How to make money from Emerging Technologies

RATIONAL INVESTING IN AN AGE OF RAMPANT HYPE

Tim Harper, December 2009
CIENTIFICA LTD
accurat e, bal anced and rat i onal f orecas t s f or emergi ng t echnol ogi es
69 Br us hf i e l d St , London E1 6AA

t e l e phone : 0 207 3 77 84 80

www. ci enti fi ca. eu
How to make money from Emerging Technologies
At Cientica we have been working with emerging technologies for fteen years, whether developing eld emission dis-
plays in the mid 90s, or advising governments, companies and the World Economic Forum in recent years. Over this
period money has been made and lost in everything from medical devices to scientic instrumentation and carbon
nanotubes, and this hands-on approach has left us with a wealth of practical experience.
As we approach the end of the rst decade of a new millennium, science and technology are advancing faster than ever,
with a wide range of new and emerging technologies ready to change the world and take investors for a ride.
As a sane and rational voice in a sea of hype, and one of the few companies whose clients have consistently been on the
winning team in technology investment, we present a brief guide to making money out of emerging technologies for gov-
ernments companies and investors.
How to make money from Emerging Technologies December 2009
Ci e nt i f i c a Lt d How t o make mone y f r om Eme r gi ng Te c hnol ogi e s
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Hands Up Who Swallowed the Hype?
Somewhere near the dawn of time, where men clad in animal skins hunted mammoths to feed their families, and those of us
who hadnt lost everything in the dot .com crash shivered in the dark, a bright scientist named Mike Roco was writing a plan
that was to become Te National Nanotechnology Initiative.
While much of the document was eminently sensible, especially given the fact that most peoples view of nanotechnology
was, at the time, inuenced by the idea of little robots, nanobots, rather than the rather mundane world of advanced materi-
als, this really didnt matter. What really caught the imagination was the headline A TRILLION DOLLAR MARKET BY
2015 and thats where the trouble started.
How to make money from Emerging Technologies December 2009
Ci e nt i f i c a Lt d How t o make mone y f r om Eme r gi ng Te c hnol ogi e s
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Tis wasnt the rst time that a new emerging technology had been touted as the answer to all of humanitys ills, or investors
prayers, and it wont be the last time. From biotech in the 1970s to synthetic biology now, we draw on Cienticas decades
of investing expertise to oer a guide of how Governments, Companies and Investors can take advantage of emerging tech-
nologies without getting seduced by the hype.
Everyone, from Venture Capitalists, who had made a few million from the dot.com era, to entrepreneurs and scientists
looked at the magic trillion-dollar number and thought I want a piece of that!
However, like almost every business plan we have seen, the plan contained a prediction that looked something like the
graphic below, where the x axis goes from now to some point in the future, far enough away that it may be plausible, but no
too near that it may be laughable.
Tis is, or course, the dreaded exponential curve, a much abused but little understood mathematical function. If we consider
the x-axis to be time, and the y-axis to be sales, revenues, prots, return on an investment, ability to attract good-looking
girls or any other measure that we want to market, then it looks quite attractive. What is less attractive is that while the last
portion of the curve looks like a worthwhile investment, almost 70% of it looks to give very poor yields.
How to make money from Emerging Technologies December 2009
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Unfortunately much of this was as a result of people not checking their facts. We still see business plans that are entirely
based on a 2007 study of nanotechnology markets that predicts that some sector or other will suddenly start gobbling up
huge chunks of nanotechnologies (showing exponential growth). We see revenues that suddenly increase by an order of
magnitude in a year, with entrepreneurs calculating back from some fantastical gure just over the horizon rather than doing
their own market research.
Were now seeing similar wild predictions for synthetic biology, industrial biotech and a host of other areas remember that
wherever there is hope there is a market research rm ready to help you develop the kind of numbers that investors like to
see.
But look at it this way, ve years ago no one predicted Twitter, Facebook or the iPhone, so why would anyone attempt to
build a business on a market predicted to start emerging in eight or nine years?
While there is money to be made from emerging technologies, the magnitude of the returns, and their nature diers widely
between the various players. Governments want wider economic returns, while investors just want a positive return while
minimising risk. Tis white paper examines three dierent strategies for reaping the benets of nanotechnologies.
What Governments Should Do
We spent a lot of time over the last ten years asking various governments why they were setting up nanotechnology pro-
grams, and the answer was usually to remain competitive in a technologically based world. Behind the blu was an element
of me too as many policy makers looked at the US National Nanotechnology Initiative and wondered whether they should
try to muscle in on the action more eectively than they did with semiconductors or the Internet. Te result was a glut of
nanotechnology research programs that proved a bonanza for infrastructure and instrumentation companies. While the peak
of the clean-tech mania seems to have passed, science has no shortage of other potential panaceas to throw at the worlds ills.
However, ten years on there are a number of challenges that governments are facing:

Nanotechnology has been heavily funded for ten years, yet we still only see a handful of products and little in the way of
the total transformation that was promised in the early days. Tis leads politicians to believe that funding can be diverted
to other hot areas such as clean tech where announcements of new programs can be more easily quantied in terms of
swaying undecided votes in their direction.

An increasing pressure to focus on grand challenges and applied science rather than pure knowledge, or impact-based re-
search funding as is it increasingly known.

Competition for funding as more areas of technology emerge, whether synthetic biology, Clean Tech, Industrial Biotech
etc., governments are faced with static budgets and increased competition due to Credit Crunch Economics. Te danger is
that existing programs die a death of a thousand cuts to placate more academic pressure groups with fewer resources, re-
sulting in an under-funded and ineective technology program a mile wide and an inch deep.

Consumer Pressure Groups are increasingly anti technology. While some of their concerns are legitimate, many are not,
and for policy makers who are not scientic experts, and few are, speculative concerns are given equal weighting with sci-
entic results.
So what can Governments do to ensure a more eective transfer of technologies from the lab to the economy?
How to make money from Emerging Technologies December 2009
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1. Support basic research. While we know a lot more than we used to about nanotechnologies we are still at an early stage.
It has taken biotech thirty years to get this far, and all emerging technologies will face a similar long haul. Te more we
understand about the basics, the easier it is to turn something that works in a lab into an industrial process. To achieve
that, you really need to understand the science behind the phenomena, and that takes ten to fteen years.
2. Create more spin-outs. Easy to say, but how much time and eort is wasted by governments in supporting small
technology-based businesses when very few of them actually exist. Te usual bunch of professional project managers
who havent moved technology forward one iota in ten years will suck up any government cash. A system of small, no
strings attached grants for technology-based start-ups would encourage university spin-outs and support them through
that dicult rst year of product development. We are talking about tens of thousands of pounds, not millions.
3. Address the issues of process and manufacturing. Many countries trumpet about a wide range of open access facilities,
but how many of them actually do what is needed by business? Te key to getting to market is moving a lab-based proc-
ess to an industrial process, meaning not just scale up, but quality control and reproducibility. For a technology to be
usable it needs to be a reproducible process with quality control to ensure that the result will be the same whether you
produce a gram or a ton, and whether you do that this week, next week, or in ten years time. Leveraging existing exper-
tise in pharmaceuticals and chemicals is an obvious place to start.
4. Cut regulation for start-ups, dont strangle them at birth. Not every start-up works, many dont, but some do. Its a
numbers game but funding more start-ups to employ more people is surely better than funding people to be idle.
5. Fire 90% of university tech transfer people and replace them with people who understand how small businesses and
science based innovation actually works. We have spent months negotiating with some institutions that issue unreason-
able demands and detailed ten-year revenue projections when current economic conditions can change in ten minutes.
How to make money from Emerging Technologies December 2009
Ci e nt i f i c a Lt d How t o make mone y f r om Eme r gi ng Te c hnol ogi e s
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What Companies Should Do
Some companies have done very well out of nanotechnologies, while others have fared less well. Te golden rule seems to be
Avoid nanomaterials at all costs (unless you are a large chemical company)
Oxonica, publicly quoted in the UK, is a classic illustration of the typical trajectory of a nanomaterials company. After ve
years of trying out dierent applications of nanomaterials, from phosphors to fuel additives, the company began to gain trac-
tion and managed to hold an initial public oering valuing the company at some 150 million. However, many of their
products were generic, for example titania nanoparticles for sunscreens, and could not be protected and others were licensed
getting the company bogged down in disputes about intellectual property and licence terms. With only a few products to
sell, and required to nd channels to market in areas as diverse as cosmetics, fuel additives and security, the company was
unable to realise its early potential. Investors gradually lost patience and the company withdrew from Londons AIM market
in 2009.
Despite this cautionary tale, many large companies who have heavily invested in carbon nanomaterials production, Mitsubi-
shi Chemical, Bayer, Arkema and others seem to be still searching for a market. While large chemical companies can, and
often do, take a fteen or twenty year view, smaller companies have a tough time getting their investors to swallow more
than a few years.
Even the largest companies have been under strain recently leading to four main challenges
How to make money from Emerging Technologies December 2009
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We built it (the plant) but they didnt come many companies have made the transition from lab-scale production to
pilot plants, and the better funded among them have even built full-scale plants, but often the growth stops there, why?
Te reason is often access to markets (see below).

Breaking out of the sales trap emerging technologies can have diverse applications. While a large company such as BASF
can add a few additional lines to its existing catalogues on paints, coatings, adhesives etc., as it already has a well-
established presence, smaller companies often do not have the resources to develop each channel, relying instead in one or
two large potential customers. But who would companies rather trust, a well-established multinational or a few guys who
just spun out a company?

High R&D costs in an era of falling budgets the latest numbers show R&D spending holding up well despite the eco-
nomic climate, but pressure is mounting, especially on longer-term R&D projects to show some evidence of success.

Cost of litigation - Oxonica, Raymor, and Evident are just three of the nanotech companies that came close to failure in
2009 as a result of litigation. Smaller companies simply do not have the resources, either nancial or human, to ght long
energy sapping legal battles with larger competitors.

Fear of backlash / litigation / class action With any new material or process there is the possibility of unforeseen eects.
It is almost impossible to determine the full lifecycle of any material, and in complex multivariate systems such as the en-
vironment there is always a possibility, no matter how remote, of unintended consequences.
So what can companies do to ensure a return on their investments thus far?
1. Search for complementary technology to address market needs one trick companies rarely succeed, and a large part of
addressing market needs involves nding out what end users really want, whether master batches, dispersions or a more
usable user interface.
2. Avoid commoditising your core product Simply producing a material puts you in direct competition with the bulk
chemical industry. Companies that protect their product and add value through IP or trade secrets (how do you get it
to stay dispersed?) can prevent erosion of margins.
3. Take advantage of government R&D collaboration facilities the last ten years has seen massive government investment
in infrastructure with much of it having the aim of providing this to industry. Some academics are more receptive to
industry than others, but as your taxes have already paid for it, use it!
4. Create a product or process magnetic storage was nothing new, but when Apple took advantage of the eect of giant
magnetoresistance which made 2 hard drives possible a whole new industry was born. Te iPod was made possible by
Nobel prize winning nanotechnology, but the technology was not developed by Apple even though they made all the
money.
5. Partner for channels to market a company may have the technology but it probably wont have the channels it needs
to get it into the hands of the people who want it. As an example, big pharmaceutical companies own most of the medi-
cal sales channels, and it is often faster and cheaper in the long run to partner with big player provided that your tech-
nology doesnt disrupt their business too much.
How to make money from Emerging Technologies December 2009
Ci e nt i f i c a Lt d How t o make mone y f r om Eme r gi ng Te c hnol ogi e s
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What Investors Should Do
How can you do appropriate due diligence on a technology that is so new that you have nothing to compare it to? You cant,
so investors need to look at more creative ways of funding emerging technologies.
Technology IPOs are few and far between these days, and if businesses that are funded by a couple of guys with a couple of
laptops that wind up reaching hundreds of millions of people have problems what is the situation like for a couple of guys
who need a lab full of glassware and some pretty fancy instrumentation just to get to proof of concept? Dismal!
Many investors nd it hard to make rational decisions when it comes to investing in emerging technologies because often
the technology is too new, and markets too diverse, but more importantly too far away from the normal everyday experience.
(Policy makers have similar issues, in that they can grasp the importance of things that relate to their daily lives and tend to
ignore the rest). In general, investing in emerging technologies is more like taking an option on the future than scoring a
sure re slam dunk home run and is fraught with danger, but there are steps investors can make to minimise risk.
1. First and foremost ignore any reports citing exponential growth and do your own due diligence. Is the science feasible, is
there anybody on the management team who would look credible to investors, how much does the company know
about its target market and how do the know this? If all the market numbers come from someone elses work then walk
away.
2. Invest for the long haul. Tats easy for multinationals and sovereign wealth funds to do, less easy for VCs and private
equity and even trickier for private investors. Despite claims that we are accelerating towards a technological singularity
it still takes ten to fteen years from the emergence of a new discipline to making serious money.
3. Dont look at the basic technology but what it enables. Coming back to the iPod analogy again, you dont have to invent
a technology to take advantage of it. In the same way that the iPhone generated huge opportunities for people to de-
velop applications running on the platform, thin lm exible photovoltaics will require all kinds of infrastructure from
smart metering to storage. Leave the heavy lifting to the huge armour plated rhinos who can raise $100 million, and
just be the bird that lives on the ticks.
4. Look for revenue as well as exits. While an IPO or acquisition is the big pay o, loan notes, R-class stock or even con-
sultancy fees are good ways to share in any growth on valuation and/or revenue.
5. Finally, and importantly, dont invest in something you dont understand. If you cant tell your proteins from your en-
zymes or your protons from your electrons either get someone to explain it to you or steer well clear of emerging tech-
nologies.
How to make money from Emerging Technologies December 2009
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Conclusion
So does this make investment in emerging technologies a good or a bad idea? It depends who you are and why you are in-
vesting.
For Governments it should be a no-brainer. Countries such as South Korea, Taiwan and Singapore managed to build wealthy
advanced economies as a direct result from investing in technology, and have the institutions in place to ensure that they can
hold on to their position through nanotech, biotech and information technology. However, as the case of the United King-
dom shows, investing solely in research without ensuring technology is eciently transferred to the wider economy can
squander a once promising lead.
For companies the situation is less clear. Emerging technologies are a good long-term strategic bet, but a degree of maturity
is required if they are to translate directly into prots. Companies that can take a ten-year view of technology will nd it
rewarding, but those with shorter term needs will always nd it more protable to outsource innovation to start ups.
Finally, for the investment community, it once again depends on your timescale. Anyone expecting a rash of dot com com-
panies that can be built and sold within eighteen months will be sorely disappointed, but investors with the ability to raise
follow on capital, or to be able to view technology as a longer term asset will do well. Unfortunately this excludes 95% of the
venture capital industry!!!
How to make money from Emerging Technologies December 2009
Ci e nt i f i c a Lt d How t o make mone y f r om Eme r gi ng Te c hnol ogi e s
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