Chemical & Engineering News - Building Businesses http://pubs.acs.org/cen/coverstory/86/8613cover.

html

ACS
Journals
C&EN
CAS

Chemical & Engineering News

Cover Story
March 31, 2008
Volume 86, Number 13
pp. 10-15

Building Businesses
Turning university research into products takes time, money,
and initiative as four nanotechnology companies' experiences
show
Ann M. Thayer

ABOUT 500 small-company business plans came through the door last year at BASF Venture
Capital, the investment arm of the German chemical giant. After an initial screening, company
analysts rejected three-quarters of the plans. BASF then carried out in-depth reviews of less
than half of those left and eventually negotiated deals with just a few companies.

Whitesides Group
Flexible Business
Nano-Terra is developing nano- and microfabrication technology from the Whitesides lab, such as that
for making metallic microwires embedded in poly(dimethylsiloxane).

"This situation is not unusual for venture capital investors," says BASF Investment Manager
Andre Moreira about the low odds for getting funded. "We are very much focused on quality."
With a doctorate in physics, Moreira is part of a 13-member team of experts in science or
economics who evaluate potential investments.

The BASF investment group tries to open windows on new technologies and generate

1 of 11 6/2/2008 10:35 PM
Chemical & Engineering News - Building Businesses http://pubs.acs.org/cen/coverstory/86/8613cover.html

adequate returns for the risks it takes. With about $190 million to invest, it has purchased
stakes in 18 small companies and has put money into five venture capital funds over the past
seven years. These investments target technology for current or future BASF businesses, or
fall into one of five company "growth clusters."

The nanotechnology cluster is Moreira's focus. Over the past two decades, the field has
emerged in large part from academia, moving from university labs into small companies.
While nanotechnology offers tremendous promise for a wide range of industries, nascent
university research or intellectual property (IP) usually requires significant commercial
development before it is of practical use. Today, the academic, business, and investment
communities are struggling to translate that basic science into real products.

"Unfortunately, what we see often, especially in nanotechnology, is that someone has a

technology that can do wonders in many areas, but they don't know what problems they want
to solve," Moreira says. "It's good to have focus to get something done and then move onto
the next stage."

To interest investors, small companies with broadly applicable—or platform—technologies,

should pursue an initial product with the greatest chance for success, Moreira explains.
Additional uses can follow later to expand a business.

BASF may invest anywhere from $1.5 million to $7.5 million in a small company. "Our sweet
spot is in the early- and mid-stage companies," Moreira says, "but it can't be too close after
the proof of concept for us to feel comfortable investing." (Click here to see a timeline of
venture investing in small companies.)

Beyond a proof of concept, Moreira, like most investment managers, wants to see a small
business meet certain criteria. Typically on investors' lists are a qualified management team,
a fully elaborated business plan, promising market prospects, and a strict market and
customer focus. Also critical is a strong IP portfolio that ensures the freedom to operate and
creates competitive barriers.

Venture investors put an estimated $668 million into small nanotech companies in 2007, a
13% decrease compared with 2006, according to New York City-based Lux Research. Along
with the decrease in funding, there has been a trend toward fewer deals being made.
Moreover, investment has shifted to more mature companies, says Lux Research Director
Michael Holman. "Companies actually starting to do things, like building out manufacturing,
are getting later and larger financing rounds."

WHEREAS THIS TREND

may simply reflect the maturing of some companies after many years, it may also indicate that
investors want to put their money behind companies with products and not just potential. The
Nanobusiness Alliance
trade group states that nanotech companies face "a significant challenge in the so-called
valley of death created by inadequate seed and early-stage capital, insufficient understanding
of nanotech in the financial community, and limited commercial transfer between Fortune 500
companies with challenges and emerging businesses with solutions."

Although getting a small business to the stage where it can attract investors takes initiative
and perseverance, nanotech start-ups and spin-offs keep appearing. According to Lux, out of

2 of 11 6/2/2008 10:35 PM
Chemical & Engineering News - Building Businesses http://pubs.acs.org/cen/coverstory/86/8613cover.html

about 60 nanotech venture capital deals in a given year, only a third involve new companies
getting very early-stage funding. At the same time, only about 10% of existing companies
generate a return for investors through a public stock offering or by being acquired, while a
slightly higher percentage close down. Not only do few companies become mature enough to
consider a stock offering, but financial markets aren't favorable for nanotech stocks.

As of mid-2007, the
Woodrow Wilson Center for Scholars' Project on Emerging Nanotechnologies counted at least
300 nanotech companies operating in three main sectors: materials, medicine and health, and
tools and instrumentation. And at least 138 universities and government labs were working on
some aspect of nanotechnology R&D.

Universities have been a breeding ground for nanotech research and start-up companies. A
perusal of technology-transfer office websites at major schools shows an array of nanotech
patents available for licensing. The University of California system, Massachusetts Institute of
Technology, and Rice University rank among leading nanotech patentees overall and are the
top three among universities. Like other schools such as Harvard University, they have spun
off several nanotech firms.

Several universities are increasingly proactive, not only in licensing technology but in trying to
develop it to the point where it may be more marketable. Their goal is to attract investors by
bridging that valley of death between innovation and commercialization. Some also partner
with large corporations to advance research and transfer technologies. And many provide
programs and facilities to train and support academic entrepreneurs.

Still, most universities don't go this route. Instead, they rely on traditional means of technology
transfer. In the worst case, interested outside parties stumble serendipitously across
university IP. The four companies C&EN explores here—Arrowhead Research, Advance
Nanotech, Nanosys, and Nano-Terra—are trying to improve the process of commercializing
academic nanotech research, although it is not yet clear how successful they will be.

"It's a grossly inefficient process that is reliant on individual entrepreneurs, who may or may
not be scientifically literate, to partner up with a professor and start a company, and then
hopefully attract some venture investors who can provide guidance," says Christopher
Anzalone, who was recently named chief executive officer of Pasadena, Calif.-based
Arrowhead Research. With a Ph.D. in biology and a background in venture investing,
Anzalone has helped create a handful of nanotech companies, including NanoInk, which
came out of Northwestern University.

Intellectual Property Three universities rank among leading holders of nanotech patents

3 of 11 6/2/2008 10:35 PM
Chemical & Engineering News - Building Businesses http://pubs.acs.org/cen/coverstory/86/8613cover.html

The traditional process for creating companies isn't good for anybody, Anzalone maintains.
"It's not good for the venture capital firms because they don't have the bandwidth to actively
manage these companies; it doesn't serve the scientific community because generally many
of these companies should not have been started or are run poorly; and it doesn't benefit the
university because they end up with illiquid and often worthless stock in these start-ups and
royalties that will never come down the pike," Anzalone says.

Seeing opportunities in the nanotech field, Arrowhead has been creating and supporting
companies based on university technology for five years. Its access to that technology has
come largely by funding research at California Institute of Technology, Stanford University,
Duke University, and the University of Florida in return for exclusive commercialization rights.

ARROWHEAD TRIES
to be market driven. "We identify attractive market opportunities, look for technologies that
can serve those, and then build companies," Anzalone says. More than just an investor,
Arrowhead provides an entire management and business development infrastructure in legal,
financial, administrative, and regulatory areas. It has five majority-owned subsidiary
companies and soon will gain two more by acquiring the Benet Group, a separate firm
founded by Anzalone. About a dozen people work for Arrowhead and about 50 are in its
subsidiaries.

Anzalone says the company lives and dies by its ability to combine scientific and business
capabilities. On the one hand, this involves bringing in senior scientists as advisers. On the
other hand, success also hinges on having experienced businesspeople who have created
companies in the industries that nanotechnology will impact.

In building companies, Arrowhead usually invests in firms at an earlier stage in their lives than
venture capitalists do. It also looks for companies that may have good science but bad
business plans, a lack of capital, or investors that want to cash out. "We acquire these and roll
them up to bring together all the important pieces of IP in a specific area and, we hope, make
a leading company," Anzalone says.

In the long term, Arrowhead may operate one of its subsidiary companies for the cash it
generates, or it may spin it off with a stock offering. Many of Arrowhead's subsidiaries are
reaching an "inflection point," Anzalone says. "We're in the company-building business, but
we're also in the company-selling business." For example, Arrowhead is likely to sell Aonex
Technologies, its semiconductor materials subsidiary.

Arrowhead also has decided to combine Calando Pharmaceuticals and Insert Therapeutics,
two subsidiaries with drug-delivery technology platforms that came out of Caltech. The
consolidation is expected to cut costs and increase efficiency. The goal is to maximize the
number of compounds in clinical trials and then license these to large pharmaceutical
partners for fees, milestone payments, and royalties, Anzalone explains.

Meanwhile, Anzalone says Arrowhead's Menlo Park, Calif.-based Unidym subsidiary looks
good for a public stock offering, if market conditions improve. To create Unidym, Arrowhead
rolled up three firms: Unidym, Nanopolaris, and Carbon Nanotechnologies, the latter started
by the late Nobel Laureate Richard Smalley. Unidym has licenses from 11 universities
covering at least 150 patents and patent applications that support its business in carbon
nanotubes.

4 of 11 6/2/2008 10:35 PM
Chemical & Engineering News - Building Businesses http://pubs.acs.org/cen/coverstory/86/8613cover.html

Owlstone Nanotech
Chemical Detection
Technology for Owlstone Nanotech's sensor head originated at Cambridge University.

"The carbon nanotube area was such a muddy space, and no one had been able to control
the market because the IP was everywhere," Anzalone says. "It's not a lack of capital that kills
companies; it's a lack of focus." Platform technologies such as carbon nanotubes offer a lot of
upside potential, but companies need to be built on products that address a market, he adds.
To this end, Unidym is initially developing transparent electrodes for touch screens, flat-panel
displays, solar cells, and solid-state lighting.

WHEN WARRANTED,
Arrowhead will halt research programs or shut down businesses. In 2005, Arrowhead
management and other shareholders closed microfluidics developer Nanotechnica after
determining that it was not progressing satisfactorily toward commercialization and that the
market potential was uncertain. Arrowhead received about $3 million in cash and assets from
the business and returned the applicable patents to Caltech.

As a publicly traded company itself, Arrowhead is expected to create a return for its
shareholders, although it has yet to do so. Since its inception, the company has raised about
$79 million. It had revenues of just $1.2 million for the year ending Sept. 30, 2007, and
reported a $30 million loss. It spent about $21 million on R&D and had about $24 million in
cash.

Advance Nanotech, founded in 2003 in the U.K. and now headquartered in New York City,
started life with a business plan very similar to Arrowhead's but is now in the process of
abandoning it.

Its founders also believed that the returns from holding majority ownership positions in a
portfolio of businesses would outweigh those achievable by venture capital-style investments.
And, through that ownership, they figured they would benefit by having decision-making
control.

Starting last year, however, Advance has shut down its university partnerships, spun off half
of its operations, and is now morphing into one of its own subsidiaries as it jettisons that
original business plan. "We've learned an awful lot in the past three years," says Magnus
Gittins, an Advance Nanotech founder and its executive chairman. "And the transition we are

5 of 11 6/2/2008 10:35 PM
Chemical & Engineering News - Building Businesses http://pubs.acs.org/cen/coverstory/86/8613cover.html

undergoing reflects that."

THE COMPANY HAD partnerships with the British schools Imperial College London,
University of Cambridge, and University of Bristol. But its approach went further than just
technology transfer, Gittins says. "We wanted to go beyond the initial IP and find out who had
invented the technology and whether there was a desire to continue the work because there
was a commercial opportunity." Advance looked for inventors who understood the path to
commercialization and the addressable markets.

The company and its partner universities also delineated milestones for success. "Our
purpose was to bridge the innovation gap and migrate promising technologies out of
universities in the most expeditious and cost-conscious manner," says Gittins, who previously
was chief technology officer of a European venture capital fund. "The plan was to keep
overhead at the top extremely light and focus management and resources on developing the
technologies."

Eventually, Advance hoped, the technologies would mature to the point that either venture
capitalists or large corporations would be interested in taking them to market. It succeeded in
setting up about 20 programs in electronics, materials, and biopharmaceuticals, and had
minority interests in five small operations.

In early 2005, Advance raised $23.5 million in a stock offering to support its programs. It also
leveraged some funding from government and industrial sources, as well as the universities'
investment in equipment and personnel. "A dollar goes much further in a university setting
than it does outside," Gittins says about the advantages of this business model.

Yet Advance managers had to face the challenge of predicting the time and investment that
would be required to realize the potential of a given university technology. Although they
hoped for great returns, they took on a lot of risk as well. Even projects that came with a
prototype device had to pass technical milestones to advance in development; some made it
through to the next phase and some didn't.

"What we learned in the process is that it is very hard to do," Gittins says about executing
Advance's business plan. "Despite being extremely promising, the technologies still require
substantial amounts of capital if their trajectory toward commercialization is to be realized."

In August 2006, faced with the need for financing that would allow it to continue operating, the
company realigned about 90% of its portfolio into two divisions: display technologies and
sensors.

Advance also discontinued many projects and sold off some minority interests. In early 2007,
the company listed its Advance Display Technologies division on the London PLUS stock
market. Its remaining operations are being folded into a majority-owned subsidiary, Owlstone
Nanotech. Owlstone
is an operating company with chemical detection products and several major customers.

"Owlstone is the success story to our model," Gittins maintains. Owlstone's proprietary
technology, which came out of Cambridge, matured both technologically and commercially
faster than other programs, he says. "The three coinventors originated the concept and
proved it within the university lab, and they continue to be the driving force behind

6 of 11 6/2/2008 10:35 PM
Chemical & Engineering News - Building Businesses http://pubs.acs.org/cen/coverstory/86/8613cover.html

commercialization."

INVESTORS HAVE
had to pay to get to that point, however. Advance reported last September that its revenues
since inception were only $875,000, while during that time it spent $16 million on R&D and
lost $33 million. Given the stock market's current skittishness toward companies with
uncertain expectations for profitability, Gittins says "it makes complete sense now to focus on
Owlstone and for its technology and several related technologies to become our business
going forward."

Looking back, Gittins says he now appreciates that entrepreneurial determination and strong
commercial skills are just as important as extraordinary technology. "Although we had a very
strong, technology-rich portfolio, it could only be realized if we also invested in the right
people," he says, "especially as the challenges evolved from those that were scientific to ones
associated with commercializing a product."

The need to combine entrepreneurial spirit, top university research, and business experience
was not lost on the founders of Palo Alto, Calif.-based Nanosys. The founding team included
Lawrence Bock, a successful biotech venture capitalist; Stephen Empedocles, a Ph.D.
chemist from MIT who had worked at two nanotech start-ups; and Calvin Chow, founder of
two device-oriented technology companies.

"The company wasn't started based on the work of a single scientist or body of research,"
says Empedocles, who is vice president for business development. Instead, when they
created Nanosys in 2001, the founders were acting on the belief that "nanotechnology had
matured to a level where it was possible to start a real nanotech products company," he says.

For Nanosys, this means inorganic materials, and specifically the fabrication and integration
of nanostructures into products. To build this platform, the team met with hundreds of
university labs. It eventually brought together 10 scientific founders and licensed several
hundred patents from the likes of Harvard, MIT, Caltech, Columbia University, and the
University of California. "We wanted to find the tool set to make nanotechnology products
successful, and no one source had everything that we needed," Empedocles says.

The company's IP portfolio, which has expanded further over the past six years through
internal development work, now covers everything from compositions of matter and different
nanostructures through assembly techniques, specific applications, device integration, and
manufacturing methods. "The combined technology we are developing today has expanded
and matured and looks very different from any of the individual technologies originally
licensed from our academic founders," Empedocles says.

Unidym

7 of 11 6/2/2008 10:35 PM
Chemical & Engineering News - Building Businesses http://pubs.acs.org/cen/coverstory/86/8613cover.html

Handy Products
Unidym, an Arrowhead Research subsidiary, is developing fuel-cell electrodes that contain carbon
nanotubes.

Nanosys added experienced product-development people and focused initially on solar cells
and biosensors. Those initial applications have since evolved into other areas, while its
platform technology has been extended to other applications. "We always look for a definable
timeline, requiring as few leaps of faith as possible, and a real market where nanotechnology
can add quantifiable value," Empedocles says.

To develop products, Nanosys is working with partners such as Sharp, Rockwell Collins,
DuPont, NTT DoCoMo, Intel, and various U.S. government agencies. Applications include
flat-panel displays, nonvolatile memory, fuel cells, solid-state lighting, and other devices.
Applications are selected "by how well our tool kit solves a particular problem and what
alternatives exist. If our technology doesn't provide a unique and high value, we don't go after
it," Empedocles says. "We want to enable our partners to make new products that are based
on our technology and that really differentiate them within their market."

The partner handles end-product manufacturing, while Nanosys focuses on the nanotech
side. "Our goal is to supply our partners with a component that can be integrated easily into
their existing manufacturing," he says. These "nanomodules" and the interface with a product
will differ to meet each partner's needs. Nanosys, however, employs the same core
capabilities both to design and manufacture specific nanostructures and to assemble the
nanomodules.

Its commercial involvement continues in manufacturing the nanomodules. From the

beginning, Empedocles says, Nanosys established a scalable manufacturing infrastructure.
Although its target applications require only small quantities of materials, reliable and
reproducible production is critical. To execute its plan, Nanosys has about 80 full-time staff.

TO SUPPORT ITSELF,
Nanosys gets revenue from joint development funding and from the sale of components to its
partners. Material and IP costs are folded into one "value added" price, Empedocles explains,
without any additional ongoing royalties. "If we selectively develop an application, the partner
gets substantially higher value, and we get paid based on the value we provide, not just the
materials' cost," he says.

Since its inception, Nanosys has raised just over $100 million in four rounds of venture capital
financing. As a private company, Nanosys doesn't disclose revenues or profits, but
Empedocles says the combination of financing, development funding, and product sales
allows it to look at new opportunities. As part of its business model, however, the company
doesn't generally pursue an area until it has a committed partner that knows the targeted
market.

Investors in Nanosys are no doubt interested in getting a return on their investment. In 2004,
the company filed for an initial stock offering but didn't proceed when market conditions
deteriorated. Because the company is fiscally strong, Empedocles maintains that Nanosys
can be "opportunistic" about future financing moves.

Nanosys doesn't do any fundamental research, so it still looks to the academic community for

8 of 11 6/2/2008 10:35 PM
Chemical & Engineering News - Building Businesses http://pubs.acs.org/cen/coverstory/86/8613cover.html

research advances, Empedocles says. But the company is often mistakenly viewed as one
that only licenses technology to others. "The seeds of those 10 academic groups have grown
within this product development environment into a very solid platform technology for
developing and manufacturing products," he says.

In contrast to Nanosys, three-year-old Nano-Terra was founded around the work of one
university laboratory, namely George Whitesides' lab at Harvard. In June 2007, Harvard
granted Nano-Terra a license to a portfolio of more than 50 issued and pending patents,
which cover nano- and microscale molecular fabrication methods for advanced materials and
devices. In return, Harvard received equity in the firm and the right to royalties.

Nano-Terra's business plan is to leverage this IP through codevelopment agreements with

large organizations. It already has announced deals with 3M, Merck KGaA, Nestec (part of
Nestlé), and the Department of Defense. Simply put, "we want to use our technology and
expertise to help companies make better products," says Carmichael Roberts, one of
Nano-Terra's founders and now its vice chairman. He expects the first products to roll out
within three years.

To execute its business plan, Nano-Terra has a staff of about 30 people and labs in
Cambridge, Mass. But it also taps into a global network of academic and industrial
collaborators, some of whom are coinventors of Nano-Terra's IP. "There's a whole group of us
fortunate enough to have worked either directly or indirectly with George Whitesides who are
hugely supportive and excited about the concept behind Nano-Terra," says Roberts, who has
a Ph.D. in chemistry and was a postdoctoral fellow in Whitesides' lab. "Many of us are
chipping in a little to a lot of time to make it happen."

One reason Nano-Terra was created was simply to increase access to the technology and
thinking coming out of the Whitesides lab. The number of requests for Whitesides' time and
input on solving problems is "enormous," Roberts says. "Nano-Terra is the embodiment of the
commercial solution to serving this unmet need."

Initial capital for Nano-Terra has come from the founders, employees, and others in the
collaborative network and was quickly augmented by development funding from the first few
partnerships. To expand operations, the company may in the future look for outside financing,
but Roberts doesn't anticipate turning to venture capital investors.

THE COMPANY'S VISION

is different from that of a small, venture capital-financed company, which must focus on a
particular application or product, notes Roberts, who in his career as an entrepreneur has set
up other companies with Whitesides. "Another way to focus is to pick a core set of
technologies for which the embodiment is very closely related and be wedded to that, never
bending from the discipline of developing the technology in collaboration with companies that
will be responsible for actually making a product," he explains about Nano-Terra's approach.

"We don't see Nano-Terra manufacturing something and selling it." Roberts adds. "At the
same time, we don't see ourselves taking a technology and throwing it over the fence and
having someone else develop it, because we know that's a recipe for failure." Nano-Terra's
business model is to partner, he adds, and take a role in advancing and developing others'
products and manufacturing capabilities.

9 of 11 6/2/2008 10:35 PM
Chemical & Engineering News - Building Businesses http://pubs.acs.org/cen/coverstory/86/8613cover.html

The value of this offering can be measured in Nano-Terra's ability to attract leading
companies as partners. And its success will be measured through a partner's success and the
revenues it yields. "Integrating our technology into a manufacturing process that produces a
product is critical," Roberts says. "The value we create is in the output of a product being sold
that would never have been made if it wasn't for Nano-Terra's technology, capability, and
people."

Although people, technology, and business approaches may differ, small nanotech
companies are all reaching for the brass ring. "There is a lot of innovation going on broadly,
but adoption of new technologies is going to be a tricky part," says John M. A. Roy, senior
executive director at the technology-focused investment firm Global Crown Capital in San
Francisco. "You see a lot of nanotech companies with a very nice product, but it may be for
an industry not used to consuming new technology, and that creates a big barrier."

Other hurdles arise when actually trying to get a product out the door. "I see a lot of university
research going into companies that get to a first prototype and then stall out," Roy says. "It's
not getting the first prototype or even signing up the first partner, but getting that first scaled
product to market that matters." Product development can languish for years at this stage for
technical and business reasons.

A company with a technology that works may develop a product only to find that it fails under
the actual conditions of use. Others may discover too late that the cost of manufacture is
prohibitively high or that scaling up is too difficult. And unless the need for a new technology
is urgent, it may be difficult to keep the attention of a large partner that simply has higher
priorities.

"These are bugaboos you just don't see in the beginning," Roy says, "but they tend to happen
more often than you would think."

Cover Story

Building Businesses
Turning university research into products takes time, money, and initiative as four nanotechnology
companies' experiences show
Stock Market
Indexes Track Pool Of Public Nanotech Companies

Email this article to a friend

Print this article
E-mail the editor

Save/Share »

Save To del.icio.us
Digg This Story
Seed Newsvine
Share on Facebook
Save to Reddit
Stumble it

Chemical & Engineering News

10 of 11 6/2/2008 10:35 PM
Chemical & Engineering News - Building Businesses http://pubs.acs.org/cen/coverstory/86/8613cover.html

ISSN 0009-2347
Copyright © 2008 American Chemical Society

[Top of Page]

11 of 11 6/2/2008 10:35 PM