Nanotech Insights #6
Dear Colleagues,
Last week we discussed the “promoter class” that is undeveloped or missing for nano, small & advanced technology companies.
We called on nanotech companies, private and public ones, to get their promotional activities in order. This amounts to a bit more than IR (Investor Relations); it is a call to put a professional in charge of Financial PR, that outreach to analysts, newsletter writers and new investors.
Moving along:
1. What are the mis-matches of expectations amongst the key players in nanotech investment and finance and how does this negatively impact the success of the traditional VC model for “small tech”?
Today (unlike a few years ago), angel investors behave almost exactly like VCs. They have nearly the identical investment criteria model, because, after all, their “out” is more often than not to VCs.
For that reason, they are investing larger dollar amounts than ever before, AND, importantly, requiring the companies they invest in have the VC formula pre-packaged within their DNA. Where angels once invested $150K, $400K on a development idea, today they want to invest $2M, $4.5M prepping a company to go three rounds (A, B and C) with the big boys for ANOTHER $6M, $18M, $60M, whatever, for a total of $50 - $150M before the much admired IPO.
Oh, by the way, they also want to make 10X their money.
It’s good work if you can get it.
But these really smart angel investors’ (and they are the brightest folks, just nearly universally unsophisticated in A. how to know a 12 year science project from commercial product with great ROI potential and B. how to make money in micro-cap stocks . . . which is the ONLY play for smallmodus operandi is ill-suited for making money in nanotech deals and the like.
The VCs have another mismatch.
How does one make 10X on their money when one invests $100M? Well, you have to sell for $1B PLUS! . . . . really, c’mon, these folks actually must take the public for idiots.
Well, they were . . . for about 2-4 years. But that “train left the station” long ago (2001 to be exact), and I’m afraid “that dog won’t hunt” anymore. Get over it.
IF, and this is a huge “if”, there were nanotech deals and nanotech teams and nanotech business plans and nanotech business models that could support $100M (or even $40M) investment, than we could MATCH the investment mandate with the mandated investment result – 10X required . . . but, we can’t.
There are no such nanotech deals. I’ve seen most of them over the last 5 to 6 years. If they can’t “make it” with $2M to $12M to an exceptional ROI return within 30 months, there is no reason to invest AND certainly no reason to invest more. If it appears they require $100M to meet their exceptional business “opportunity”, check your premises and check your wallet.
We talk to top scientists all the time. The real money (NOW, TODAY) in nanotech and microfluidics and MEMs and opto-electric and the cutting edge of microelectronics, etc. is in enhancements to existing products and niche products. You don’t have to build a $3B market cap company with hundreds of employees to make a great return. In fact, that’s the path to huge losses in this “space” at this time.
It is emphatically NOT in building the Google of Nano or the Genentech of Microfluidics . . . we don’t care how “great” your team is.
Investment banks want to earn fees, get some exceptional warrant exercise profits and not embarrass themslelves. To not embarrass themselves they have to give their institutional, “accredited” and retail investors a good “kick at the dog”. The stock they sell them has to have a good chance of going up; that means it cannot be grossly over-priced, out of the box. Good luck if you’re trying to sell the “great unwashed” 70% of a company that has never made $1 revenue from the sale of a product or service to anyone but the government or 3 national labs for $100M, much less $1B.
Endless mismatches of institutional, corporate and individual expectations, needs, mandates and reality.
2. What alternatives to that model exist and why is the merchant banking model best?
In our opinion, the best model (if it existed) would be a “well-informed” (read, super scientifically, technically, business acumen and financially astute), very wealthy (read $300M+ net worth), opportunistic angel investor or family office that built multiple companies to 15X total investment sales to majors, a public market cap that provided that 15X or 1X investment/year licensing deals.
A great way to compound invested wealth at 30-60% annually, it seems to us.
A small institution that “mimicked” that investor would be a merchant bank or a private equity firm so mandated and focused on this type of approach.
It’s not so simple. There is much more complexity and there is an astounding array of potential profit centers for such a firm (as I detail in the previously mentioned, 24-page white paper I have written on the subject) that go well beyond what we have room for here. Complex, but not difficult or obstruse and it makes total sense: to us and, we firmly believe, for our investors.
For the rare companies the merchant bank invests in, there are alternatives, as well:
Assuming an honest, quite competant, appropriate team, good science and technology, and an ability to get to a working prototype of something that can be manufactured to industrial standards and enter the world of commerce WITHOUT need for a “complete” retooling of an industry, etc within 36 months and needing less than $12M to do so:
Companies could develop privately by so-called “bootstrapping”
Companies could seek licensing/royalty opportunities at the earliest opportunity with major company partners
Companies could work with the denizens of the pink sheets and Bulliten Board markets and offshore gameplaying and raise money; go public
Companies could go public on the AIM or the Toronto Venture Exchange and finance itself that way
Companies could do a “straight” IPO on the NASDAQ
3. Why is the
The AIM is expensive. By our reckoning, it takes a US $30M financing to make all the fees feel light in any way. In addition, there is no trading liquidity to speak of on the AIM. It is a great “financing” place for some companies, but almost always a lousy liquidity venue.
On the other hand, the “pinks” and the Bulliten Board, done “right” (and it can be done), are trading venues . . . you are still going to have to do a financing with the reverse takeover of a shell corporation, and that almost always means dealing with financial pros and/or off-shore entities. Who needs the headaches of either?
A straightforward IPO using a small, regional broker/dealer or even a 3rd tier national investment bank has a great “ring” to it. However, here another “mismatch” jumps to the fore. Even small, NASD broker/dealers don’t even want to do $25-$35M deals anymore (much less $10M deals!). Given the current
Why do a $30M deal to make $300,000 for the firm (just example numbers)? We are hearing (and have been, for some time) that $40M is about the minimum IPO even a small firm can do . . . and $65M is preferred.
And $40M and higher “small” & advanced tech-related deals don’t make sense.
$2M - $12M deals are the sweet spot for the Toronto Venture Exchange.
Previously known almost exclusively as a natural resource, mining "public venture capital" venue, it is now ripe as an extraordinary venue for smaller IPOs for "small" and advanced technology companies.
Direct A or even seed round deals are possible as well as exits or liquidity and financing events for traditional VCs.
Lack of banker support after the IPO and dumping by speculative, short-term investors of stock on the first 5-20% of profit are leading issues on the
Professionals must do effective Financial PR that takes into account all the legal and
While Sarbanes-Oxley compliance is not required, excellent Canadian securities attorneys and accountants work with your existing legal and accounting firms at a combined cost that is usually less than the burden would be in the
We hope you will contact us to pursue these ideas further to mutual benefit.
Again, I will be speaking in Vancouver, Canada from January 19 – 25, Indian Wells, CA on February 5 and Phoenix, AZ from February 7 – 10 and and I would like to invite each of you to contact me to set an appointment at any of those places to discuss mutually profitable business ideas.
I am always available to meet in
Best regards,
Darrell Brookstein
Managing Director
The Nanotech Company, LLC
darrell@nanotechnology.com