Nanosys round shows small tech turning heads in big boardrooms

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June 3, 2003 — In another sign that established companies are paying more attention to small tech startups, a pair of decidedly old-economy firms are investing in Nanosys Inc.

The extension of the Palo Alto, Calif., nanotech outfit’s second funding round was announced this morning.

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H.B. Fuller Co. and Eastman Kodak Co., two companies with roots in the 19th century, participated in the $8 million extension to the round. Nanosys initially closed on $30 million in second-round funding in April.

“What we’re coming to believe is that you’re going to see a fairly lot of this type of activity,” said Charlie Harris, president of Harris & Harris Group Inc., a publicly traded venture capital company that invests in nanotechnology, microsystems and MEMS companies and an investor in Nanosys. “The big corporations are going to decide that it makes more sense to invest in venture-led private companies than to do their own R&D, or to supplement their R&D.”

St. Paul, Minn.-based Fuller makes coatings and adhesives for shoes, cereal boxes, insulated windows and more, although Nanosys Chief Executive Larry Bock declined to name specific applications where the two companies might complement one another.

Rochester, N.Y.-based Kodak acknowledged in this morning’s release that Nanosys’ work in macroelectronics, or large area flexible electronics, was applicable to its research in areas such as flat panel displays. In December 2002, Nanosys cut a deal with Matsushita Electric Works to develop nanotechnology-based solar cells for the Asian building materials market.

Nanosys is hardly the only small tech startup to garner funds in the second quarter. In April, NimbleGen, a provider of custom microarrays and affiliated services, announced closing a $12.5 million fourth round. In May, Ziptronix, a developer of semiconductor and MEMS design and manufacturing processes, announced $17.4 million second-round funding while U.S. Genomics, a developer of analysis technologies for the life science industry, announced $25 million in third round funding.

If the year’s first quarter is any guide, there will be many more by quarter’s end. A Small Times analysis of the PricewaterhouseCoopers/Thomson Financial Venture Economics/National Venture Capital Association MoneyTree Survey found that venture capitalists invested $162.2 million, or 4.3 percent of dollars spent, in small tech startups in 21 funding events in the first quarter of 2003. Overall, venture capitalists invested $3.8 billion in 623 companies, down from $4.3 billion and 726 companies in the previous quarter.

The bulk of the first quarter’s small tech dollars, $108.2 million, went toward expansion stage companies in 11 funding events. Biotechnology snared the most small tech dollars of any industry, with $62 million in eight funding events. California topped the state list, with $108.3 million in nine events.

In the case of Nanosys, Bock said, even the institutional investors can play a strategic role. In addition to Fuller and Kodak, a pair of Singapore-based institutional venture funds joined the Nanosys syndicate — UOB Hermes Asia Technology Fund and UOB Venture Technologies Investments, both managed by a subsidiary of United Overseas Bank of Singapore. “It’s strategic in a sense that we’re going to be doing a lot of work in Asia,” Bock said. “Their investors are like a who’s who in Asia.”

The Healthcare Focus Fund, managed by Arch Venture Partners for the California Public Employees’ Retirement System, also joined in the extension. CalPERS, the $130 billion megafund that provides retirement and health benefit services to more than 1.3 million members, had $19.6 billion actively invested in private equity as of December 2002.

Although strategic investments can lead to acquisition, that’s not necessarily the plan for Nanosys, Harris said. The company is developing products as diverse as biosensors, photovoltaics and macroelectronics. As a result, it’s a tough fit for any one industry, a fact that suggests it is not looking to be acquired, Harris said. Bock said there were also other, unnamed strategic investors who participated in the round.

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