective mechanisms to guard against “accidents and abuses” of the capabilities of nanoscale processes and materials.

A Note To Would-Be Investors

The average investor must remain keenly aware that firms involved in nanotechnology will have to assign significant resources to research and development. There is no reliable means of predicting the ultimate outcome of such activities, and the probability that any firm can maintain an enduring edge over its competitors is small. Investors should expect the mantle of leadership in innovation to change with a relatively high frequency. As such, pure-play nanotechnology firms will need to pay critical attention to means of sustaining market dominance that go beyond core competence in the science of nanotechnology.

Lux Research estimates that revenues from products using nanotechnology will increase from $13 Billion in 2004 to $2.6 Trillion in 2014. The 2014 estimate represents approximately 15% of global manufacturing output.⁷

In 2005, Lux Research and PowerShares Capital Management launched a nanotech ETF – The PowerShares Lux Nanotech Portfolio (PXN). In addition, Lux Research measures the performance of publicly traded companies in the area of nanotechnology through the Lux Nanotech Index^TM, a modified equal dollar weighted index of 26 companies. The companies in this index earn profits by utilizing nanotechnology at various stages of a nanotechnology value chain;⁸

• Nanotools – Hardware and Software used to manipulate matter at the nanoscale.
• Nanomaterials – Nanoscale structures in an unprocessed state.
• Nanointermediates – Intermediate products that exhibit the features of matter at the nanoscale.
• Nano-enabled Products – Finished goods that incorporate nanotechnology.

Companies in the index are further classified as

• Nanotech Specialists, or
• End-Use Incumbents.

Investors must note that the investment characteristics of Nanotech Specialists are likely to differ markedly from those of End-Use Incumbents. The end-use incumbents that are part of this index include 3M, GE, Toyota, IBM, Intel Hewlett-Packard, BASF, Du Pont, and Air Products & Chemicals. Because these companies have large, well-established and significant operations in arenas that do not rely heavily on nanotechnology, investors can expect them to achieve financial results that are only moderately volatile. In contrast the financial performance of nanotech specialists will exhibit highly volatile swings, because;

• With the exception of companies in the “picks and shovels” segment of nanotechnology, much of the work that many nanotech specialists engage in is still in the “trial and error” phase, and
• There is no reliable means of predicting the results that heavy investment in R&D will yield.

Finally, it is likely that financial valuations of nanotech firms will fail to capture the true value of the intangible assets that provide the bedrock of each company’s ability to sustain innovation, create economic value, and protect its competitive advantage. If nanotechnology is truly the way of the future, then investors must embrace that future with enthusiasm that is layered with caution by;

• Performing an extra amount of due diligence before committing significant funds to investments in individual nanotechnology companies,
• Limiting such investments to companies in the U.S., Japan, Canada, Western Europe, and Australia, in the near term, and
• Following developments in the nanotechnology initiatives of the BRIC block of emerging market economies without committing any funds until a clear assessment of the future prospects of individual investment opportunities becomes possible.

Individual investors must exercise an extra amount of caution in pursuing nanotech investments, and should not commit more than they can afford to lose. Most individual investors with a desire to invest in nanotechnology should do so through PXN and similar instruments. Institutional investors must bring all their resources to bear in assessing the viability of a nanotech investment strategy prior to committing funds to this nascent area. For added security, individual investors that seek to invest in publicly traded nanotech companies should seek firms with the following characteristics;

• No debt, and positive cash flows, and evidence of an ability to sustain profits.
• Companies that supply corporate customers must not be too reliant on one customer.

Founders and insiders should have a significant and increasing portion of their net worth at stake in the company, and a track record in multi-disciplinary research.

In a Feb 2014 State of The Market Report update, Lux Research says “Our expanded forecast for nano-enabled products reveals the global value of nano-enabled products, nano-intermediates, and nanomaterials reaching $4.4 trillion by 2018.”

Closing Thoughts

Many risks accompany investments in nanotechnology. However, if nanotech is to be believed, it may yield significant long-term returns to those investors that learn to harness its power while keeping the following caveats in mind;

• Many nanotech companies face an up-hill task in converting promising research into products that can sustain a steady revenue stream.
• A considerable number of nanotech companies may be surrounded by “more hype than substance”.
• There is no guarantee that the price investors pay for an investment in nanotech will be adequate, once all associated risks are taken into account.

1. Let me know if you feel I have failed to attribute something appropriately. Tell me how to fix the error, and I will do so. I regret any mistakes in quoting from my sources. ?
2. For perspective, 100nm represents about 1000^-1 of the width of a human hair. ?
3. Hassan, Mohamed H. A., Small Things and Big Changes in The Developing World. Science,Vol. 309 no. 5751, Jul 1 2005, accessed on Dec 19, 2006 at http://www.sciencemag.org/cgi/content/full/309/5731/65 ?
4. The National Nanotechnology Initiative, Research and Development Leading To A Revolution in Technology and Industry, Supplement to The Presidents FY 2006 Budget ?
5. National Nanotechnology Initiative, accessed online on Jul 12, 2015. ?
6. See the announcement from IBM. Accessed online on Jul 12, 2015. ?
7. Gosh, Palash R, How To Invest In Nanotech, www.businessweek.com, Apr 17, 2006. Accessed on Dec 22, 2006. ?
8. Adapted from www.luxresearchinc.com ?