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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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    Ramsey2 12/4/2012 | 7:32:07 PM
    re: Nanovation Goes Bust Although Nano is now finished and it is time to move on, I would just the same prefer to have the complete story about all that really happened. I am a Stamford shareholder who followed the Nano saga with great diligence. I thought it a shame Stamford would not agree to Nano's financing plan, as I always assumed the company could have made it to an IPO, despite serious internal shortcomings, had the funding continued.

    I can be reached at:

    [email protected]

    TIA
    ex_nanovite 12/4/2012 | 7:30:10 PM
    re: Nanovation Goes Bust As a former Nanovation employee, I feel compelled to address Mr. Chaney's comments regarding the demise of Nanovation. To call them self-serving, as other readers suggested, is quite an understatement. The quote that I find most ironic is "... I'm known for taking on tough assignments as I always enjoy a good challenge". Apparently the challenge of reading the portion of the bylaws that govern the issuance of new shares was too great for both him and the highly paid legal counsel. Had either bothered to do so, they would have understood the ramifications of the Stamford situation in time to address them. I have no doubt that some agreement could have easily been reached. After all, how could it have possibly been in the best interest of Stamford and its shareholders to bring about the demise of Nanovation?

    While it's easy to blame Stamford, I feel the problem rests squarely on the shoulders of upper management. Despite the fact that the company had a management structure more befitting a Fortune 500 company than a startup (and a payroll to match!), in the end they simply were unable to develop and execute a rational business plan. I attribute this to the fact that, with some notable exceptions, the management team mainly consisted of rookies, career minor-leaguers, and wannabes who were given a shot at the bigs and simply struck out. No amount of Tatum-style PR can overcome that deficiency. It's very disturbing to see the work of many excellent technical people laid to waste by a lack of management ability. Hopefully there's a lesson to be learned from all this. Personally, I've learned not to join a company where the top executives aren't even committed enough to relocate to the same state.
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