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Thursday, November 17, 2005

Will Nanotech Ever Achieve .Com Bubblemania?

Thesis: Nanotech fever won't result in the investor hysteria we experienced in the late 1990's because nanotechnology is a general process for discovery and product fabrication, rather than a whole new "thing in our lives."

Evidence of a coming nanotech bubble?

Most everybody would be interested to know if a bubble reminiscent of the .com heyday is upon us. And indeed, the market has seen some early indicators that a bubble may be in the works. For example, companies are already playing the name game. The Forbes/Wolfe Nanotech Report ran a story that compared ".com" name changes to recent "nano" name changes. During the .com boom, the number of companies changing their names to something containing ".com" increased dramatically, and this relabling paid off big-time in stock appreciation; similarly, the number of companies changing their names to something containing "nano" has increased greatly in the past few years, and in most cases, they have experienced a notable boost in market value. Investors are putting a premium on all things "nano."

A new way of doing things, not an industry

So, is the name-game evidence of a coming nanobubble? I asked a senior banker leading the nanotech effort at Lehman Brothers this very question, and she did not anticipate a bubble in our future. Nanotech, she said, is essentially a new way of doing old things, unlike the .com boom which suddenly resulted in an entirely new "thing in our lives." Bundled within this theme are a number of reasons why we will not see a .com-like bubble, namely: definability of market size, barriers to scale, access to the end market, and the lack of a novel centering force like the internet.

Definability of Market Size

When the internet first came into being, nobody knew quite what to make of it. I remember when our family first subscribed to AOL and Prodigy. These two application-driven, online communities were the only "internet" we knew. When AOL unveiled the ability to connect to the "world wide web," I remember being unimpressed. I couldn't get anywhere or do anything useful, but within a few years, that all changed.

In it's nascency, the internet had indefinable market potential. Some thought it would revolutionize civilization almost immediately, with Amazon soon to outrun Walmart. Others didn't see the big deal. With indiscernible market limits, the investing frenzy raged out of control, and the founders of made out brilliantly before the lay investor suffered in the downturn.

In nanotech, there is more visibility, at least within a typical investment horizon. For instance, solar power will increase significantly, but we understand the power market and its limits. Similarly, for nano-enabled clothing, we know the size of the apparel market, for quantum-based computing, we know the size of the computer market, for nano-enabled drug delivery, we know the size of the drug market, and so forth... Nanotechnological innovations will disrupt many existing markets over time, rather than aggregating in a new and unfathomable market, at least in the foreseeable future.

Barriers of Scale, Industry and Access to the End Market

Differences in business model make unbridled investment in nanotech unlikely. Nanotechnology relates chiefly to the production of physical goods, whereas the internet relates to the production and distribution of information. In a software or .com company, a product can easily be copied or shared widely once a master is produced. A nanotechnology company must develop a master design as well as effectively scale production of the physical good in a cost effective manner.

The issue of scale results in a key hurdle--that of industry. Most nanotech companies will have a life-or-death dependence on industry partnerships (since the market they are targeting already exists) to scale their product and access existing sales channels. During the .com era, products could be built and scaled quickly, and distributed widely on internet almost immediately. In a matter of weeks or months, a team of dedicated programmers could produce a gang-buster product and watch it skyrocket to internet stardom in a blizzard of "check this out" emails. Nanotech companies do not have this convenience and will face additional challenges including: production capacity, ability to overcome or befriend incumbency, and slower time to market, all of which make for a more difficult equity story.

Lack of a Centering Product

The one truly unique feature of the .com boom was the novelty of the internet itself. The .com bubble was the peak investment moment during the information revolution. Improvements in information and communication access resulted in significant network effects. During the booms of the past, Wall Street and extremely wealthy individuals around the world were a buzz, but to the everyday Joe, there was only a vague notion of the hype and a limited ability to join the greedy money. Whereas, during the internet boom, anybody with money to invest had access to the very product in which everybody was investing, and it seemed to grow, improve, and generate new excitement daily. Also, the advent of online trading resulted in diffuse market access and the hype grew as network effects took hold. In effect, investors were drinking their own koolaid. The result was a bubble-bust outcome that left the smart money laughing and the greedy money high-and-dry in valueless stocks.

Although nanotech hype has begun to propagate through the internet, don't expect the same reaction. Nanotech companies are slower to market, difficult to understand, and more deliberate in their business plans. The novelty of the internet has come and gone, and nanotech, like other revolutions, will likely be played out in a more reserved, prolonged fashion than the .com boom.


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