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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
    http://www.lightreading.com
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    optolink 12/4/2012 | 7:34:24 PM
    re: Nanovation Goes Bust Peter,

    No one I know at Nanovation had any confidence in the Chaney/Kenning/Bjorklund management team.

    In addition, their inability to raise Series C funds or understand basic corporate law with respect voting rights of shareholders (aka Stamford International)- hence the loss of control of the company and ultimate bankruptcy speaks volumes for their leadership skills. At least Tatum kept Stamford International on his side during his tenure as CEO.

    Don't believe all you read in Chaney's press releases.



    Ramsey2 12/4/2012 | 7:34:20 PM
    re: Nanovation Goes Bust optolink,

    I am one of many small retail Stamford shareholders who really wanted deep in their heart for Nanovation to succeed.

    I think it is pretty obvious at this point that Chaney and Kenning were highly unqualified to run Nanovation...that is putting it kindly. It is a shame because there was potential in the technology, and I believe an experienced and sincere leader could have saved the company, in spite of certain damages caused by Tatum. Tatum's demise was over hyping and under delivering...it is my understanding he lost credibility on the Street.

    When Tatum was fired, we were repeatedly told by IR that a CEO search was underway, including multiple interviews with certain candidates. That is one version. The other version I heard after the bankruptcy emerged, is that Chaney and Kenning ascended to the throne by way of a power play to oust Tatum. A key question in my mind is: were there ever any serious CEO prospects from the outside or was Chaney a shoe in? If there were other choices, I will never understand why the Board went with sales people like Chaney and Kenning.

    Thanks

    SmokedWhitefish 12/4/2012 | 7:34:16 PM
    re: Nanovation Goes Bust I want to thank you Light Reading for its thoughtful covering of Nanovation. However, I feel you have let Bob Chaney, Nanovation's CEO, get away with presenting a rather self-serving version of the story.

    I especially want to take issue with his characterization of investors in Stamford International as "Canadian penny-stock traders." I have come to know many Stamford, as well as Nanovation private placement, investors through our only source of information, a discussion board on Raging Bull. Many of us are scientists, engineers, and other professionals, with strong technical backgrounds and advanced degrees from elite universities, who made the mistake of thinking there was a way of investing in what seemed to be a promising photonics company, with close ties to MIT and Northwestern, before Wall Street blew stock prices through the roof during an IPO, as had happened with other photonics start-ups (this was before the bear market). Nanovation and Stamford investors have been hurt by the shenanigans and incompetence of the directors of both companies. Chaney's is a classic example of "blaming the victim."

    Stamford may not be the most reputable source for venture capital, but there would not have been a Nanovation without its seed money and initial support. It was (former Nanovation CEO) Bob Tatum's P.T. Barnum act that brought in further dollars from private placement "angels." And, can we really say that Stamford is any different from the mainstream Wall Street investment bankers who fund dot.coms and other businesses with far less possibility of success than Nanovation, so they can profit from pumped-up IPOs?

    I suspect Chaney's attitude towards Stamford investors partly explains his unwillingness to deal with Stamford in a way that might have allowed Nanovation to obtain the new round of funding needed for its survival. Apparently, Nanovation management failed to understand that a majority vote of common shares, not just a majority of total shares (including preferred shares) was required to win approval of the new funding plan, so they ignored Stamford, which controlled just enough common shares to block the plan. Nanovation might have made comprises to get Stamford's vote, or in a pinch, it could have sought help from the Canadian court, which had restricted Stamford's board of directors from acting against the interests of Stamford's shareholders, because of prior actions of fiduciary irresponsibility.

    There are many lessons to be learned from the Nanovation debacle, not only for investors, but for inventors seeking capital. In this new era, where university scientists are allowed to market their research, I think universities have an obligation to provide help in obtaining funds from reputable sources, something that did not happen in this case.

    Inventors, investors, and the now unemployed Nanovation engineers and workers have all lost. I have no sympathy for the executives. I think I can speak for all of us who have suffered from mismanagement by Nanovation and Stamford alike: "a pox on both your houses."
    optolink 12/4/2012 | 7:34:12 PM
    re: Nanovation Goes Bust Now that Nanovation has ended. I think it is important to learn from the experience.

    One of the key lessons for me, that was less visible to people outside of the company, was that of the company's design and manufacturing location of Northville, Michigan.

    Choosing the Detroit metro area for a high tech optical network components company was a terrible mistake on many counts.

    1] It is very difficult to recruit key talent to this part of the country. The area itself does not have a good reputation, and people feel trapped if they join the only high tech company for miles. Bear witness that with the exception of one person, all the senior executives at Nanovation lived out of state.

    2] There is no silicon/high tech infrastructure in the area, compared to say Boston, Dallas or San Jose.

    3] The company was located as far as possible from potential customers on both coasts or the Dallas and Atlanta areas.

    If Nanovation had been located in the Dallas or Boston or San Jose area then many of the engineers and managers may have stuck around to form a new company with VC funding. But since we were in the middle of no-mans land in Detroit - everyone went there own way, mainly to the East or West coasts.

    So I guess the old realtors adage still holds true - location, location, location.
    Half-Inch Stud 12/4/2012 | 7:34:12 PM
    re: Nanovation Goes Bust So many of us have to endure others' Research without Application by keeping quiet until the cards lay down flush or bust. Come on folks, Guilt feelings and pity aside,...time for a big "told you so".

    Nanavation CEO Chaney, probably had all the business disciplines to make the right decisions: grab them horns and turn the head into the ground - to save whatever money there is. He faced-it: Either make a Business Plan that makes positive Net margins or get out. Otherwise, he had begrudgingly made PR notes to show market focus & hope...a plan. Poor Chaney.

    Technical persons within Nanavation must have had heated discussions long ago about "Being Commercially competitive". I would personally shake hands and buy a beer for every technical person that left before finishing their first year of employement! Otherwise, no pity for ignoring their internal monologue.

    H.I. Stud
    Ramsey2 12/4/2012 | 7:34:09 PM
    re: Nanovation Goes Bust But optolink, VC funding was not possible without Stamford's consent. Stamford BOD contolled about 8.8M votes and were able to enlist about another 1.3M votes against the Nano resolution to issue more shares. I don't think it mattered who supplied the VC bucks bro'. Prices are cheap and dilution required Stamford's consent. BOD and Chaney's biggest failing was not getting Stamford's vote, thru the Toronto court if necessary.
    Ramsey2 12/4/2012 | 7:34:09 PM
    re: Nanovation Goes Bust Peter,

    I agree with SmokedWhitefish that Chaney's comments are, as quoted in your article, self-serving. The simple fact is Chaney and other key players like the BOD simply failed to obtain shareholder consent when it was the most needed, namely to approve Nanovation's financing plan, and failed to predict early enough that the consent would even be required. Shareholder consent for stock offerings is required past a certain level of dilution according to the Nanovation corporate bylaws. I don't know what that level is, but shareholder consent was not required for the 2000 round in which Motorola and two funds each invested $10M. Apparently though, for the last round Nanovation was attempting, shareholder consent was required as the level of dilution was very high, due to the rock bottom prices brought about by the collapse of the optical sector. By the time management and the BOD finally realized they would need shareholder approval, they assumed they would be able to obtain it from a simple majority of all shareholder types but apparently the corporate bylaws required a majority of common, which without Stamford's vote, they were not able to get. In fact the margin was razor thin (like about 10K out of about 20M)...apparently Stamford was able to obtain the majority (of common) by recruiting the extra votes from other Nanovation common holders (Stamford holds about 40%). But the fact remains Stamford was able to secure the necessary votes, probably by pointing to what it considered a questionable company track record. Although I believe that consenting to Nanovation's Resolution to issue more shares was the correct shareholder vote, in all fairness, some credit goes to Stamford for achieving the majority. Without a doubt many Stamford shareholders would have voted for the Nanovation plan, had they, rather than Stamford's BOD, had the vote. The company appeared to have momentum. Salomon Smith Barney had been hired to raise the round and the roadshow had reportedly gone well. Why vote against the dilution...a smaller slice of something potentially large was certainly better than not enough funds to make it to an IPO. After all, the $10M bridge was in escrow waiting to be released pending shareholder consent to the Resolution!

    You stated in the article that "Nanovation couldn't launch an IPO until it sorted out legal complications concerning the way in which shareholders were treated." That is not quite accurate. In fact Stamford was already under a 1999 Canadian court order to distribute it's Nanovation equity to their shareholders. This was the result of a suit brought against Stamford by certain Stamford shareholders and Nanovation itself so that Stamford shareholders would get their Nanovation shares. Not only was Stamford always regarded by Nanovation as somewhat of a threat due to the history of their promoters, but mainly some very large Stamford holders recognized the potential of Nanovation and wanted their shares. The share exchange was very complicated for tax reasons and was to have taken place around July 2000. Obstensibly due to new tax laws being considered in Canada, the exchange was delayed and never executed (the court order required that the exchange be done in the most tax efficient manner which resulted in an expensive, extremely complex share exchange scheme). We have never been sure if the tax situation merely presented a timely excuse for Stamford to not do the share exchange and if perhaps not this they might have found another reason to delay it. Going back to your statement about the IPO, in fact there was no known reason Nanovation could not have IPO'ed with Stamford still holding it's block. Certainly it was not an ideal arrangement, but I believe it was possible, and in fact after an IPO any Stamford shareholder who might be subject to taxation (by either government; Canada or U.S.) would then have had the liquidity to pay their taxes, effectively solving the tax problem which supposedly delayed the exchange.

    Chaney did not really "dump the idea of going for an IPO", he merely attempted to implement the new strategy for reaching an IPO, a plan I believe was already in motion by Tatum, when Tatum was fired. Also Chaney might not be entitled to take credit for "bringing in Motorola", as I also believe that alliance very much under development while Tatum was still on board (I stand to be corrected on that).

    As SmokedWhitefish pointed out, Nanovation under the leadership of Chaney and the BOD might have applied to the Canadian court in order to allow the Stamford shareholders to vote any Nanovation resolution. The intent of the court's rulin was to distribute the Nanovation shares to the Stamford shareholders, which in principle should include the vote.

    I treat Chaney's contention that he inherited a flawed capital structure as an excuse for not being able to conquer what was certainly a tough situation but not unsolvable. The technology was real, and in spite of tough internal problems the company appeared headed for an IPO. The leadership of the company simply failed to obtain the majority consent of it's shareholders, pure and simple. It's a bad piece of luck that 40% of the common was held by an unfriendly entity (Stamford), but that entity was (and still is) under a court order to distribute that equity to it's shareholders, which beyond any doubt would have swung the vote to Nanovation (one friendly Stamford shareholder alone controlled more than 4M votes). Unfortunately the potential from those votes was not realized.



    SmokedWhitefish 12/4/2012 | 7:34:08 PM
    re: Nanovation Goes Bust Optolink,

    I want to speak on behalf of Michigan, which is a wonderful state. The envisioned "high tech corridor," of which Nanovation was to be a part, is still in its early stages, but there are enormous possibilities for ties to the increasingly high tech auto industry and to the two major research universities, University of Michigan and Michigan State University. Michigan is also generally a cheaper place to live than other centers of high tech.

    I have a lot of experience with faculty who come Michigan from one of those centers of the universe (Boston, NY, San Francisco, etc.)GÇöI are one. Those who continue to believe they are stuck in a backwater and spend all their free time back where they wish they were leave as soon as they can (or complain year after year). Those who take the opportunity to explore the state invariably stay, sometimes rejecting offers from the prestigious places they once thought were the only places to be.

    I think Nanovation's top management set a horrible example by rejecting Michigan as a place of abode. I also think they failed to make an effort to turn employees on to the state. I'll bet I could have turned most of the engineers into Michigan buffs with a field trip to Lake Superior.

    At the very least, I hope you've tried the smoked whitefish salad at Zingerman's.
    optblues 12/4/2012 | 7:34:06 PM
    re: Nanovation Goes Bust So, you liked the booth or the babes??

    ===========================
    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.
    workerbee 12/4/2012 | 7:33:05 PM
    re: Nanovation Goes Bust I have to laugh. I am also a former employee of Nanovation. The technology was/is real. The diference is being able to transform a science experiment(in the lab) to reality of manufacturing. I met some world class engineer's. Ones who really knew what they were doing. Unfortunatly I also met some real gomers.. who had fancy degreees and couldn't find there a..holes with a road map. They were for the most part the mid to upper level managers. In respnsr to sound "reality advice" you were labled with a negative attitude. There were several people who tried their best to help Nano succeed despite some effort from the top. (Hopfully some of you read this bulliten board... you know who you are and it was a pleasure to work with you.)I don't trhink that it's fair to blame it all on Cheany. He did inherit a badly wounded ship. He did the right thing negotiating his way out of the MIT fiasco that Tatum set up. (a startup making a $90M grant... Isn't that grandiose.) Good PR but not the best business move. To any of you out ther that might read this, best of luck...it's too bad that it didn't work out. Keep plugging. There are optical companies that are well funded that will jump at the chance to get your expertise. Chris, Tony, etc. It was fun if frustrating...Cg
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