September 18, 2006 –
There is a coming revolution in science that will produce many millionaires among the early investors in this industry. There is no doubt in my mind of this. And this industry is being ignored due to everyone’s preocupation with commodities right now.
This industry is nanotechnology. Nanotechnology is the engineering of functional systems at the molecular scale. It is believed that nanotechnology will raise standards of living globally more so than any event since the Industrial Revolution. Because my educational background was filled with courses about organic chemistry, molecular science, and genetics, I understand a lot of the scientific papers I read about nanotechnology. However, even if you don’t have a background rooted in science, it’s easy to see the potential of this industry.
Currently, nanotechnology is being explored for solutions to the world’s water crisis, to control infectious disease outbreaks, to provide advanced and cheap communication technology to the developing world, to provide cheap, efficient solar energy, to improve entertainment systems such as LCD screens and TVs, and to provide medical breakthroughs such as cures for cancer. Furthermore although this may seem counterintuitive, nanotechnology does not require skilled labor or complicated, expensive infrastructure.
One of the biggest problems in improving standards of living in impoverished areas is the lack of skilled labor required to manufacture and implement advanced technology. Nanotechnology actually simplifies this process, allowing unskilled labor to integrate nanotechnology to improve standards of living. In essence, nanotechnology allows the production of very high quality products at very low cost and even allows the production of other nanofactories at very cheap and efficient costs. For this reason, nanotechnologies have the potential to experience explosive, exponential growth in real everyday applications. The potential for nanotechnology to greatly improve global health, alleviate poverty, and to take information technology to a whole different level makes this industry one of the most exciting and explosive growth industries today.
However, the great difficulty that exists with industries that are in its infancy, as is the case with nanotechnology, is to sort out the winners from the losers. There are hundreds of small companies in this industry, most of which will go bankrupt, and many more that will be acquired by others as industry consolidation increases. The true players have yet to clearly separate themselves from the “wannabes”. We have been following nanotechnology companies since early 2004, but up until now, we have thought that this technology was just too far away from making a significant impact in peoples’ lives to merit a significant investment. Our opinions regarding this are slowly changing. We think as the end of 2006 nears that it may finally be time to invest in this industry. And how would we do it?
I still feel that significant consolidation needs to occur before any clear leaders will emerge and that trying to determine who will emerge from a pool of hundreds of companies, many of which are not even publicly traded yet, to assume this position is an extremely difficult task. That’s why currently, as of mid-2006, I feel that your safest way to invest in nanotechnologies are through two companies that invest in a multitude of nanotechnology companies, Arrowhead Research (Nasdaq: ARWR) and Harris & Harris (Nasdaq: TINY). As is the case in selecting mining companies that will be winners, people are extremely important when selecting nanotechnology stocks. Both of these companies are loaded with competent industry leaders.
Although many people still feel that real changes in lifestyle through nanotechnology will not be realized until 2025 or beyond, I believe that these estimates are more applicable to huge sweeping global changes that nanotechnology will create. As far as more immediate applications of nanotechnology, there is no doubt in my mind that some real applications will occur within the next decade. In fact, I remember reading about the use of nanotechnology in clothing materials by world-class slalom skiers during the 2004 Winter Olympics. As skiers hurtled down the slopes at frightening speeds and collided with slalom poles, nanotechnology in their high-performance ski outfits hardened upon impact with the poles, protecting their body, then softened again and became flexible seconds afterwards. As sensible applications of nanotechnology become increasingly available for commercial applications, significant profits within this industry will commence.
Arrowhead Research Corporation (NASDAQ: ARWR)
Nanotechnology industry focus: Anti-cancer drugs, RNAi therapeutics, Carbon-based electronics and Compound semiconductor materials.
Business model: Arrowhead provides funding to universities for nanotechnology R&D in exchange for rights to intellectual property. In effect, Arrowhead Research business model functions much as a pharmaceutical company. Using the pharmaceutical industry to provide an analogy, Arrowhead has many nanotechnologies in their pipeline and just needs a very small percentage of their projects to achieve success to reap monumental gains from their investment. Furthermore, Arrowhead does not 100% finance the R&D stage but funds the launch of companies, thus allowing them to benefit from revenue streams at a lower cost. In addition, Arrowhead leverages the pool of scientific talent by encouraging Arrowhead sponsored university scientists to share knowledge with one another regarding their projects under development.
Arrowhead also sponsors additional research in the below industries in exchange for rights to patents and intellectual property.
Nano Stem Cell Device: Professor Nick Melosh and other scientists at the Stanford Institute of Stem Cell Biology and Regenerative Medicine and the Lucile Packard Children’s Hospital are developing a device to control and test stem cell behavior.
Drug Discovery and Molecular Diagnostics: Professor C. Patrick Collier’s group at Caltech is developing new technologies that could make possible the study and control of biomolecular materials at the nanometer scale.
Interconnects for Semiconductor Chips: Professor J. Liu and his team at Duke University are developing a novel solution to replace copper interconnects with nanotube interconnects to help enable smaller chips.
Harris & Harris (NASDAQ: TINY)
Nanotechnology industry focus: Electrical lighting, Materials synthesis and assembly, Plant-made drugs and vaccines, Semiconductors, Quantum computing systems, Renewable energy, Cancer and cardiovascular disease, Drug delivery systems, Nanolithography, Electronic sensors,
Business model: Harris & Harris is a well-seasoned company, having made its first nanotechnology investment back in 1994 in company called Nanophase Technologies. In 2002, Harris & Harris successfully exited this investment through a successful IPO, and decided from that point on, to used the proceeds of this successful investment, to focus solely on nanotech, microsystems and microelectromechanical systems (MEMS) technology. Unlike Arrowhead, Harris & Harris is an early stage investor in their portfolio of companies.
This choice of business model makes investing in Harris & Harris higher risk than Arrowhead Research, but again, the risk is mitigated by a highly diverse portfolio of 25 companies compared to Arrowhead’s more concentrated portfolio of 3 major subsidiaries. But with higher risk comes the potential of much higher reward.
As the nanotechnology industry consolidates and the ability to predict and forecast winners becomes clearer, there may be a handful of other companies I like. But for now, given that volatility in this industry is likely to remain high at least until the end of 2007, we like the companies with diversified portfolios and numerous opportunities to produce winners as the safest way to invest in nanotech.
Lastly, I also am a big fan of TinyOS and ArchRock.
What does Arch Rock do?
Arch Rock, a company founded in mid 2005, develops products that enable wide adoption of wireless sensor networks. Wireless sensor networks are groupings of hundreds or thousands of tiny computers, many no larger than a quarter, that can monitor almost anything that is capable of being monitored with today’s technology, including light, motion, proximity, temperature, biometrics and chemical substances. The operating framework, a wireless mesh maintained with a low-power radio, is called Tiny OS. The applications of Tiny OS are enormous for commercial agricultural, retail, and consumer use as well as military use. For example, these networks can be used to monitor the movements of world-class athletes to enhance their performance.
Tiny OS is cutting-edge technology that is rapidly being adopted for multiple uses around the world.
Arch Rock, however, is a private company, so we’ve dug so deep down the rabbit hole with this industry that you can not even purchase Arch Rock’s stock yet. Our advice for now would be to keep an eye out for a potential Arch Rock IPO and to possibly participate in Arch Rock now through Intel (Nasdaq: INTC), though we must note that Intel has a tiny investment in Arch Rock, and that Arch Rock is being careful to keep their claims on their intellectual property. Therefore, our preference would be to be able to directly participate in Arch Rock through a future IPO.
Ah, J.S. you’re making it difficult for me today. It’s hard to relate nanotechnology to martial arts so I’ll discuss something that exists within all martial artists that people can not “see”. And that is chi. What is chi? In very basic terms, chi is your life’s energy force. To gain better health, most people focus 100% on diets, pills or traditional physical activity, but ignore to a fault, any exercises focused on building chi. Yet martial artists and tai chi practitioners are renowned for living healthy lifestyles well into their twilight years because of superior health. Furthermore, I have heard numerous stories of people that sought traditional Western medicine solutions for chronic pain never to meet with success until they commenced treatments with accupuncture (which regulates chi flow through the body).
Although we live in a society today obsessed with needing scientific proof to believe something, just because you can’t see something, doesn’t mean that it is not powerful and that it does not exist.