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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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Peter Heywood 12/4/2012 | 8:04:36 PM
re: Nanovation in Crisis Yes, Petabit, I was just just fishing on Lumenon. It is a little strange, but I wouldn't put it in the same category as Silkroad. Also, plenty of other companies in this space are strange - and continue to surprise me by coming up with good news.

I'm thinking Light Management Group when I say this.

More fishing: We wrote this story a while ago, saying some ex Silkroad staff has formed another startup, NOT using Silkroad technology:

http://www.lightreading.com/do...

Anybody know how Telena Communications is doing?
Petabit 12/4/2012 | 8:04:37 PM
re: Nanovation in Crisis Silkroad:

If you want to learn more, there is a message board dedicated to them on Silicon Investor, with a large number of posts at the time.

Silkroad came out of university physics labs. In common with many of the startups that come out of non-telecoms backgrounds, the language was hard to convert - the terms and descriptions used physics not telecoms terms.

An example is the laser that Silkroad had developed - the linewidth was quoted in Angstroms not Hertz. An easy enough conversion to do, but when every single unit has to be converted, it makes the descriptions very hard to read.

Silkroad developed a technology that they called SRSC - Silkroad Refractive Sychnronous Communication (I think) - which everyone else would call SCM - sub-carrier multiplexing. In effect they were using analogue electronics to mux a group of signals, which were then transmitted on a single laser. It is exactly the same approach that cable TV uses.

Somewhere along the way, Silkroad's claims changed from the reasonable to the blatantly ridiculous. However they really believed their own hype. They started making silly claims, like their system would have a reach of 600 km with no repeaters or amplifiers. They also undertook a field trial (with USC ?) where they demonstrated that an entire lab full of kit using their technology could transmit data nearly as far and as fast as a $50 Agilent transceiver.

Sadly their website is no more, since they had the best white paper you have ever seen. The first page had a picture of a fish (to demonstrate refraction), then went on to include pictures of Einstein, before they got on to a picture of their Chief Scientist. It's a shame it's not there any more, you would have really enjoyed it.

In the end, Silkroad imploded under a mass of accusations and shareholder lawsuits. I'm not sure anyone got their money back.

It is a very different story to both Nanovation and Lumenon. Both of these companies are components vendors (not systems), who are trying to commercialise an exisiting lab technology. Unlike the Silkroad technology, these exisiting lab technologies have been duplicated by research groups around the world, and have appeared in peer-reviewed publications.

It looks like Nanovation couldn't get the process to work before the money ran out. Lumenon is still afloat, but they have limited time left. Don't get caught up in Peter Heywood's taunting, Silkroad was a hoax, but the others aren't.

P.
lightmaster 12/4/2012 | 8:04:38 PM
re: Nanovation in Crisis Milano,

Sometimes the only difference between a bad business plan and fraud is whether or not you believe your own lies.

I am always very carefull about giving anyone credit for being smart enough to commit fraud. Bad business plans and VCs who will fund them are statistically much more likely.

I will admit that I have seen a few really good ones, however.


Novice 12/4/2012 | 8:04:38 PM
re: Nanovation in Crisis I'm new to this area. What was the fraudulent issue with Silkroad? Promises that could not be kept, technology which did not work, or running out of funding? Thanks.
wiseguy 12/4/2012 | 8:04:44 PM
re: Nanovation in Crisis Would you believe that the FCC was considering a special rule making that would have given Media Fusion pioneers preference rights to power line carrier applications for broadband? Their Office of Science and Technology bought their line, completly.
Physical_Layer 12/4/2012 | 8:04:48 PM
re: Nanovation in Crisis Yes !!! It was Media Fusion. I knew I'd recognize the name if I heard of it. What a joke that was.
Milano 12/4/2012 | 8:04:50 PM
re: Nanovation in Crisis Peter, let's be fair, there is a difference between a poor business plan and a scam, my guess is that Lumenon falls in the first category. Their business is based on an alternative manufacturing technique (they call it Phasic) to build AWG filters. Could have worked if AWG had taken off like RHK kept predicting (the question of is Phasic works in the first place, I'll leave it to the engineers to tell).

They burn $1 million a month with about $13 mil. left, so they won't make LR death row before mid-2002. Instead look for pre-IPO companies to fill the obituary of the coming months!

M.
LRcarr 12/4/2012 | 8:04:50 PM
re: Nanovation in Crisis

I did work with them temporarily, and had an opportunity to work with them on a permanent basis. Some of the people were excellent, but from the beginning they had fundamental technical issues that I knew could not be overcome in the alotted time.

Regarding MIT, having a $90 million dollar deal with MIT and giving $90 million dollars to MIT are two entirely different things. I doubt that any serious amount of money ever exchanged hands, but I could be wrong.

One more thing, I was actually discouraged from working there by one of their managers who said "one of the people leading the MEMS effort is very difficult to work with". I know first hand that one bad person can completely destroy a technical team. By the time they started doing MEMS, it was probably too late to be successful anyway. That is not something that a startup can just decide to make and bring it to market before the money runs out.

LRCarr
redface 12/4/2012 | 8:04:53 PM
re: Nanovation in Crisis Retireonoptics wrote: "Nobody had a photonics background!"

Actually, some of the technical people are reasonably good. I met some of them when I interviewed there. I agree with others who posted here that Nanovation is not 100% scam, like Silkroad was. Nanovation did have an inkling of justification for their grandiose claims.

There is a post about Lumenon as being the title holder "runner up to Silkroad". Is that the company which does polymer on PLC platform? I have no knowledge about them. But to me, anyone playing with polymer for telecom applications is asking for trouble.

I remember Professor S. T. Ho of Northwestern was supposed to be the founder and the originator of the Nanovation technology. Nanovation was started after he wrote in Scientific American an article on the whispering gallery stuff and a Canadian banker who read the article approached Ho to start a company out of it. Seems like Ho has distanced himself from this stinking ship a long time ago. Now he is not even on the Board of Directors.

Nanovation did a bunch of weird things. They acquired a company Apollo Photonics and gave $90 million to MIT. What happened to these two matters?
retireonoptics 12/4/2012 | 8:04:54 PM
re: Nanovation in Crisis I agree with your earlier comment about the depth of technical prowess. I could have worked at Nanovation but turned it down for three reasons:
1. Upper leadership had left.
2. Upper leadership had given away the VC $ ($70MM to MIT).
3. Nobody had a photonics background!

I have been watching the company from a distance. Sorry to see it has difficulties, however, I am glad my assessment was correct.
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