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"Valley of Death" in Nanotechnology Investing

A Foresight Nanotech Institute Policy Issues Brief

by Jacob Heller and Christine Peterson

The U.S. federal government spends billions of dollars on basic nanotechnology research. Venture capitalists are willing to invest billions more on nanotechnology products once a credible business plan and team have been assembled. However, in the challenging period between these two stages, there is a significant gap in financial capital available to nanotech firms.

With a few exceptions such as some Small Business Innovation Research (SBIR) and Defense Advanced Research Projects Agency (DARPA) grants, the federal government has so far been unwilling to finance research efforts within this gap, while venture capitalists are reluctant to take on the substantial risk that the pre-commercialization investment may never become a marketable product. This gap period in capital financing is commonly referred to as the "valley of death": it is where good lab discoveries go to die because they lack the funding necessary to become a commercial product.

Nanotech innovations are particularly at risk for succumbing to the valley of death. Burned from the dot-com bust, venture capitalists are all the more unwilling to finance technologies that are not close enough to being a saleable product, especially "platform technologies" that have yet to prove their effectiveness on the market.1

There is reason for concern regarding a valley of death in nanotech-based industries. Nanotech venture capital financing has accumulated in a concentrated set of well-developed firms. For example, during the first quarter of 2005, all venture capital deals in nanotechnology went to only four large, well-known firms.2 Venture capital investment is so low that all VC nanotech investment from 1998-2004 is approximately equal to the amount that the government spent on nanotechnology in 2004 alone.

The valley of death is a serious concern, and is seen by many industry leaders and members of Congress as the main roadblock preventing nanotechnology industries from reaching maturity. If good ideas do not survive through the valley and come out as commercial products, the initial research results lie unused. End-products — the inventions that actually benefit humanity and drive the economy — are seriously delayed.

Members of Congress on both sides of the aisle have come up with myriad propositions meant to deal with the valley of death. Most recently, Representative Mike Honda (D-San Jose) introduced the Nanomanufacturing Investment Act of 2005 (HR 1491). The act would make available $750 million in government financing and investments for nanomanufacturing projects (and explicitly not basic research, which the government already finances through the National Nanotechnology Initiative), contingent on private investments of $250 million. Private investors would get a greater return on their investments to persuade them to make these relatively risky investments. Funding applications would be peer reviewed and approved by an advisory board. The program would continue until all $1 billion is invested.

In testimony to Congress, Sean Murdock, the Executive Director of the NanoBusiness Alliance, outlined other possible solutions to bridge the valley of death. His solutions include increasing support for infrastructure and nanotech user facilities, which would provide necessary machinery and tools to nanotech developers and therefore decrease the capital requirements of nanotech startups. Murdock also suggested linking basic research with specific goals, increasing federal funding for SBIR and the Advanced Technology Program, and increasing overall investment in nanotechnology research.3

While the above represent mainstream suggestions for solving the valley of death problem, many observers are skeptical of additional government involvement in technology commercialization, advocating a more free-market approach. Policy options which reduce the burdens on startup companies in general should also be explored, from reform of the Sarbanes-Oxley Act at the federal level, to the abolishment of California’s unusual tax on the purchase of manufacturing equipment. A wide variety of policy options, some free-market and others interventionist in flavor, have been outlined by the Blue Ribbon Task Force on Nanotechnology.4

Regardless of which strategy governments choose to address the valley of death, action is desirable to speed nanotech products to market. Creative programs can help nanotech entrepreneurs in their efforts to bring the benefits of nanotech advances to everyone in an affordable way.

1Matthew M. Nordan. "Hearing on: Nanotechnology: ‘Where Does the U.S. Stand?’". The Research Subcommittee of the Committee on Science of the United States House of Representatives. June 29, 2005.

2Sean Murdock. "Hearing on: Nanotechnology: ‘Where Does the U.S. Stand?’". The Research Subcommittee of the Committee on Science of the United States House of Representatives. June 29, 2005.

3Ibid

4Blue Ribbon Task Force on Nanotechnology. "Thinking Big about Thinking Small: an Action Agenda for California". December 2005.

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