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Optical components

Nanovation in Crisis

Integrated optics startup Nanovation Technologies Inc. is in deep crisis today as it struggles to finalize an emergency infusion of cash to keep it going.

Yesterday the company was forced to lay off two thirds of its 169 employees following the collapse of a $75 million Series C round of funding. In a note to Light Reading today, Nanovation's CEO, Bob Chaney writes: "We are currently attempting to obtain funding to hold on to the remaining one third of our employees while focusing only on two silica photonic IC products and two indium phosphide photonic IC products."

Nanovation's crisis appears to have been triggered by Stamford International Inc., a shell company that provided a backdoor way of investing in Nanovation ahead of its planned IPO, which never actually materialized (see Nanovation Prepares the Ground for an IPO).

As Nanovation's largest common shareholder, Stamford derailed the latest funding round and is now offering Nanovation cash in exchange for control of its Board of Directors, according to Chaney's note.

In the note, Chaney says that Nanovation had secured a $10 million bridge loan with Motorola Inc. (NYSE: MOT) for its Series C round, in which Salomon Smith Barney was the placement agent. The money had been placed in an escrow account on June 29. Motorola is an existing Nanovation investor (see Nanovation Bounces Back).

Nanovation needed shareholder approval for the issuance of additional shares for this offering, according to Chaney. "The overwhelming majority of our preferred and common shareholders approved," he writes. "However, our largest common shareholder blocked this deal for nearly two weeks, causing Motorola enough concern to pull out on July 13, and the bridge round then collapsed.

"Nanovation still plans to deliver in August the industry's first true photonic IC, consisting of a switch, splitter, and monitoring taps all on a single substrate," Chaney concludes.

Nanovation has raised a total of $91 million in funding. The identities of many of its investors, apart from Motorola, have been kept quiet. A September 24, 1999, press release announcing a $16.5 million round of financing made no reference to where it came from. Similarly, a press release announcing a further $30 million round of funding, dated Dec 6, 1999, merely referred to an unidentified "crossover group of 13 mutual funds and mutual fund managers" as the source of the funds.

As it happens, it's almost exactly a year since Nanovation dumped its original CEO, G. Robert Tatum, and switched strategy -- bringing to an end an era of spending big bucks in order to pump up Nanovation for a whopper of an IPO (see Nanovation's CEO Gets The Heave-Ho).

At that time, Nanovation was already entangled in litigation with Stamford International, although John Ofenloch, Nanovation's VP of Finance, made light of it at the time. "It's just a monkey on our back," he said. Now the monkey has turned into an organ grinder.

— Peter Heywood, Founding Editor, Light Reading
http://www.lightreading.com
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jclasssailing 12/4/2012 | 8:05:16 PM
re: Nanovation in Crisis If they had just saved the money they spent on their ofc booth, they probably could have pushed out their fume day by a few months
runner 12/4/2012 | 8:05:15 PM
re: Nanovation in Crisis These guys came to the company I worked for in late 1999/early 2000. They looked slick and acted slick but couldn't tell me a thing about their roadmap, technology or anything. Just a hint - when you send salespeople out, train them just a little to they have a clue. These guys sure didn't.

It was obvious at the time they were selling a dream. Their 'plan' was to blow smoke, show Powerpoint slides and pop a monster IPO and got caught.

They got what they deserved.
redface 12/4/2012 | 8:05:12 PM
re: Nanovation in Crisis probably Nanovation is second only to Silkroad (the San Diego company, remember?) in terms of the scale of the fraud.
Peter Heywood 12/4/2012 | 8:05:11 PM
re: Nanovation in Crisis I've been faxed a copy of the letter that appears to have been sent by Nanovation's VP of HR, David Bundy, to staff that were laid off yesterday. The letter starts:

"This is to inform you that effective July 16, 2001 Nanonvation Technologies, inc. will be permanently closed. On that date, your employment will be terminated."

I've asked Nanovation to comment.

maryt 12/4/2012 | 8:05:11 PM
re: Nanovation in Crisis there is an old saying "pigs get fat and hogs get slaughtered."

looks like the greedy shareholders are headed to the slaughter house.

i knew they were not going to issue all of those shares they promised to everyone.

DKP 12/4/2012 | 8:05:08 PM
re: Nanovation in Crisis
Runner; I agree with you. My experiences with Nanovation are that they talked, and talked, and talked, and talked... but never delivered. It was hot air.

A company should under-promise and over-deliver. Nanovation did the opposite, to the extreme.
CogswellCogs 12/4/2012 | 8:05:03 PM
re: Nanovation in Crisis Now that really is an insult - comparing anyone to that Silkroad scam! Somehow this one doesn't feel quite as dirty, but I agree, a close second.

Cogs
Photonboat 12/4/2012 | 8:05:02 PM
re: Nanovation in Crisis >>They looked slick and acted slick but couldn't tell me a thing about their roadmap, technology or anything<<

Yeah, they seemed to place a priority on hiring "slick" people, who hadn't a sliver of history in the industry. Even a few months would have given them a clue about what an OEM wants--but then again if you think of a used car salesman, they never are overly concerned with what the customer needs. Relative to other startups, nobody at any level of this firm seemed to have come from a background that included a component player or an equipment maker. That CEO had come from GE, but wasn't from a relevant unit to this venture (something like MIS as I recall).

Slick people are prone to embarrass themselves by hyping a mediocrity. Remember their first "miracle" product at NFOEC99--a tunable filter based on "whisper modes", accessing the portions of the pulse in an optical resonator. Great idea, which has been around for 30 years, but their efforts at materials development may have succeeded at pulling this feat off at some point IN THE FUTURE. But to debut a 6-7 nm passband, 7 dB insertion loss filter told me they had a technology in search of a current application, but had no idea what that application was. At subsequent events, this product was taken off their data sheets and became merely a portion of a PowerPoint slide on future developments.

Bad companies still can pretend to have products the market wants--but at some point they will have to ship them to customers. Once Nanovation decided to have real products, they touted an AWG and other typical integrated optics products. Of course, the data sheets I had were all stamped "preliminary", which is sales-speak for "this is what we are aiming to do, and have done in a lab, but we are not ready to commit to it because we have no idea if we will be able to produce repeatably on a manufacturing line." [As an aside,"Target" specifications are even more full of Bull Sh$#] Their other strategy was to import some things from China, but these products, such as a traditional bulk-optics EDFA, was behind products on offer from the incumbents technologically, yet, despite being made in China, cost about the same.

A big mistake for a struggling firm is to engage in hype. The repeated comparisons to "we're where Intel was in 1975" and "Photonic IC" was hype. What integrated optics company doesn't have a splitter, etc. on a single chip? Nothing special here, except trying to associate one's firm with Intel in an investor's mind.

The sad fact is that there was of course some decent people here, but as someone pointed out, "pigs get fat but hogs get slaughtered". Giving them the benefit-of-the-doubt, this venture began with some decent research ideas and talent. It wasn't a bad idea to use InP based substrates and try to hit a home run, but there were a lot of scientific breakthroughs required here. And some of the hype brought them attention, and more important funding. A business plan must balance bleeding-edge engineering and science with market realities.

And most important of all, a business plan should call for good management that puts footsoldiers in place in sales, marketing, manufacturing, engineering to go with the few researchers that were there at the company founding.

In some cases, Nanovation is just an extreme example of sins that many a start-up has made over the last few years: technology in search of an application, too much hype, inability to move into production, etc.
Peter Heywood 12/4/2012 | 8:05:01 PM
re: Nanovation in Crisis
What about Lumenon?
Peter Heywood 12/4/2012 | 8:05:01 PM
re: Nanovation in Crisis - I think you should make a distinction between the Tatum and Chaney eras. The former was pretty wild. The latter seemed much more down to earth.

- If it was such a sham, how do you explain Motorola being an investor? If you look at it from Motorola's point of view, it probably could have invested in a variety of startups with indium phosphide developments but it picked Nanovation. Also, I would have thought Motorola must have the expertise in house to do some serious due diligence on Nanovation's technology before plunking down $10 million or whatever it was (I received a note yesterday saying it was only $4 million).
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