Weight, not height, driving VC dollars


Disappointing. That sums up my opinion of the venture capital numbers for the first three quarters of 2006. Just add “extremely” for the public market transactions. 2006 will not turn out to be a banner year for small tech. We will see a moderate increase in nanotechnology investments - nothing extraordinary.

The Small Times tracking of the first three quarters of 2006 indicates a little more than $490 million dollars - thus the sector will probably end the year between $600 and 630 million once Q4 data is in and the straggler deals come to light. Last year’s figures were $434.3 million for the full year with a total of 51 deals.

Though that looks like a big spike, much of the increase will come from a few mega deals, not from a rampant flow of more transactions. Nanosys had the biggest round in 2005 at $40 million. In 2006, NeoPhotonics raised over $83 million, Nanosolar added $75 million in funding for manufacturing, and Nanosphere landed $57 million to commercialize its diagnostic technology.

2005 saw total small tech funding at a little more than $1 billion. 2006 should be in the same ballpark with the first three quarters clocking in at $850 million. Nanotech accounts for a bigger slice of that pie, which leaves MEMS/microtechnologies on the losing side of the equation. The total pie should be growing for both sectors, especially with MEMS manufacturing starting to ramp up, bringing real products to market. Contract MEMS fabs are expanding AND profitable. What gives? Let me know your theories.

MEMS/micro technology-based solutions are getting the most traction in semiconductors, electronics, medical devices and networking. The companies leading the funding pack include Infinera, which closed on $97 million in 2006, Proteus Biomedical securing $32 million - hopefully a small portion can be used for a Web site update - and NanoNexus taking $32 million for semiconductor testing solutions.

Click here to enlarge image

While I’m sure readers are tired of hearing this from me - the volume of startup and early stage funding rounds is alarming. A quick check of the PricewaterhouseCoopers MoneyTree data for Q3 2006 showed startup and early stage deals at 19 percent of the total investments for the quarter versus just 8 percent for small tech deals through Q3.

The “buzz”-iest buzz word right now in small tech has to be “cleantech”. And although alternative energy/solar companies like Konarka, Nanosolar and nStructures brought in close to $100 million in the first three quarters, the place to look for heavy investment in small tech applications is in the less sexy semiconductor and electronics sectors. These two sectors alone accounted for more than half of the small tech funding in the first three quarters of 2006. MEMS and nanotechnology-based companies brought in more than 32 percent of all semiconductor VC investment dollars in Q3.

Click here to enlarge image

Numbers are interesting. Assigning real meaning and analysis is difficult. It can be argued that even though small tech investment is flat, the increase in nano investment is worth some celebration. In my opinion, the bump in 2006 should have been bigger and we should have seen significant growth in the startup/early stage pipeline. To be fair, venture investment is only one source of capital, but it is an important one.

As Chris Hieb notes in his column on page 44, corporate partners can be a good source of cash. However the consequences of doing a bad deal with a big company can be significant worse. Companies have to have leverage when negotiating with partners, customers, and suppliers. Having the monetary security that venture capital often supplies can go a long way on the road to commercialization.

Patti Glaza is vice president and publisher at Small Times. She can be reached at