Advanced Materials: The Next Wave
of Innovation
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About John ChenAreas of Interest:John is interested in investing in Advanced Materials, Nano-technology and Clean Tech companies Current Investments and Boards Include: |
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EmailA look at Battery’s investment thesis for Advanced Materials, featuring interviews with the CEOs of two of our portfolio companies, Lion Cells and Nanoconduction.
At Battery Ventures, we’re constantly looking for greenfield opportunities where disruptive new technologies can form the foundation for sustainable, market-defining companies that achieve extraordinary returns. One area in which we see a new wave of technological innovation taking place is in Advanced Materials, which encompasses the field of Nanotechnology. We define Advanced Materials as “a new generation of engineered materials that leverage novel compositions, structures and properties to enable substantially improved performance over existing solutions.” The term captures a very diverse set of technologies including: quantum dots, carbon nanotubes, aerogels, photonic crystals and thin films.
Innovations in Advanced Materials are transforming numerous industries by enabling altogether new products, delivering disruptive performance for mature products, and substantially driving down manufacturing costs. These innovations will affect industries as diverse as computing, telecommunications, energy, electronics, chemicals, life sciences, and transportation. The impact of Advanced Materials on the overall economy is expected to be significant. Look at nanotechnology alone — only a small slice of the overall Advanced Materials market — which the National Science Foundation forecasts will be $1 trillion worth of nanotechnology-enabled products by 2015.
A number of key drivers are converging to make the time right for venture investing. Mature industries are facing stagnating growth due to lack of innovation, a reliance on conventional materials, and ever increasing price competition from abroad. Companies are finally realizing that innovation in materials provides a sustainable competitive advantage, drives growth and improves margins. Equally important, governments, universities and corporations have been investing heavily in research for more than a decade, and many of these technologies are now ready for commercialization. In 2006, worldwide investment in nantechnology research alone was $12.4B (source: Lux Research).
The large potential impact of Advanced Materials on industry is reflected in the growing interest by investors in this sector. Since 1999, roughly $2 billion has been invested by venture capital firms in this area (source: Lux Research, Clean Tech Venture Network). According to a recent study by Deloitte, Advanced Materials is expected to be one of the areas US venture capital firms plan to increase their investment in over the next 5 years.
At Battery, we view Advanced Materials as an enabling platform of technologies for driving disruptive innovation across many industrial sectors. In particular, we see exciting market-driven or product-focused opportunities in information technology and clean technology where distruptive technologies can create a strong barrier to entry or competitive advantage while giving end customers a compelling value proposition. Specifically, we are interested in the following areas:
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Over
the past few years, we have made a number of investments in Advanced Materials.
To get a first-hand perspective on building a business in this space, we
interviewed the CEOs of two of our portfolio companies: Jeff Depew
of Lion Cells (left), and Vinod Mahendroo of Nanoconduction (right).
Jeff, Vinod, let’s start with a few general industry questions for both of you: Do you think innovation in Advanced Materials is important to the global economy and how significant a driver of new technology companies will it be?
Vinod Mahendroo, CEO of Nanoconduction: Advanced Materials offer tremendous advantages in solving problems that conventional materials either cannot solve, or that are solved with significant cost/performance trade-offs. Innovation in this area will continue to be a critical driver of the global economy, with significant opportunities available to large global companies as well as to new technology companies.
Jeff Depew, CEO of Lion Cells: Advanced materials will be a dominant driver moving forward and will be key to solving global energy supply issues, water availability, consumer electronics, chip performance improvements, opto-electronics and more. I see advanced materials companies becoming a selective sub-set of the larger venture-backed community, with longer timelines but higher potential upside.
What industries or applications will be impacted the most by Advanced Materials?
Depew: I think that key industries will include Energy, Water, Consumer Electronics, Integrated Chips, Opto-electronics and Bio-technology.
Mahendroo: The ideal Advanced Materials application is characterized by (a) a chronic, long-term, strategic “pain point” experienced by all customers across an industry or multiple industries (b) a “laws of physics” or “properties of materials” problem, i.e. a situation where continuing to wring 5 to 10 % annual improvements from current solutions merely delays the inevitable and (c) applications where the cost of mitigating the pain is very large and prevalent, even to the point where it may be accepted and therefore “transparent” to all but the industry experts.
To have a meaningful impact, materials innovation must be matched with product applications that provide compelling enabling capability and cost/performance benefits that are easy for the target industries to assimilate.
In addition to the areas Jeff points out above such as Energy Storage and Clean Energy, a few examples include: Thermal Management (disassembling a game console is an easy way to see how much thermal management is necessary and taken for granted by consumers) and Solid State Lighting.
What unique challenges do you think entrepreneurs face when building Advanced Materials companies?
Depew: I see four key challenges in terms of the venture-financing aspect of an advanced materials company:
- Longer time frames than much of the VC community is used to versus software or Internet ventures.
- Significantly higher capital infrastructure spending than many VCs are comfortable with. Materials companies are more reminiscent of early chip companies.
- Fewer existing benchmark companies and less expertise within the VC community to assess deal risk.
- A small pool of materials engineers/scientists in the Bay Area. Importing multi-disciplinary, non-software talent to our area has economic challenges tied specifically to housing.
As a counterpoint to these challenges, the entrepreneur/VC combination is the perfect incubator and agent of commercialization. With big companies reducing the size of their R&D budgets, entrepreneurial networks from University labs and start-ups in combination with the venture eco-system are well-positioned to scout opportunities and commercialize operations.
Mahendroo: The challenges and risks for Advanced Materials-based companies are very different than for traditional fabless semiconductor or software companies. We have a dual development challenge: first developing the base materials technology as a platform for innovative products, and then applying this technology to form a product (or products) that meets market requirements. Since mitigation of risk and time to money are universal imperatives of all start ups, Advanced Materials start ups face the challenge of successfully managing this dual development challenge at the correct pace.
These challenges, however, provide us with a significant competitive advantage. And, the breadth of markets addressed also often means a larger market opportunity. The combination of a compelling, difficult to achieve but highly leverage-able advanced materials technology, and large markets with a significant, strategic pain point that can only be addressed by such developments can create a very attractive ROI thesis. Large returns often accrue from doing things that are difficult, well.
Advanced Materials technologies are often enabling platforms for many applications. How do you balance the desire to capture value across the multitude of opportunities enabled by the technology with the need to focus and build a successful company?
Mahendroo: The first requirement is to focus on one significant opportunity and to monetize it. While it’s tempting to address multiple markets and applications, converting the basic advanced materials technology into products for each market involves significant marketing, applications and technology development talent that is often specific. As an example, we are creating thermal solutions for electronics and could use the same advanced materials for cooling LEDs. However, we need to find LED-specific marketing and applications expertise and engage with unique customers to create products that leverage our unique technology for cooling LEDs. Once the product is envisioned, we might also find that additional technology, fabrication and marketing expertise is required to deliver cost-effective CNT-based thermal solutions for the LED market.
So for a start-up, focus is absolutely critical to ensure that the company does not create a “75% solution” for multiple markets. At the same time, it is important to ensure that the company has access to the financial return that accrues from the broad marketplaces that its platform technology can address. One way to achieve this is to have a clear strategic intent addressing specific broad markets that guides many specific strategic and tactical decisions in areas including Intellectual Property filings and strategy, strategic alliances, licensing, and developing core skills.
Depew: Success, in my experience, is about establishing a foothold where you are solving a legitimate market need. The next critical item is a development path that balances market opportunity with creating a sustainable, cash flow positive platform. With material platforms, you must prioritize resources across high-potential opportunities that are addressing real pain points. This helps to mitigate the market and operational risk as well as the investment risk across the required infrastructure investment. And lastly, you must clearly understand the underlying objectives and developmental path in order to avoid unnecessary cash burn.
Let’s drill down a little bit now on Nanoconduction: Vinod, what Advanced Material innovation is Nanoconduction’s business founded on?
Mahendroo: Nanoconduction uses the innovative properties of Carbon Nanotubes (CNTs) to conduct heat away from various kinds of devices, such as integrated circuits, LEDs or photovoltaics. CNTs are nano-structures with graphitic sheets of carbon rolled up in tubular form, nesting within each other. Since pure graphite has approximately 8X the conductivity of copper, correctly designed and fabricated CNTs have excellent thermal conductivity. We are initially focusing on electronics applications with integrated circuits that require better and more cost effective cooling.
How is your technology disruptive to existing solutions?
Mahendroo: Existing solutions for cooling integrated circuit chips have reached the “end of the road” of thermal performance. One set of commercially used solutions are Thermal Greases or Phase Change Materials (PCM). These are largely organic compounds that improve thermal conductivity by allowing >70% surface contact between the IC chip and a copper “heat exchanger” to which the heat needs to be spread to. Over the last 5 years, grease and PCM manufacturers have improved performance by introducing thermally conductive particles in the organic grease matrix, and by controlling the size and distribution of these particles. These improvements are asymptotically approaching the point where no additional performance gains are realized. Nanoconduction’s proprietary CNT products are simple to manufacture, easier to use, and our first generation products today provide significantly better performance with the promise of long-term cost reductions as well.
Where do you see Nanoconduction in the short term and long term?
Mahendroo: In the short term, Nanoconduction will move beyond intimate customer evaluations of our products into generating revenue. This will be followed by a production ramp and generating model profitability. In the long term, we have the opportunity to move into adjacent markets and build a very significant, highly profitable and valuable enterprise.
When building an Advanced Materials company, what do you look for in an investor and what has your experience with Battery Ventures been like?
Mahendroo: The partnership between company and investor can be a critical determinant of success. The desired relationship has a shared vision, including an understanding of the success horizon and ROI, and is one where the investor provides access to people, expertise and ideas, in addition to capital and strategic guidance. We’ve had an excellent experience with Battery. From the outset, you’ve had a keen appreciation of the market space we’re addressing, and also provided significant strategic advice and perspective. You have also demonstrated a significant understanding of advanced material technologies and have introduced us to key technologists and thereby shortened our product development cycles.
Let’s hear about Lion Cells: Jeff, what advanced material innovation is Lion Cell’s business founded on?
Depew: Lion Cells is changing the morphology (or nature) of the active materials within a battery electro-chemical system. This enables significant performance advantages across the primary market drivers: power delivery, energy density, cycle life, charge times and safety.
How are Lion Cell’s technology and products disruptive to existing solutions?
Depew: Lion Cells changes the traditional industry trade-off between power and energy density (run time). Historically, you could have either/or, but not both. We deliver both, effectively establishing a new performance boundary and transforming markets/applications for battery-powered or enhanced products. This enables new applications such as cordless circular saws that have the same performance as corded saws, so carpenters do not have to drag cords across construction. Homeowners in the suburbs will not have to wake up to the howl of lawnmowers and leaf blowers powered by high polluting 4/2 cycle engines. Lion Cells will enable plug-in hybrid or electric vehicles that are both environmentally and economically sound purchase decisions.
Where do you see Lion Cells in the short term and long term?
Depew: Lion Cells’ vision is to enable “independence” and contribute to a cleaner environment across markets and product applications. In the near term, independence is cutting the cord for power tools, enabling corded performance for cordless tools. In the longer term, we believe we have a contribution to make to energy security and reducing our dependence on foreign oil. Battery-powered electric motors are both more efficient and less polluting in their use of fuels. A 10% reduction in the United States’ use of oil for transportation has the potential to radically transform global energy markets, and hybrids are an effective means to that goal. We believe the adoption of our cells across these markets will be well-received and well-rewarded.
When building an Advanced Materials company, what do you look for in an investor and what has your experience with Battery Ventures been like?
Depew: We are looking for investors who are smart, willing to roll up their sleeves to build the company, and low in the “psychic space” requirement. That means true business partners who are working with us to maximize our success for customers, channel partners and suppliers, and to maximize the value of the company for employees and investors. We could not have asked for a better investor team from Battery Ventures than you and Ken.
- To discuss Advanced Materials business ideas or these featured companies, contact John Chen or view our Advanced Materials portfolio.
- To learn more about Nanoconduction, email Vinod Mahendroo.
- To learn more about Lion Cells, email Jeff Depew.
© 2007 Battery Ventures. All rights reserved.