Nanovation Goes Bust

The fate of Nanovation Technologies Inc. was sealed yesterday (November 13) when its case was reviewed by the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division.

The integrated optics startup hadn’t been able to organize a rescue plan by the deadline set by the court, so the company will now be wound up under Chapter 7 of the U.S. Bankruptcy Code.

Nanovation’s remaining 52 employees were laid off yesterday, with the exception of a small transition team to handle the liquidation of the company’s assets in the coming weeks. This will include selling Nanovation’s state-of-the-art 108,000-square-foot planar integrated circuit fabrication facility in Michigan, according to CEO Bob Chaney.

Chaney says that plenty of companies expressed an interest in recapitalizing or acquiring Nanovation -- the options the bankruptcy court had given him 100 days to investigate (see Nanovation Up For Sale). But none of them had come forward with a firm offer in time.

In some ways, Nanovation is an extreme example of what many optical component startups have gone through in the past couple of years.

The company began life as U.S. Integrated Optics and was renamed Nanovation in November 1998. This marked its "transition from a research-oriented enterprise into a leading edge technology driven company dedicated to the rapid development of commercial applications for its products,” according to the press release issued at the time.

The renaming also marked the beginning of a big campaign to hype Nanovation's achievements in making the optical equivalent of integrated circuits using indium phosphide technology. Robert Tatum, the company’s president and CEO at the time, spent large amounts of money preparing the company and potential investors for a blockbuster IPO (see Nanovation Prepares the Ground for an IPO). This included grandiose gestures such as giving Massachusetts Institute of Technology a $90 million grant for research in this area.

In the end, Nanovation wasn’t able to launch an IPO when it planned -- in the late Spring of 2000 (when there still was an IPO market) -- for a couple of reasons.

  • First, it ran into problems translating lab-scale developments into mass manufacturing processes. It’s worth noting here that Nanovation wasn’t a scam, even though it may have been over-hyped in its earlier days. “Some of its etching is world class,” says the CTO of a startup also working with III-V semiconductor materials such as indium phosphide, who requested anonymity. World-class etching translates into smaller feature sizes and better yields, he adds. Making arrayed waveguide gratings (AWGs) in indium phosphide, as Nanovation is reported to have done in its labs, is also no mean achievement, the CTO says.

  • Second, Nanovation couldn't launch an IPO until it sorted out legal complications concerning the way in which shareholders of Stamford International Inc. (Toronto OTC: STFD) would be treated. Stamford is a shell company whose only material asset is 8.8 million common shares in Nanovation. It provided a backdoor route for what Chaney characterizes as "Canadian penny-stock investors" to invest in Nanovation prior to its IPO.

    These problems came to a head in July 2000, when Tatum was kicked out and Chaney took over as Nanovation’s CEO (see Nanovation's CEO Gets The Heave-Ho). Chaney dumped the idea of going for an IPO and refocused the company on more achievable goals based on silica-on-silicon AWGs and MEMS (micro-electro-mechanical system) technology (see Nanovation Comes Down to Earth). He also brought in Motorola Inc. (NYSE: MOT) as a strategic investor. At the same time, he negotiated his way out of the $90 million research grant to MIT, limiting it to $3 million.

    Chaney blames Stamford International for Nanovation’s ultimate downfall. He says the company, which is Nanovation’s largest common shareholder, blocked approval of a $10 million bridge round (led by Motorola) during Nanovation’s efforts to raise Series C funding. As a result, Nanovation ran out of money, had to lay off two thirds of its staff, and eventually filed for bankruptcy protection (see Nanovation in Crisis and Nanovation Files for Chapter 11).

    It's possible that Stamford International hoped to grab control of Nanovation by blocking the Motorola-led funding round, but the ploy appears to have backfired badly. Stamford executives were traveling today, and couldn't be reached for comment.

    In a message to Light Reading last night, Chaney makes the following points “to set the record straight”:

  • First, says Chaney, Nanovation’s engineers persevered throughout this turbulence because they thought their technology was ahead of the field. On the silica-on-silicon side, “the team delivered a working prototype (before filing for Chapter 11) of a true Photonic IC that had a 1x2 switch, 1x2 splitter, and 3 monitoring taps all on a single substrate. I believe this was in fact industry-leading technology and, therefore, very valuable intellectual property."

    On the indium phosphide side, Chaney says Dr. Wei-Ping Huang’s work at Nanovation was “highly respected” by Motorola. Motorola recently claimed a breakthrough in chips by layering gallium arsenide on top of silicon (see Motorola Breakthrough Makes Waves ). Motorola was planning to “invest in us at a corporate R&D level to work with them to layer indium phospide on top of silicon."

    (As it happens, Motorola today announced that it had set up a wholly owned subsidiary, called Thoughtbeam Inc., to commercialize its semiconductor-on-silicon developments -- see Motorola Spins Off Wafers.)

  • The second point made by Chaney in his message to Light Reading is that Nanovation’s capital structure was “genetically defective." Rather than raise money via the normal venture capital route, it had got embroiled with Stamford International. It had also raised $28M from more than 400 angel investors in the 1998-1999 timeframe, “creating a very non-traditional capital structure that was unwieldy at best... ”When I took over in July 2000, my plan was to attempt ‘gene-splicing’ by bringing in the smart money VCs alongside Stamford's. While I believe our management and technology story was credible with the smart money VCs, unfortunately, the existing antibodies (Stamford) continued to rear their ugly heads and scare off these new, good genes...

    ”By the time the professional management arrived, the fate of the company had been sealed by the non-traditional capital structure of the company and the (previously reported) antics of former board members and officers...

    ”There was just too much baggage and too many broken parts that needed to be fixed, all within the timeframe of the entire optical market collapse...

    "However, I'm known for taking on tough assignments as I always enjoy a good challenge, and I have no regrets that we couldn't get this one fixed in time. I'm energized (and educated) to lead my next startup opportunity, but I'll be sure to personally perform more comprehensive due-diligence next time.” — Peter Heywood, Founding Editor, Light Reading
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    gea 12/4/2012 | 7:34:34 PM
    re: Nanovation Goes Bust Opto-something or other said...

    "and then spend tons of money on OFC booths"

    Sorry. As a long time OFC attendee I loved that Nanovation booth. Don't get me wrong, I thought it looked like a White Castle hamburger stand. And to really see what they had I think you had to sit though some stupid video.

    But for several years that booth had this awesome brunette gal that used to give me these smoldering looks. And the other gals at the booth were always decent looking, and normally reasonably intelligent. I'll miss that booth.
    hawkman 12/4/2012 | 7:34:34 PM
    re: Nanovation Goes Bust Who is going to be Sir Issac Newton at OFC this year? How bout those Booth Babes?! Come on, they dont have any products, but maybe the OSA will lend some empty OFC booth space to Nanovation just for laughs...because thats what we all did even when they supposedly were a company; laughed at them. Whaddya say, once more for old time sake?
    optolink 12/4/2012 | 7:34:34 PM
    re: Nanovation Goes Bust As a former employee of Nanovation, let me add a few comments on my take of what happened at Nanovation:

    First of all, the top management at Nanovation didn't have a clue about the optical networking industry. Some of them didn't even have a components background.

    Secondly, none of the top management were located where the troops were: Chaney was in Atlanta, Kenning in Chicago, Tatum in Miami and Bjorklund in San Francisco. This was a recipe for disaster. Perhaps IBM or Intel can pull off product development by remote control - but not a start up.

    Thirdly, Nanovation's Board was almost as bad as its top management. The Board lacked optical and start-up business experience.

    Finally, Nanovation's extravagance was something to behold - there was no concept of let's get a product out first and then spend tons of money on OFC booths, million dollar accounting systems, fab capacity, ISO certification etc. etc.

    So did Stanford play a part in Nanovation's downfall - yes, but the management of Nanovation has a lot to answer for when they spent $80M and did not have a product to show for it.

    Any one else from Nanovation agree ?

    Titanic Optics 12/4/2012 | 7:34:33 PM
    re: Nanovation Goes Bust I nominate the last post to be cited in the weekly Article Talk feature.

    Good post "gea"! (Don't remember the brunette...alas, I was so serious about the industry they could have been naked for all I cared.) At least in my last job I got a good severance package for all my hard work the last few years.
    optolink 12/4/2012 | 7:34:32 PM
    re: Nanovation Goes Bust What happens to the I.P. when a company like Nanovation goes under ? Do patents die if the owner or patent assignee no longer exists ?

    Is there anyone from Nanovation still around who would know ?

    Just wondering ?
    Peter Heywood 12/4/2012 | 7:34:30 PM
    re: Nanovation Goes Bust I think a lot of this changed when Tatum left and Chaney took over...didn't it?
    Peter Heywood 12/4/2012 | 7:34:30 PM
    re: Nanovation Goes Bust Bob Chaney is still at Nanovation, and as the article says, so are a small team of folk handling the liquidation process.
    davey59 12/4/2012 | 7:34:30 PM
    re: Nanovation Goes Bust If they were granted patents, that is with a USPO patent number, then they become part of the companys assets, to be sold as the receivers see fit. If they are in the middle of filing a patent, or if they have a filing date granted, they are still valuable IP but only to someone who sees value in going forward with the patent case, to fruition. Otherwise, they are just abandoned and never get a patent number granted.
    grendel 12/4/2012 | 7:34:29 PM
    re: Nanovation Goes Bust

    If you went anywhere near the nanovation booth & missed the babes, you aren't serious about the industry, you're blind! Your severence package is money, the nanovation babes were what life is all about!

    Titanic Optics 12/4/2012 | 7:34:28 PM
    re: Nanovation Goes Bust >>If you went anywhere near the nanovation booth & missed the babes, you aren't serious about the industry, you're blind!<<

    I may have seen them but they may not have registered, in the same sense that when I pass by the strip joints in the city I live in, I notice, but then quickly forget the woman standing out front. If you don't have anything to offer other than over-priced beers, you need a come-on, whether you are a liquor establishment or an optical components firm.

    Some things are simply part of the landscape...

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