Welcome to the maiden issue of Real Nanotech Investor. Before we get started with the “what,” it’s important to understand the “why” and “how.”

I’ll start with the easy one first: Why invest in nanotech?

As my partner, world-renowned nanotech scientist and consultant Tim Harper likes to say, nanotech is to the 21st century what chemistry was to the 20th century. You have to see nanotech as more than carbon nanotubes or tiny gold spheres housing cancer drugs.

It’s the ability to manipulate and create materials at the atomic level. It’s the fact that we’ve reached a point in our technological development where we can do things on a regular basis that were impossible to contemplate a decade ago. The stuff of science fiction is becoming plausible and–what’s more–real.

For investors, that can be a double-edged sword. All that opportunity in fabulous whiz-bang technologies is too tempting to pass up. Every intrepid investor is looking for that ground-floor opportunity to get in on the next Microsoft or Intel.

However, there are always people out there ready and willing to fleece the greed-blinded, the overly optimistic and the poorly informed. Remember how the Internet revolution of the late 1990s played out?

People were buying optical networking companies that couldn’t download a software upgrade. Some dotcoms went public that had no Web presence, no business plan and no business.

I remember, in the heady days leading up to the fateful crash, when one of my generally more sober colleagues gushed that if a stock didn’t have a triple-digit price-to-earnings ratio, it wasn’t worth buying. And soon it will be déjà vu all over again.

The goal of RNI is to make sure that the optimism and hype surrounding nanotech and disruptive technology are presented to you so that you can understand why I like what I like and what you can expect in a world that has a lot of sheep and wolves gathering.

That’s why I found it crucial to hook up with my esteemed colleague Tim Harper so that science—and at its most fundamental level, rationality–had a place at the table before we started pouring our hard-earned money into this sector.

Getting back to Tim’s chemistry-nanotech analogy, the fact is that nanotech is less an investment sector than it is a technology that pervades numerous sectors.

Nanotech is certainly a disruptive technology or distech (in the simplest terms, distech is a technology that, when introduced, radically transforms markets, creates wholly new markets or destroys existing markets for other technologies). But like its cousins–WiFi, spintronics and fuel cells, to name a few—it’s interrelated with other distechs and spans numerous sectors. Distech is also part of my beat, so you’ll also get the scoop on cutting-edge matters beyond nanotech.

Nanotech has applications in everything from cosmetics to laminates to medicines, computing, energy production, food and textiles. Its breadth makes it at once inextricably attractive and simultaneously treacherous because this technology powers new opportunities in almost every field, just as chemistry pervaded all aspects of the marketplace a century ago. This heady combo has already captured the notice of hopeful investors, techies and poseurs.

Getting into all the numbers, the projections for various markets, etc., shed more heat than light on the real reason to get involved here. If you want starry-eyed projections, read my competitors.

With RNI, you’re going to get news and analysis about what’s happening and how I think it’s best to take advantage of that reality.

The “What”

I follow four precepts in screening companies. They are as follows:

• It’s What You Do With Size That Matters There’s an old Texas saying: It’s not the size of the dog in the fight, it’s the size of the fight in the dog. Big companies have numerous advantages—patents, research and development (R&D) money, big clients, deep pockets. But also bear in mind, it’s puny humans that run the Earth, not blue whales, elephants or polar bears. Size has a point of diminishing returns. Intellect and agility are always prized attributes in the race to the top of the food chain. If a big company isn’t constantly looking for new ways to do things or spends more money lobbying politicians to keep the status quo than it does on scientists to push the envelope, the company’s best days are behind it.


• Show Me The Money The hip lingo in the nanotech realm is the valley of death. It means you have a eureka moment in the laboratory and then have to cross the valley to commercialization. In the old days, it was called “Lab to Fab”—fab meaning fabrication. For the little guy, it’s what it’s all about. When the grant money dries up and the venture capital is spent, if there’s no compelling, viable product, the company quickly becomes a carcass in the valley. A big firm has to be looking for a way to make the economies of scale work. Ideas being tweaked in R&D year after year without management committed to rolling out a product are worse than worthless. The most apocryphal example was when IBM patted Bill Gates on the head when he presented them with his operating system. Compare a price graph of Microsoft to IBM since 1987.


• Friends In High Places Being well-connected can be an enormous benefit if you’re big or little. The national defense industry is always looking for the Next Big Thing and usually has the money to throw at anything reasonably attractive. And since most government bureaucracies function on the premise of “use it or lose it” regarding their budgets, they’re the blood source for many high-tech projects. It’s a helpful toe in the door for small firms, but it’s not the sine qua non. It keeps a small firm alive, yet it’s still a Hobbesian world. Once big firms are in with the government, they have a meal ticket for life. That’s why it’s always encouraging to see little guys working with the big guns for a piece of the subcontractor crumbs. It’s the best way to make it big or get bought out.


• Wake Up, Sleepy Dreamer For investors, it means you can’t just buy a great idea. For companies, it means you have to pick a spot and do battle—with a plan. Cool ideas with 50 different applications mean a company is looking for handouts for a buyout of the idea, not any specific product. More than a few nanotech firms have tried to develop products and realized how hard and bitter it was to get to the business pinnacle on the other side of the valley of death. “We now plan on licensing our intellectual property”—it’s becoming a fairly common phrase for dying start-ups. Good luck with that. Until a company has the guts to develop a clear strategy on how it plans to exploit a market, its investment value is limited at best. And buying into these companies is like going to the track and betting on a horse because you like its name.

The “How”

Given the pervasive nature of nanotech, it’s fair to say that there’s little more than a footpath between laboratories and the investment community.

You go to investment conferences and you see maybe one or two people talking about nanotech or distech. You go to a nanotech conference and there are scientists talking shop to other scientists.

Investors end up plunking down risk capital on companies or funds that their broker or golf buddy told them about, with no real strategy. And the nanotech community hasn’t yet figured out how to talk about its scientific achievements in a way investors without material science degrees can understand.

In RNI, I’m going to attempt to widen that narrow path. And my investing philosophy is simple: Buy big and buy small.

Most nanotech insiders who have a good understanding of both sides of the valley of death say that most small nanotech firms will never make the commercial side of the valley. They’ll either die or be eaten.

However, the latter option isn’t necessarily that bad. A small company that can build and sell a unique and valuable product will likely be subsumed into a large company at a premium. And a few will cross the valley and thrive on their own.

The great challenge is sorting between the quick and the dead (or soon to be dead). I have a collection of small companies—the Pioneers in my Top Stock Talk table–that pass my four precepts (see above). It doesn’t mean they’re guaranteed to make it across the valley, but they have a good chance.

Also bear in mind that this isn’t a trading service. Some of these small companies get sucked into momentum traders’ programs and get tossed around like rowboats in a gale. You’re betting on companies that are trying to make their mark in a crowded, unsentimental world. It takes time.

While we wait for these little fellas to get their feet under them, there are a handful of big companies that understand the nano revolution and are making great strides in getting to the market with advanced materials and products.

These companies are just as crucial to nanotech and distech investors because they’re the likely acquirers of small firms with good ideas and the developers of products and applications for new materials. They make up the Big Dogs in my Top Stock Talk table.

The name of the latter Portfolio collection is intended to be more a metaphor—i.e., you can run with the big dogs or stay on the porch—than a literal description. These huge firms have proven to be committed to developing advanced technologies and business plans even before it looked cool to analysts and investors.

They also balance the volatility of the Pioneers with stability. Again, my goal isn’t to make investing into a game; this is serious business. To make money, you can’t expect high-risk stocks to anchor your exposure in this sector.

My Top Stock Talk section has the lowdown on my picks at this point.

Thank you for giving RNI a shot.