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Nanotechnology: Where Does the U.S. Stand?

  Subcommittee on Research
U.S. House Committee on Science
Hearing on Nanotechnology
June 29, 2005

Nanotechnology & Entrepreneurship:

In its second hearing in as many months on nanotechnology, the Subcommittee on Research was told by a top Presidential advisor and a panel of industry leaders that the U.S. is facing increasing competition in nanotechnology from foreign competitors.

The witnesses, who included Mr. Floyd Kvamme, the Co-Chair of the President's Council of Advisors on Science and Technology (PCAST), offered broad recommendations to improve the National Nanotechnology Initiative (NNI) and secure the U.S. position as the preeminent leader in nanotechnology. Among their recommendations, the witnesses urged a greater investment in math and science education and training to develop a nanotechnology workforce, more research on nanotechnology environmental, health and safety issues, and a strengthening of the federal investment in goal-oriented and fundamental research in nanotechnology.

Recognizing the potential of advancing innovation from the field, the federal government began its National Nanotechnology Initiative (NNI) in 2000 as a way to use public resources to encourage research and development in nanotechnology. The purpose of the June 29 hearing before the House subcommittee was to evaluate and assess the initial performance of NNI and to, more broadly, take note of the entrepreneurial climate of the nanotechnology sector in the United States.

For those most familiar with the sector, nanotechnology represents the future of entrepreneurial activity. The quickly emerging field, which looks at particles on a sub-microscopic scale, promises to revolutionize the nature of commerce by leveraging and manipulating the unique properties that characterize matter on a nano level - small groupings of atoms that may possess unique qualities absent at either the single-molecule or the macro scales.

The top experts in the field agreed that nanotechnology holds the promise of fundamentally changing the nature of the global economy and of entrepreneurial activity. Because of its almost universal application in all sectors of the economy, most believe new nano-materials and techniques will prove to be as groundbreaking and transformational as the semiconductor and the assembly line.

"Nanotechnology research holds tremendous potential for stimulating innovation," Motorola Vice President of Intellectual Property Incubation and Commercialization Jim O'Connor told House members.

O'Connor's view was echoed repeatedly by others during the hearing.

"Nanotechnology is likely to be the engine of innovation for the next fifty years, and we must be at the forefront of this innovation," said Sean Murdock, executive director of the NanoBusiness Alliance, an industry group that lobbies on behalf of the industry.

In particular, witnesses testified that nanotechnology will likely form the foci of innovation in the sectors that will promise to serve as hubs of entrepreneurial activity in the early part of this century. For example, new nanoparticles promise to transform energy usage and generation, providing building blocks for materials much more energy-efficient than those currently in use. In addition, the field is currently working on new techniques with broad application in environmental protection, pharmacology, national defense and computing.

In 2004, nanotech innovators saw more than $8.5 billion in capital support - a more than 10 percent increase from the year before - coming from governments, corporations and venture capitalists. By the most common measures like government and corporate research and development spending, patent activity and scientific publication, U.S. entrepreneurs and scientists led the way; however, the American lead appears tenuous due to heavy focus and growing spending on nanotechnology in other regioms, particularly China, Japan and the European Union.

The most conservative estimate, prepared by the National Science Foundation, calculated that nanotechnology will result in a trillion dollar global economic impact by 2015, meaning that it will represent a significant part, if not the core, of entrepreneurial and innovative activity over the next several decades. Perhaps the most rigorous study to date, prepared by Lux Research, estimated an impact of $2.6 trillion in global economic output from nanotech by 2015.

Challenges to Commercialization:

Unfortunately, though it holds the potential to fundamentally change the nature and scale of technology, nanotechnology presents unique challenges to new innovators entering the field. Because of its low internal-rate-of-return and relatively high risk, nanotechnology has failed to receive a warm embrace from institutional venture capital. Venture funding for nantechnology start-ups declined by almost half between 2002 ($385 million) and 2004 ($200 million), representing just 2 percent of research and development funding in the field, according to Lux Research. Between 1998 and 2004, all of global nanotech venture funding totaled $1.1 billion, compared to $3.6 in corporate funding in 2004 alone and $4.8 billion in government funding that same year. In addition, the investment to date has been highly concentrated in a few mature nanotech companies, further complicating efforts for new entries into the sector.

Corporations, too, have been unhelpful in providing the funds to support new innovation and entrepreneurship in the sector. Most have scaled back their initial-stage research development activity as a result of stockholder pressure for short-term profitability and lower costs, according to Murdock. Instead, companies have adapted a strategy to "innovate through acquisition," relying, first, on start-ups to develop and commercialize innovations, and then purchasing controlling stakes in the successful firms.

For entrepreneurs, this is a bittersweet environment. On one hand, the current investment and venture environment and the nature of nanotechnology investment has created a "valley of death" - a highly fragile period between a company's formation and the time it can achieve significant cashflow. Over the last five years, this has meant stagnation in the formation of new nanotech start-ups in the U.S., totaling 42 in 2000 but just 29 in 2003. However, this also means that, perhaps more than ever, small start-ups led by independent entrepreneurs will provide the product pipeline for large corporations and hold the key to continuing the prosperity of current enterprises.

Role of Government and Public-Private Partnerships:

Due to the uniquely acute "valley of death" in the sector and the capital-intense barriers to entry, the witnesses testifying before the committee agreed that the government and other public institutions should play a perhaps unusually large role in encouraging the development of nanotechnology.

In particular, the experts urged elected leaders to create stronger incentives for the private sector to invest in the commercialization process by establishing a permanent research and development tax credit and new vehicles like R&D Limited Partnerships, which have played a dominant role in the growth of biotech capital formation. They also urged government investment in infrastructure and facilities that can be used by start-ups through public-private partnerships, reducing the costs of entry for new entrepreneurs. Finally, if the risk proves too-large a deterrent for private venture capital, the panel agreed that the government should take a preeminent role in providing direct funding for continued research and innovation.

In addition, the witnesses suggested that universities and other public institutions should play a dominant role in closing the "manufacturability gaps" that result from the technological barriers posed by the needs of the small-scale nature of the new technology likely to emerge from the field. They said that such institutions can provide new scientific knowledge and discovery while private entities can operationalize the conceptual ideas into practical commercial activities a process that has showed inadequate growth in recent years. According to Floyd Kvamme, the co-chair of the President's Council of Advisors on Science and Technology (PCAST), NNI should expand its work and efforts in increasing the efficacy and efficiency of technology transfers in the sector.

Though the PCAST reported a generally favorable regulatory environment for entrepreneurial activity in nanotechnology, Lux Research Vice President of Research Matthew M. Nordan urged lawmakers to eliminate uncertainty in environmental, health and safety regulations. Because little research has evaluated the toxicity and hazards posed by nanoparticles, regulatory agency have been understandably reluctant to adopt permanent guidelines and regimes, he testified. However, the ambiguity has slowed commercialization in the field, he said, because "firms do not want to play a game whose rules may change at any time."

More broadly, Kvamme said continued rigorous enforcement of intellectual property protections was key to creating incentives for private investment in the risky field. The protections, when combined with reductions in corporate taxes, are key to creating a comparative advantage for the United States as the home for new innovation.

A Remaining Challenge:

Kvamme and Nordan agreed that education poses the biggest threat to entrepreneurial adoption of nanotechnology. According to Motorola's O'Connor, "we have found that everyday we go into the marketplace searching for highly skilled workers, demand far outpaces supply, and this challenge seems to get worse as each month passes." Asian nations, in particular China, have far outpaced America in graduating new scientists and engineers, the panelists said.

In the short term, Kvamme said Congress should move to relax astringent visa regulations to help the U.S. retain highly skilled foreign professionals. In the long term, he urged new efforts to increase domestic education and interest in science and math fields.

For Additional Information:

Hearing charter

Webcast of hearing 

Chairman's opening statement 

Testimony of Floyd Kvamme, President's Council of Advisors on Science and Technology

Testimony of Jim O'Connor, Motorola 

Testimony of Sean Murdock, NanoBusiness Alliance

Testimony of Mathew M. Nordan, Lux Research 

PCAST report on NNI implementation

POLICY AREAS

E-Commerce

Entrepreneurship Education

Financing

Intellectual Property

Minorities

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Tax System

Technology Transfer

Women

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