Posted on 05/27/2004 5:24:27 PM PDT by BenLurkin
Nanotech firms making defense products find it isn't easy being small. Yes, the Pentagon has teamed up with scores of small companies to develop nanotech, or molecular-scale, products for the military. But its funding is limited, and the startups must learn some hard lessons in the art of winning defense contracts.
The limited Pentagon funding seldom helps the startups attract other funding.
Many nanotech startups must operate on shoestring budgets, hoping to develop a product or two that will let them succeed. But many of their products are in the testing stage and years away from substantial returns.
"It's very hard to operate unless you have a certain critical mass," said David Reisner. He's chief executive of nanotech startup The Nano Group, which makes nano-coatings for periscope and propeller shafts for the Navy.
Conference Panel
Reisner spoke at "NanoBusiness Conference 2004," a conference on nanotechnology held in New York City on May 17-19.
The field's received much hype, but Reisner and a panel of executives from nanotech firms active in defense say their sector faces challenges.
Among their complaints:
- Quick staff turnover at the Pentagon, due to the current conflicts, is making it hard to build relationships with military officers who oversee projects.
- As young firms whose products and activities are in flux, it's tough to estimate funding needs.
- Many nanotech firms are living off small grants they get from the government to develop specific products. They find it hard to just break even on the grants, which usually range from $100,000 to $400,000.
- Venture capitalists and other investors have trouble understanding uses and markets for nano products.
Besides Reisner, others on the panel were: Michael Natan, the CEO of Nanoplex Technologies, David Doderer, the senior development engineer for US GlobalNanospace and D. Michael Connolly, the CEO of Integrated Nano-Technologies.
All these firms are developing nano devices or materials for the military.
Nanoplex is working on nano sensors that "tag" molecules in order to identify anthrax and other germ agents.
U.S. Global makes bullet- and blast-resistant nano-materials. It's also working on nano-foams that neutralize dangerous chemicals and germs.
Integrated Nano-Tech is developing nanotech-based germ and chemical detectors and other devices.
Losing Contacts
The nano companies, though, often lose their military contacts to other assignments. Iraq and Afghanistan has accelerated this situation, Reisner says.
"You spend time creating a relationship and then they're gone," Reisner said.
Other panelists say their staff must spend a lot of time on Capitol Hill mustering political support for their projects. With limited resources, it's a costly use of time and manpower, they say.
Many firms also find that they're steered toward developing different products quickly, as military and Homeland Security needs shift. For a startup, that's a costly situation.
US Global Nanospace, for instance, suddenly found itself developing nano armor-lined turrets and doors for Humvees when U.S. forces began taking casualties in ambushes in Iraq.
It also started working on nano foams to neutralize germ and chemical agents to cope with terrorist threats.
Cost overruns are common. And the executives say it's hard to cover the costs on their relatively small government grants.
"It's tough to break even on grants because of cost overruns," Nanoplex's Natan said at the conference.
The government's Small Business Research Initiative grants are intended to give small companies more access to publicly funded R&D projects.
Grants Under $400,000
The grants seldom exceed $400,000 and don't cover some expenses, like paying for transferring workers between different product teams and offices.
But panel members say dealing well with SBIR grants is necessary to get "phase two money," where the government kicks in more cash.
Nano firms also find it hard to get corporate investors.
"And if you fail with your corporate relationship, you are not allowed to come back," Reisner said.
Integrated Nano-Tech's Connolly said at the conference that venture funds and other investors often are confused about the market for some nanotech products.
"If you say you have a device that tests for anthrax, they don't know how to value the market," Connolly said.
"But if you call it a medical diagnostic product, then (they see its potential)," he said.
Analysts say there's also confusion on what part of the military, government or private sector will be the end users of such products.
Wall Street analysts and other industry observers are still piecing together estimates on how big the markets for nanotech defense products will be, they say.
On the upside, many small nanotech firms are learning to cope with these speed bumps.
Fibers Catch Interest
Reisner says SBRI grants can be used as a marketing strategy. He says getting the grants is a good way for nanotech firms to get products "out in front" of the government and investors.
Reisner also says that the military's taking a wider view of the types of nanotech products they want.
He says the Pentagon's recently shown more interest in heat- and impact-resistant nanotech coatings that can be used in jet engines and ships.
There's also more interest in developing nano fibers that can be used to filter out germs and other harmful agents.
Nano Group has won more than $20 million in funding through government SBRI grants.
It, Nanoplex Technologies and Integrated Nano-Technologies, all privately held, haven't issued sales or financial data.
Reisner forecasts Nano Group sales at more than $10 million in 2006.
US Global reported $128,000 in revenue for the nine months ended Dec. 31, 2003.
Its net loss rose 14% to $5.8 million.
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