Nanotech company shifts gears to survive

CNET ^ | Wed Aug 10 | Russ Arensman

[nickcarraway]

Billions of dollars have poured into nanotechnology research in recent years in hopes of developing everything from better lightbulbs to tinier transistors to more-effective drugs. Yet most nanotech companies are still years from bringing actual products to market.

NanoOpto is one of the rare exceptions. The tiny company early this year began shipping its first optical components used in camera-equipped cell phones and telecommunications equipment. Since then, the Somerset, N.J.-based company also has started using nanotechnology to make optical waveplate components that modify signals in optical drives, which it says will enable cheaper, more durable DVD players.

By year's end, NanoOpto hopes to unveil its first components for digital projectors and high-definition TV displays. Company officials expect their so-called nano-imprint lithography, or NIL, technology to improve the performance of all of these products while making them smaller and less costly.

The privately held company does not disclose its sales, which are roughly estimated to be a few million dollars annually. But the simple fact that NanoOpto generates commercial sales at all is significant. "I don't think you could name five other companies that are truly selling a nanotech product," says Darrell Brookstein, managing director of San Diego industry consultancy Nanotech.

Remarkable as that is, what's even more telling about the start-up's success to date is that only two years ago NanoOpto was targeting the dying optical telecommunications sector with products no one wanted to buy and with its existing round of venture capital quickly evaporating. "Our great epiphany was that we had to diversify," recalls Barry Weinbaum, a former Lucent Technologies executive who became NanoOpto's CEO in mid-2001. "Every company has what I like to call 'the Budweiser turning point of the game,' and ours was believing that our technology could address markets outside of telecom."

True enough in hindsight, but NanoOpto's success also stems from a strong management team, dedicated investors who have contributed $46 million in venture capital since the company was founded in 2000, and an ability to overcome a few stumbling blocks to get its initial products into customers' hands, adds Brookstein. "These guys have done just about everything right up to this point," he says.

The technology that underpins NanoOpto's products involves a high-tech stamping process in which a mold etched with microscopic patterns is pressed into a soft polymer layer on a silicon wafer or optical crystal. After the polymer is heated to harden it, the mold is removed, leaving behind an exact, reverse copy.

Conventional chipmaking processes can then selectively remove some of the polymer and, if desired, add antireflective coatings or metal circuit lines. The resulting microstructures, often very fine gratings, are used to filter, reflect, rotate or change the polarization of light.

NIL offers two important advantages over conventional optical lithography. It can produce far smaller features than optical patterning, which is limited by the wavelength of light. The smallest commercial semiconductor circuits, for example, are 90 nanometers wide, while NanoOpto's optical chips boast 50-nanometer features.

NIL also costs less than optical lithography, which creates patterns by projecting light through stencils onto layers of photosensitive chemicals. Today's optical "steppers" used in chipmaking can cost more than $10 million, with future models expected to cost upward of $30 million. NIL tools have barely cracked the $1 million mark.

Several companies--including Austin, Texas-based Molecular Imprints, Princeton, N.J.'s Nanonex, Austria's EV Group, Sweden's Obducat and Germany's SUSS MicroTec--have developed and are selling NIL manufacturing tools. Most of these tools, however, are being sold to university and corporate research labs. NanoOpto appears to be the first company (and certainly the only optical company) actually using NIL technology to build commercial products.

NanoOpto's achievement is especially impressive considering what it has overcome just to survive. Founded five years ago to commercialize the nanotech research of Princeton University professor Stephen Chou, the company initially planned to build optical polarizers for telecommunications equipment, then a booming $100 million market with Corning, N.Y.-based Corning as its sole supplier.

But by late 2001, just as NanoOpto closed its first $18 million round of venture financing and broke ground for a new manufacturing facility, the telecommunications market was imploding. The market for polarizers nearly dried up, falling to just $8 million as buyers struggled to work through huge inventory surpluses. London-based market researcher Ovum-RHK estimates the entire optical components industry plunged from about $10 billion in 2001 to $2.1 billion in 2003 before rebounding slightly to $2.5 billion last year.

Barely 100 of the 1,000-plus optical components companies launched during the boom operate today. "The market is considerably smaller in dollars and in the number of players," says Ovum-RHK research director Daryl Inniss.

After the company's first telecommunications product samples drew little response from struggling customers in 2002, NanoOpto's managers set their sights in 2003 on the consumer electronics market with its growing appetite for optical-based technologies such as CD and DVD players, digital cameras and projection TVs. The start-up's survival hinged on the shift, says Weinbaum.

"We made a decision to go after a broader array of optical components, and overnight, instead of addressing a $100 million market, we're addressing a $1.5 billion market," Weinbaum adds. NanoOpto began production of its latest products earlier this year after two years of development and lining up customers.

Throughout the company's shift in strategy, NanoOpto has enjoyed consistent support from its financial backers. Morgenthaler Ventures, which specializes in early-stage technology investments, has stuck with the company since its initial funding round. Faith in NanoOpto's management team and its ability to succeed in new markets kept the Menlo Park, Calif.-based venture firm behind the start-up, says Greg Blonder, a Morgenthaler partner and NanoOpto board member.

Previous Next "We believed they had a platform technology that was not specific to the telecommunications market," he says. "So they had a chance to recover."

NanoOpto's other investors include Menlo Park's Draper Fisher Jurvetson, one of the most active nanotech investors, and New York-based Harris & Harris Group, a publicly traded venture capital company that invests mainly in what it calls "tiny technology." Participants in NanoOpto's latest $14.5 million C round of financing include Chicago-based Masters Capital Nanotechnology, Germany's Nanostart, Japan's Itochu and Chicago private equity investor First Analysis.

First Analysis partner Tracy Marshbanks says his company looks for relatively late-stage start-ups that are ready to expand with well-developed products and initial customers. Though he says he has looked at numerous nanotech companies, Marshbanks says "most of those others really haven't moved to the point where they come into our investment framework."

NanoOpto's best-selling products so far are filters that improve picture quality in cell-phone cameras by removing ultraviolet and infrared rays. Weinbaum claims NanoOpto's filters, which sell for about 50 cents, "blow away" the performance of conventional filters, which are made from blue glass.

About 1 million camera phones are using the company's filters now, although that's still just a fraction of the 353 million camera phones that research firm iSuppli expects to be shipped during 2005.

The potential market for NanoOpto's components in digital imaging--mainly camera-equipped cell phones--could reach $80 million annually, predicts John Roy, an analyst with investment bank WR Hambrecht. He sees a $150 million market opportunity for NanoOpto in various telecommunications markets, which finally are starting to rebound, and an even larger $220 million market in optical drives. Roy estimated in a recent report that the company's total addressable market adds up to "over $1 billion today and growing."

Roy notes that NanoOpto has resolved most questions about whether its technology works. Next, he says, it needs to prove it can be a reliable supplier and build a solid, profitable business. Toward that end, the company recently hired new senior executives for manufacturing and business development. It also is adding more manufacturing space at its New Jersey headquarters.

NanoOpto is still a long way from recouping its investors' money, though some optimists think the process could begin relatively soon. "They have a chance that, if they want, they could go public during the next 12 months," Roy says. An IPO, however, would require at least $10 million in sales, or contracts for that much, he adds.

Consultant Brookstein is a bit less sanguine, noting that a backlash against the technology's early hype has lowered valuations for nanotech IPOs and acquisitions for the past year. He's not expecting a rebound before mid-2006 and possibly not until 2008. "Most people are a bit fed up with hearing about nanotech on CNBC," he says. "I'd be looking two to four years out."

[SunkenCiv]

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