One-man nano investment bank plays matchmaker to firms, funders

Published in Small Business

March 2003

Here’s one more sign the nanotech industry is getting closer to maturity: A former Wall Street analyst is creating what he calls the first investment bank focused solely on the nano business.

NanoTech Financing Solutions LLC was formed late last year by R. Douglas Moffat, who wants to help startups with promising technologies navigate the treacherous waters of corporate finance. It’s a one-man firm right now, but eventually Moffat wants to branch out and launch a venture capital fund to invest in nanotech companies.

One of the most difficult challenges for any emerging technology is to bridge the gap between its beginnings in a research lab and creation of a company prepared to bring commercially viable products to market. Along the way, the company’s financial backing must evolve through several stages.

Discovery and development in labs typically begins with financial backing from universities, foundations or government grants. The entrepreneurial startup phase is where private investment is added to the mix, usually provided by the company’s founders and individual angel investors. As the company grows, the amount of money required, sources of capital and types of financial deals grow much more complex. Venture funds and investment bankers lead the way to the next round as the nascent company prepares to sell its first product.

Investment bankers typically serve as middlemen and deal advisers. They help companies seeking funding to identify likely sources of funding, structure the deal and bring the company and prospective financial backers together.

Moffat is analyzing firms in a variety of disciplines as he searches for technologies that are almost ready for commercialization. There is often a gap between the time it takes between discovery and a marketable product, and the investment horizon of most venture capital firms. “Most professional investors have a pretty definitive time frame in which they need to get a return and get liquidity,” Moffat said. “Ten or 15 years is too long for most of them, five to seven probably pushes the envelope.”

By getting involved with a nanotech firm early in the process, Moffat believes he can help reduce the time to market, making his clients more attractive to prospective investors. Scientists often see too many possible avenues of development for a truly exciting new technology. In trying to follow all the possible directions, they may overlook the need to identify opportunities that can be commercialized quickly enough to satisfy investors.
“If you really focus hard on a business plan, I believe that a lot of companies can realistically shorten up their commercial activity,” he said. “There’s a tendency in a lot of these startup companies to try and pursue too many things.”

Many entrepreneurs, Moffat said, don’t have a good grasp of the time and effort required to assemble a management team and get all the elements in place that investors expect. “There are a lot of structuring issues that come up for small companies. I think it’s far more difficult than most of them realize.”

Trained as an engineer, Moffat has recent experience following nanotech firms as an analyst, and more than three decades of experience on Wall Street. Before launching NanoTech Financing Solutions, Moffat was director of research and a managing director at SunTrust Robinson Humphrey Capital Markets in Atlanta.

There’s a venture capital fund in the future, too, Moffat said, although he thinks it’s a year or two away from reality. “I think that in a couple of years, there will be a much better environment for making those investments,” he said. Until then, NanoScience Capital is dormant.

Of course, venture capitalists are eyeing the nanotechnology sector and a few have taken the plunge. Nearly half of the attendees at the Los Angeles Regional Technology Alliance’s (LARTA) annual nanotechnology conference are venture capitalists, private equity firms and investors trying to get up to speed on the emerging industry, according to Lynn Foster, director of technology consulting at the nonprofit technology development agency.

“We believe there is a lot of potential (in nanotechnology),” said Bob Blackstock, a senior associate at NGEN Partners, a venture capital firm in Santa Barbara, Calif. NGEN has made investments in five nanotech firms so far, he said. “I think it’s very early, and the industry is overhyped,” he said. Echoing Moffat’s views, Blackstock said the most difficult aspect of nanotech investing for his firm is to “try to assess how long it will take” for an investment to pay off.

Moffat believes that when investors decide the time is right to get into nanotechnology, there will be frenzy among investors trying to get in, just as there was when Internet companies became the must-have investments in the late 1990s. “I think there’s a terribly exciting time coming up for nanotech,” he said.

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