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Monday, January 09, 2006

Nanotech Investing Will Require Some Patience

In the months and years ahead, investors are likely to hear an increasing amount about the emerging field of nanotechnology. Much of the news will be exciting, fascinating and, potentially, quite profitable. Pundits and analysts alike will speak of nanotechnology’s ability to create everything from hundreds of cancer-curing drugs to materials a hundred times stronger than steel.

The press surrounding nanotechnology may, in fact, grow so great that readers will be tempted to dismiss it as mere hype—a second coming to the Internet boom/bust if you will. That would be a mistake. The science behind nanotechnology is real—as are its immense possibilities. Investors, however, need to demonstrate a little patience with the field.

Nanotechnology, over the course of the next decade, will create a lot of new wealth, and it will also destroy a lot of old wealth—by rendering old businesses as well as business models obsolete. It will not do these things overnight. Instead, it will do so incrementally. As such, now is the time for prudent investors to begin familiarizing themselves with nanotechnology.

A few historical examples are worth bearing in mind. The first is the semiconductor industry. The original transistor—the basis of today’s computer industry—was created in 1947. It was not, however, until the creation of the integrated circuit, eleven years later, that the potential of the industry began to become evident to some very farsighted investors.

These first investors, therefore, did not see a return on their investment until the mid-1970s when integrated circuits began being incorporated into some familiar commercial items. And patient investors only received a handsome return on their investment when the manufacturing processes for integrated circuits grew so efficient and affordable that the devices started to drive the growth of entirely new markets in personal computers, cell phones, and a host of other popular consumer products.

The time frame between the creation of the first transistor and the semiconductor industry’s dominance was roughly forty years, but investors with enough foresight to invest $1000 in a company like Intel in 1973 and then enough patience to hold on to it for the next 30 years saw their investment grow a thousand-fold -- to well over $1 million.

The biotechnology industry followed a similar pattern. Today’s biotech giants, Genentech and Amgen, started more two decades ago. But they have only become profitable within the past decade. This means that a modest $1000 investment in Genentech would not have grown at all during the first half of its life, but skyrocketed to a value near $500,000 in its second decade.

The third and final example, of course, is the Internet. Widely touted in the late 1990’s, the Internet lured, with the promise of quick riches, a great many investors into dubious or questionable stocks. As we all now know, the market crashed and, along with it, took many investors hard earned dollars.

The follow-up to the crash has, however, been equally enlightening. Just as many of its early boosters predicted it would, the Internet really has changed the game for a variety of industries. While it may still be too soon to assess whether eBay, Amazon.com, Yahoo and Google (among others) will achieve the long-term success of an Intel or Genentech, few investors now question the premise that the Internet is a powerful force that is transforming how business around the globe is conducted.

These three examples are offered merely to add some historical perspective to the coming nanotechnology revolution, as well as to temper the enthusiasms of investors hoping to strike it rich through nanotechnology tomorrow. The important point is that all three industries have become profitable; and the prudent, patient investor has been rewarded.

This is not to imply that nanotechnology investors will have to wait 40, 20 or even 10 years to begin to reap profits from their investments in nanotechnology. This is because the shortening path to profitability for the semiconductor, biotech and Internet industries—from 40, 20 to 10 years—may appear to be just a coincidence, but it isn’t.

Ray Kurzweil in his book, The Age of the Spiritual Machine, provides a series of examples showing that the time between the development of a new technology and its widespread acceptance by society (defined as 25 percent of the population using the device) has been consistently shrinking. For instance, from the time the phone was first created by Alexander Graham Bell in 1876, it took thirty-five years before one-quarter of the homes in the United States had one. The television took only 25 years, the computer—16 years, the cell phone—12 years, and the Internet a mere seven years.

I mention these facts because nanotechnology is going to enable a host of new materials, medical devices, energy-related devices, and drugs. And many of these products are going to be on the market sooner rather than later—some before the end of this decade.

Yet human nature is to presume linearity. That is, most people assume progress will proceed in a prescribed, organized, and straightforward fashion. This line of thinking is best exposed with a short quiz. Consider a pond. If a lily in the pond doubles every day and it takes thirty days to completely cover the pond, on what day will the pond be one-quarter covered? On what day will it be half covered?

Many people instinctively respond that the pond will be one-quarter covered in one week and half covered on the Day 15. They are wrong. By the end of the third week—a full week after many people guess the pond will be half covered—lilies only cover 1/512th of the pond. In fact, the area covered is so small (.002 percent) as to be indiscernible. It is only on Day 28 that the pond becomes one-quarter covered. It is half covered the next day and, because it is doubling every day, it is, of course, fully covered the following day.

Why do I tell this story? It is because many people demonstrate the same tendency with respect to the emergence of new technologies—like nanotechnology—which are growing almost exponentially. That is, they overestimate the potential for the technology in the short run (i.e., they think nanotechnology will achieve market dominance much sooner than it actually will). And when that doesn’t happen, they tend to become disappointed and discouraged.

Ironically, it is precisely this disillusionment that gives rise to the second fallacy; that is, they underestimate the long-term potential of the new technology. Often, by the time they do recover their faith in a given field and seek to capitalize on its explosive growth—say on Day 28 of the earlier example—it is too late.

Therefore, I encourage investors to think of the emerging field of nanotechnology as being around “Day 15” in the year 2006—that is, it is barely discernable. It is, however, coming. In fact, the first nanoscale computer memory device is slated to hit the streets this year. In 2007, the Food and Drug Administration is expected to have approved the first medical device incorporating nanotechnology, and by 2008, nanotechnology-enabled solar cells (as thin as wallpaper) will be rolling off presses in California and Japan. As a result, the computer, medical device and energy industries are likely to undergo significant change.

The underlying science of nanotechnology is real and it is rapidly growing—as is the number of products it is enabling and creating. And while many of them won’t be here tomorrow, they are on the horizon. In order to reap the maximum benefits of nanotechnology over the long haul, the prudent investor is strongly encouraged to begin learning about the field today. In fact, for the patient investor, it is not too soon to begin considering some early investments.

Jack Uldrich is the president of The NanoVeritas Group and a world renowned speaker on the topic of nanotechnology. He is the author of The Next Big Thing is Really Small: How Nanotechnology Will Change the Future of Your Business. His most recent book is Investing in Nanotechnology: Think Small, Win Big and will be released in March 2006. It profiles over 100 of the most important and promising nanotechnology companies in the world. He can be reached at jack@nanoveritas.com.