Sunday, June 11, 2006
Thursday, January 19, 2006
Nanotech: Your Winning Lottery Ticket
Thesis: If history is any guide, investors may become enamoured with the word "nanotechnology," in which case there are fortunes to be made.
The day has finally come: I’m fresh out of BS. The Facebook and campus dating just aren’t doing it for me this week. So, as a consolation, I’ve decided to tell you how to make millions of dollars. Sound good?
Look around. Palo Alto is slumbering like a lion that just made the kill of a lifetime. All is quiet as four of the 10 most expensive housing markets in the United States, all within a half-hour of Stanford, tranquilly doze amid hundreds of billions of dollars of new wealth.
Yeah — you and me — we missed that whole dot-com thing.
The only hope for us is to anticipate the next investing frenzy, which will correlate with some great leap forward. I remember when a partner at Lehman Brothers gave me some words of wisdom at a sell weekend: He said that you don’t get into banking to make money during a career, you do it for the years when the market comes unglued and investors go berserk.
So what’s the next big thing? It may well be nanotechnology, something very Stanfordesque. A seemingly abstruse term, nanotechnology simply means controlling matter on the sub-100 nanometer scale (one nanometer = 10 atoms). Nanotech thus implies the nexus of the sciences and engineering at the atomic scale, where the traditional distinctions between chemistry, biology and physics finally blur into the same quantum playbook.
This convergence will enable product design that is fundamentally different from anything we’ve attempted in the past. Since the dawn of man, we have used the materials made available by Mother Nature, and these materials come biggie-sized. In a top-down approach, we carve out raw materials from the earth, joining them, soldering them and mixing them to create the products we desire. Even microprocessors, one of the tiniest techs to date, are created top-down using ultraviolet light to burn circuit images into a slab of silicon.
Nanotech goes the opposite direction, bottom-up, building materials one atom at a time. This reversal in the construction process has the potential to revolutionize almost every product in existence and make the basic sources of well-being — food, water, medicine and energy — more accessible to the developing populations of the world.
“Hmm...” you say. “Sounds fishy.” Not sure you want to trust the shady columnist who constantly writes on completely useless topics? Let’s ask Michael Dell.
“Nanomaterials,” Michael Dell said, in response to what he would pursue if he had to build his fortune today. A myriad of the world’s business and political leaders — including John Mauldin, Steve Jurvetson, John Doerr, Hilary Clinton, Newt Gingrich and George W. Bush — have made similarly enthusiastic statements. I recently exchanged e-mails with a billionaire who informally wrote, “I think nanotechnology is really freakin’ cool. I only know the very basics, but I have a feeling that there are going to be some real fortunes made in that area.”
Indeed, nanotechnology is now the most well-funded government scientific initiative since the space race. And thanks to recent advances, nanotechnology is no longer just a government pipe dream. The torch is finally being passed to the private sector as commercialization increasingly becomes a reality.
Lux Research estimated that private sector spending outpaced government spending on nanotechnology for the first time in 2004. The Forbes/Wolf Nanotech Report stated in 2004 that over 1,500 companies worldwide have publicly announced their involvement in “nanotechnology,” and hundreds of start-ups have been launched in the United States alone.
OK, great, so why could this be a boom? Because it only takes a word to break the markets. If you’ve read Malcolm Gladwell’s Tipping Point, you know what I mean. People are largely ignorant and the markets are too vast to understand. As a result, a sexy and rousing word or idea sometimes comes along that catalyzes the aggregation of capital. The rest is just Psych 1. Money chases money and the markets come unglued. A few examples:
In 1593, Conrad Guestner imported the first tulip bulb into Holland from Constantinople. They became a status symbol among the rich but soon swept the nation in a tulip-trading craze. Tulip bulbs increased in value more than 20-fold in one month, and by their peak in the 1630s were worth about $76,000 each in today’s currency.
• South Sea
In exchange for financing its war debts, Britain granted exclusive trading rights in the South Seas to the South Sea Company in 1711. Anticipating a monopoly on trade in half of the New World and fueled by the excitement of the colonial period, investors bid up shares more than 10-fold in a few months. The stock crashed, leaving the British economy in shambles. Isaac Newton lost a large part of his fortune and remarked, “I can calculate the motions of heavenly bodies, but not the madness of people.”
• The Great Crash
The 1920s were known as the “Roaring Twenties” because industrialization had introduced many new technologies, such as the radio and automobile, that radically altered human quality of life. The economy boomed and the Dow increased six fold in under a decade, that is, until the Great Depression.
This late-1990s boom needs no introduction. It thrived on the potential of the Internet to drastically alter the economy and our way of life with connectivity and knowledge-sharing.
Though each of these resulted in a market crash, the latter three each marked a great leap forward for mankind — advances so exciting they inspired investors to the point of irrationality. Does the word “nanotechnology” command the same psychological power as tulips in Holland, trade in the New World, invention in the industrial period and dot-coms in the Information Age? Maybe.
Companies are already playing the name game. The Forbes/Wolfe Nanotech Report noted that “nano” name changes echo the “.com” name changes of the late-1990s. During the dot-com boom, the number of companies changing their names to something containing “.com” increased dramatically because this re-labeling paid off in stock appreciation. Similarly, the number of companies pulling a “nano” name switch has greatly increased in recent years and resulted in stock appreciations.
Similarly, the number of references to “nanotechnology” in both scientific journals and media references has increased exponentially, from a few hundred to tens of thousands, in a matter of years. Look no further than your shiny new iPod Nano to see the term already being used as a mass-marketing mechanism of the highest order.
Not to worry — just like the information revolution, your friendly neighborhood faculty are on top this thing. Small Times magazine ranks the Pacific states as the number-one region for nanotechnology, and places Stanford in the top five universities for nanotech research and commercialization. A search of engineering and sciences faculty profiles returns over 30 professors who list nanotechnology among their research endeavors, and Stanford Alumni Magazine recently ran a cover story on nanotech at Stanford.
So, there you have it. You’ve got a few years yet to decide for yourself and perhaps get involved. Stanford and Silicon Valley is the perfect place to do it. Cash in your ticket. The valley lion will reawaken soon enough.
Want me to return to my bread and butter — columns on completely useless and uninformative topics like the Facebook and sketchy grad students? E-mail me at email@example.com.
Saturday, December 31, 2005
Philosophy in Science: Reductionism versus Emergence
As seen in the highly publicized debate between proponents of evolution and intelligent design, the media often provides coverage of impassioned debates between elemental groups and lobbies in the United States, such as the religious and scientific communities. These issues are important and tap society for the discussion and weighing of heartfelt and treasured values. What the media often fails to capture, however, are the debates that occur within these camps, some of them axiomatic in nature. Such debates thrive in the scientific community in which truth and knowledge must be tested and agreed upon through consensus.
Some of my previous posts have discussed artificial intelligence and the tension between designing fully architected systems and self-organizing systems (i.e. emergence-based systems). This theme extends into the whole of science in the form of "reductionism" versus "emergence" and is debated on the highest levels. A post by nanotech blogger Richard Jones (April 15, 2005 Nobel Laureates Against Nanotechnology) , author of Soft Machines, discusses one such debate in the scientific community. Jone's post discusses a book in which two Nobel Laureates, and proponents of studying emergence, argue that the philosophical paradigm on which nanotechnology is based (reductionism) is flawed, i.e. that breaking down matter and controlling every aspect of it is not how science and technology will ultimately achieve its full potential. The trajectory of science has carried human observation deep into the nano-realm revealing the peculiar laws and secrets of quantum mechanics. As science has enabled the study of increasingly smaller particles, questions have been raised as to whether a unified theory, or a "theory of everything," is achievable through continued reduction.
Reductionists believe that complex systems can be understood through its most fundamental elements and processes. In such a quest to explain reality, physics has in recent years superceded the atom and quark and embarked on various mathematical constructs, noteably string theory and m-theory, to link observed forces in exoteric dimensions. Because of its theoretical nature, string theory is largely untestable which conflicts with a key tenet of science, begging the question, will we ever find grand meaning in the small?
Emergence holds that the underlying organization of a system is as or more important than constituent elements and their properties. One need only look to the human body, the most sophisticated system on earth and the product of billions of years of biological "computing power," to see the value of emergence. Although we might catalogue and every gene and record the movement of every protein in the human body, such a databank would hardly capture the fundamental automata that underly the emergence of human intelligence from a pinpoint of genetic information. A proponent of emergence would argue that the seemingly immeasurable complexities of the human body can be surmised in certain, more general organizational principles represented in the system.
The battle over the virtues of "open source" code long waged between figureheads Microsoft and Sun Microsystems provides another example. When a program is compiled from language-based code (understandable to a programmer) into machine code it is impossible to reverse engineer and unlock the original "program" for development or manipulation. Microsoft only releases their code in a compiled format so that it remains proprietary. From the perspective of a third party, the machine code is inscrutible, and in fact, a given set of machine code could represent an infinite number of "programs" in any language. Similarly, the developer does not understand their program through its final elements (1's and 0's) and the trillions of operations they can adaptably perform in response to a potentially infinite number of scenarios. The meaning of the program is locked away in the organizational constructs inherent in the programming language and code itself. Like "open source" advocates' frustration with Microsoft, one must wonder if man can ever access the organizational principles fundamental to nature's grandest inventions. And so one must ask, where does meaning lie, and how does our understanding of the universe--be it reductionist or emergent--relate to our ability to eventually fabricate intelligent systems?
There may not be a need to draw a line in the sand between these two paradigms. Yes, they are dichotomous, but one may well be the vehicle for the other. Technology is, by definition, the fabrication of tools useful in the lives of men. Reductionism and the pursuit of nano-scale control will better position man to study and build emergent systems. For instance, the two paradigms might be united in the context of empiricism. Using reductionism, one could develop an understanding of the operations and emergent properties and phenomena of an ant colony. Although individual ants are generally ignorant, their systematic behavior yields an emergent intelligence that can build complex structures such as bridges to achieve collective objectives. One could then model the system and adjust various operations or schemes of operations (i.e. organizational principles) to learn how the emergent phenomena of the collective change. I think a lot of biomimicry will do exactly this--unite these divergent paradigms under empiricism.
Philosophical debates between scientific rock-stars such as these have occurred since the dawn of science, from Aristotle and Plato to Hobbes and Boyle to Einstein and Bhor. As we discover more and more about our world through science, questions are answered and paradigms arise; but then exceptions are found and crisises result until a yet more refined paradigm brings resolution. Philosophers scout and break the dreamy and untestable ground that engineers and scientists--equipped with increasingly sophisticated tools--later venture to conquer. Nanotechnology promises the nexus of engineering and the sciences, but perhaps also the resolution of some of the most triumphant and previously irreconcilable philosophies in man's intellectual history. Indeed, science may finally begin to grasp the most elusive of philosophical inquiry, metaphysics (the study of concepts seemingly beyond the realm of science such as "consciousness"), as we become masters of emergence.
Monday, December 19, 2005
Nanotech Wonders Galore
Electrowetting of Carbon Nanotubes:
Never before had researches been able to cause liquid to enter a carbon nanotube. In fact, a body of research indicated it was impossible. However, researchers at Cal Tech successfully caused mercury to fill carbon nanotubes using techniques to exploit certain electric properties of mercury. The breakthrough could have applications in nanofluidics such as the development of printers with resolution at the nanoscale. Read more here.
Single Molecule Switching
If Moore's Law, which states that the speed of processors will double every year, is to continue, then a new platform technology will eventually be required. Current methods are limited by the resolution that can be achieved using light to burn circuit patterns into silicon, which in turn is limited by the natural wavelength of light. Researchers are testing many different methods of creating smaller circuits in anticipation of this barrier. One development occured recently as researchers announced they have created a reliable single molecule switch. Read more here.
Heading in the opposite direction of Reagan's Star Wars program, scientists have discovered how to make tiny lasers, only 60 nanometers wide. They used a silicon wafer with billions of tiny holes and green light from an Argon Ion laser to create a lasing effect. Though the experiment occured at cryogenic tempetures, they hope that further research will reveal phenomena that can be harnessed for practical application. Read more here.
Researchers in the UK have developed a simple, scalable method for creating tetrahedral pyramids using double helix DNA. The structures self-assemble with 95% reliability. Such pyramid structures, which are used in modern day architecture at the macro level, can withstand significant stress at the nanoscale as well. The researchers believe the pyramids could be used to support nanowires or other structures in the fabrication of nanoelectronic systems. Read more here.
Thursday, December 08, 2005
Patent Land Grab Continues
The company Arrowhead Research recently announced that its NanoPolaris subsidiary has assembled a significant portfolio of intellectual property related to carbon nanotubes. See the Dec. 8, 2005 article here: http://www.arrowres.com/news.html
The Company is listed on the Nasdaq [ARWR] and has a market cap of $107 million. Arrowhead is a Cal Tech spinout that is attempting to build a cogent IP portfolio by systematically procuring IP from various universities that may be key for the commercialization of future products. Arrowhead plans to generate revenue by licensing their portfolio.
One might think of Arrowhead as a private version of what the PTO (Patent and Trademark Office) sometimes encourages and endorses known as patent pools. Government-sponsored or privately contracted patent pools provide easy and standard access to the most fundamental sciences and technologies underlying an industry. Such pools are encouraged because they prevent a situation in which every company must engage in complicated contractural arrangements with numerous entities to secure the fundamental IP needed for their technology. Other companies, such as privately owned Nanosys, are engaged in a similar strategy of acquiring a strong patent portfolio in anticipation of later commercial developments.
However, I'm uncertain investing in Arrowhead just yet is wise. Nanotechnology IP is so nacent, fragmented and complicated that there is great uncertainty as to which IP will underly the most lucrative commercial developments of the future. The state of the industry is somewhat reminescent of the land grab that followed the Homestead Act of 1862, in which settlers were able to claim 160 acres of free land. Who would be so lucky to squat on land that was particularly fertile or would later have valuable mineral right to gold or oil? Nobody could know. Arrowhead's strategy could be successful, as proven by Rambus [RMBS], an early mover that is now a $1.6 billion company licensing the critical IP related to computer RAM technology, but it's extremely difficult for an investor in the public markets to evaluate something as nebulous as a patent portfolio when so much uncertainty exists.
Until the road to commercialization becomes clearer, a wait and see approach may be best for companies that have no product pipeline but are nonetheless assembling a powerful intellectual property portfolio. Keep an eye on Arrowhead for now.
Indexed By Tags: future, nanotech, nanotechnology, technology, patent, intellectual property, Arrowhead Research, Rambus, PTO, Cal Tech
Monday, December 05, 2005
Konarka "Prints" Solar Cells
Under the leadership of a Nobel Prize winning chemist, Konarka has developed polymer-based photovoltaic cells as thin as photographic film. Traditional solar panels are on a glass substrate and are, as a result, larger, bulkier, and less pliable. With its lightweight design, Konarka's technology is more suitable for large scale manufacturing and distribution.
Konarka has no shortage of accolades. Among them are the Mass High Tech's 10th Annual All-Star Award, 2005 Popular Mechanics Breakthrough Award, Red Herring 100 Finalist, Red Herring Top 100 Innovators Award, 2004 Silicon East Summit "Company to Watch", Small Times Magazine Best of Small Tech Award, InnovationWorld Top 21 Company, AlwaysOn Top Innovators of 2004, TiECon 2003 Nanotechnology Field Award, and the World Economic Forum Technology Pioneer
The PV market has been growing at a rate of 40% per year for the last five years, and there's no indication of a slowdown. It seems that Konarka may be at the right place at the right time, an not surprisingly, the Company had no problem raising capital during its Series C financing, with a number of top tier VC firms anteing up for the ride. As for the rest of us, we'll have to wait for the IPO.
See a photo of their technology here: 2005 Popular Mechanics Breakthrough Award
Indexed By Tags: future, nanotech, nanotechnology, technology, solar power, energy, konarka
Friday, December 02, 2005
Wednesday, November 30, 2005
The U.S. Deficit and Global Liquidity
Mauldin manages hundreds of millions of dollars in capital, is a respected thinker, and has published several books. His newsletter has 1.5 million subscribers. The most recent newsletter can be viewed here: deteriorating global liquidity
Indexed By Tags: future, nanotech, nanotechnology, technology, hedge funds, silicon valley, stocks
Tuesday, November 29, 2005
Product Feature: VivaGel Topical Agent for HIV Prevention
Starpharma is one of the first companies to attempt to commercialize a dendrimer-based drug through the FDA with its VivaGel product. A recent $20 million grant from the National Health Institute bodes well for VivaGel, which is estimated to reach the market by 2008. VivaGel can be used by women to prevent various STDs, including HIV. Starpharma also believes the technology could be used as a coating on condoms and is discussing the possibility with major condom manufacturers. At $4.00 / share Starpharma is a good value.
Product Description (Source: Company Website):
Starpharma’s microbicide, VivaGel™, is a topical agent that can potentially prevent or reduce
transmission of HIV and other STDs when applied to the vagina or rectum prior to sexual intercourse. Women are more vulnerable to HIV infection than men due to biological, sociological and cultural factors, and a safe and effective microbicide would offer women an alternative to dependence on condoms for STD prevention . The development of microbicides is being backed by a global effort to fight the enormous social impact of HIV, particularly in the developing world. Microbicides are one of the technologies known as “female-controlled protection against sexually transmitted infections”, which have been identified as one of the top ten biotechnologies for improving health in the developing world. Starpharma’s development of VivaGel™ is supported through collaboration with the topical microbicide team within the US National Institutes of Health (NIH).
VivaGel™ is a dendrimer-based nanotechnology in phase II/III of clinical trials and expected to become available in 2007. Dendrimers are synthetic, nanoscale molecules with unique features that make them suitable for the development as pharmaceuticals. For instance, dendrimers can be used as encasings to protect and release an agent only under specific conditions, resulting in more targeted and effective drug delivery.
Monday, November 21, 2005
Running Money: A Hedge Fund Honcho Tells Tech Bubble Tales
Andy Kessler managed a hedge fund from 1996 to 2001 that ranked among the top ten funds in history over a five-year period, in terms of overall return. His fund averaged a ~50% return per year and grew from about $20mm from launch to over $1billion upon closing (which includes additional invested capital). At one point, he turned down $1billion in Saudi Oil money because he wanted to remain faithful to his strategy and not become over extended. Just what was that strategy? Read on...
Before opening a fund, Kessler spent most of his career as a research analyst in the technology sector for Morgan Stanley. That means he made lots of contacts, asked lots of questions, and wrote lots of reports containing investment recommendations. But he found it quite difficult to raise money when he started his fund. In a somewhat self-effacing tone, he remarks that he told prospective funders that his investment thesis was "finding companies with great long-term prospects." Don't we all--seems obvious. But Kessler demonstrates a particularly deep commitment to his philosophy and an incisive intuition when in search of growth.
Dot-Com Craziness and the Need for an "Edge"
Kessler begins by using the story of his fund as a vehicle for relating the fun (and insanity) of the tech boom in Silicon Valley and introducing us to some of its most memorable characters. Kessler provides an account of a host of investment strategies he encountered, ranging from Clark and Doerr's grand slam with Netscape, to the currency arbitrages of the Tiger and Soros funds, to the bond trades of Long Term Capital Management, to the more loony schemes of some of his peers. One investor, for example, claimed to have found a pattern in tech conferences. He went to these conferences, noted the companies presenting to investors, observed their stocks tick up the next 1 - 2 days, then watched them correct back to their previous level the next day. He would long and short the stocks based on this pattern. Similarly, Kessler watched as investment managers interacted with company management at these conferences, gleaned extremely ambiguous insights, then placed a phone calls that resulted in notable changes in the stock price. His point--it's all about an edge. Call it information. And the average Joe and Mary on ETrade don't have a tee-ball kid's chance in hell of hitting one out of Fenway, unless they're lucky. You've got to be plugged in; you've got to know something. So what did Kessler know?
Kessler's Philosophy: Steamships and Microprocessors
Kessler tells the story (and the background leading up to the boom) in parallel with the story of the industrial revolution. He compares steam power technology and its dramatic effect on power availability to the rapid development in computer technology and its effect on knowledge. For instance, he notes how exponential growth in power resources reduced the cost of most labor intensive processes and enabled a host of other key industrial technologies, while noting how the processor has doubled in speed about every 18 months (Moore's law), thus resulting in, for example, the cost of emails declining from a few dollars per email (Carter's presidential campaign), to a few cents per million emails today. Kessler refers to this concept as "scale," and provides several other more nuanced historical comparisons to understand this concept.
Putting It Into Practice: MP3s and the "CFO Closed Door Indicator"
Kessler attempted to find companies that would experience a massive increase in demand as a result of some rapidly scaling phenomenon. For example, you might remember that Napster served as the catalyst for a gluttonous world exchange of mp3s in the late nineties. Investors, of course, wondered how they might monetize this deluge of downloads. Most of them avoided Napster for legal concerns, but eventually other more legitimate services went public, like MP3.com, and investors got on board. Rather than investing in these ludicrously overpriced companies, Kessler put his money in a little-known company, with no competition, producing the $2 laser diodes in CD R/W drives. As the world began burning its MP3s in order to play them on other mediums, Kessler's investment skyrocketed somewhere between 50 and 100x.
To find these companies, Kessler put in some serious work. He conducted interviews tirelessly. He referred to his car as his office as he turned over "every rock in the valley." He typically scheduled interviews with 3 to 5 companies per day. He described various subtle behaviors he became attuned to in his interviews. For example, the "CFO closed door indicator" was one favorite. If a CFO closed the door to his office or conference room, something could be inferred about the state or dynamic of the company. Maybe the CFO didn’t want fellow employees to hear the truth about their company's financial situation, or maybe they knew the truth, and he didn't want them to hear him lying to a prospective investor. Despite interviewing hundreds of companies, Kessler invested in only a few he believed would be winners, or as he called them, 5 or 10-baggers (that is, 5x or 10x expected growth).
Debunking Econ 1: Intellectual Property and the U.S. Trade Deficit
Kessler concludes his book by merging the stories of the industrial revolution and the dot-com era in an economic analysis of the U.S. trade deficit and increasing reliance on intellectual property for growth. He asserts, in a position inconsistent with traditionally accepted economic theory, that the growing U.S. trade deficit is not necessarily detrimental to the U.S. economy. He states that U.S. companies focus on IP, ideas, and innovation and thus achieve superior margins and high growth compared to the rest of the world. The outflow of capital from the trade deficit eventually returns to the United States, he says, because of the attractiveness of U.S. companies with superior returns. This money flows into our stockmarket without the "bean-counting" economists taking note. The result?--a lower cost of capital for U.S. based companies, which means more growth, which means more wealth created for Americans as capital gains.
Even if his analysis is correct, the two flaws I note are 1) foreigners own an increasingly larger stake in U.S. exchange traded securities and 2) the very notion of scale he discusses means that these countries (like China) will eventually match or overtake the United States in IP generation, achieve similar margins, and the U.S. will have neither a competitive advantage in the industrial nor the knowledge based economy. In other words, we can swim upstream for now (i.e. outsource the mundane to the rest of the world), but eventually the other fish, namely asia, will catch up. Just like we did to the European economy a century ago.
What's Next?--You Guessed It
Kessler's book, though it conveys the obvious in some ways, does so in an entertaining and insightful manner. He peels away the ambiguity that often clouds investor judgment and demonstrates how to focus on the essential--growth and scale. In the final pages of his book, Kessler says that he's closed his fund believing that the information cycle has past, but that he'll be back. What's the next big hit? He named a few possibilities, one of them--nanotechnology.