Nanotech Baby Breakers on the Horizon?

According to a new report just released by Small Times, a leading source of information about the nanotechnology industry, venture capital funding in nanotech start-ups surged by 121% in 2005 to $434 million.

Compared with the nearly $10 billion that governments and major corporations will pour in to the field this year, that figure represents a mere drop in the bucket. But it's a bullish sign nonetheless, because a large portion of the money was funneled into late-stage investments. That's a strong indication of increasing confidence from venture capitalists that their nanotech investments will be able to achieve a successful exit in the near future, whether in the form of an IPO or an acquisition.

The Small Times report speculates that the most likely candidates for an IPO this year are Nano-Tex and Aspen Aerogels. The former is the developer of nanostructures that give fabrics the ability to resist stains. For better or worse, Nano-Tex's stain-resistant pants have become both a poster child and a whipping post. For nanotech promoters, they show one of many facets of the field's promise, while detractors argue that stain-resistant pants are hardly the stuff of which high-tech revolutions are born.

What's not being brushed aside is that more than 100 apparel brands are now using Nano-Tex's technology. And some of the names are well known: Eddie Bauer, Lee Jeans, Perry Ellis, Tommy Hilfiger (NYSE: TOM  ) . The company's technology was even cited as a big part of the reason why investor Wilbur Ross purchased textile company Burlington Industries. (Before its bankruptcy, Burlington owned a controlling interest in Nano-Tex).

Aspen Aerogels also has a bevy of customers and, like Nano-Tex, is believed to be profitable. Its super-lightweight and highly thermal technology has a host of exciting applications in the aerospace, home-construction, and apparel industries. Aspen's "Toasty Feet" insoles, in fact, could prove to be a serious competitor to 3M's (NYSE: MMM  ) Thinsulate.

Other private nanotech start-ups that got late-round VC funding in 2005 include Nantero, Nanosys, and Molecular Imprints. If they go public in 2006, they might also make attractive investments, since they're already engaged in active partnerships with major corporations. Nantero has been testing its technology with LSI Logic (NYSE: LSI  ) , Molecular Imprints has sold its technology to Hewlett-Packard (NYSE: HPQ  ) and Motorola (NYSE: MOT  ) , and Nanosys has signed agreements with Sharp and Intel (Nasdaq: INTC  ) .

Nanomix, NanoOpto, and Starfire Systems were also graced with some late-round funding, and even if there's not an IPO for anybody in this group, investors can already buy a stake in them. How? Publicly traded venture capital firm Harris & Harris (Nasdaq: TINY  ) , a Motley Fool Rule Breakers recommendation, holds an equity stake in each. (It also owns a position in Nantero).

Keep in mind, of course, that none of these late-stage investments is proof that nanotech is poised for a breakthrough. However, the fact that many of these nanotech companies are now making real products (and, in some cases, real profits) and are partnering with major corporations is definitely a positive sign. It also tells me that the investors can expect at least a few nanotech Baby Breaker announcements before the year is over.

Care to read more Foolishness about nanotechnology?

3M is aMotley Fool Inside Valuerecommendation, and Harris & Harris is aMotley Fool Rule Breakerspick. Whatever your investing style, the Fool has a newsletter for you. Check out our newsletter family, and take your favorite for a free, 30-day spin.

Fool contributor Jack Uldrich has been thinking small since grade school. He is the author of two books on nanotechnology, including the forthcoming Investing in Nanotechnology: Think Small, Win Big. He owns share of Intel. The Fool has an ironclad disclosure policy.


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