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
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Physical_Layer 12/4/2012 | 8:05:00 PM
re: Nanovation in Crisis Oh man...I remember that company (Silkroad)....what a joke. There was an even better fraud (can't remember the name). Anyone recall the company that was going to transport data at exabit rates through you power line?

ray bender 12/4/2012 | 8:04:57 PM
re: Nanovation in Crisis If I remember correctly, didn't Nanovation give a big grant to MIT to help their photonics research? If I do remember correctly, wha has hppened to that relationship?
lread 12/4/2012 | 8:04:57 PM
re: Nanovation in Crisis Oh man...I remember that company (Silkroad)....what a joke. There was an even better fraud (can't remember the name). Anyone recall the company that was going to transport data at exabit rates through you power line?

Was that Media Fusion? Their web site now just has a one page ad that has no links to anything, no phone numbers, no e-mail contact, nothing. It just says "Our web site will be updated in the near future". They said that in Febuary. Their founder and chief scientist who came up with the patent was fired a couple of months ago.
Photonboat 12/4/2012 | 8:04:55 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.<<

When I referred to "that CEO", I was indeed referring to Tatum.

>>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 could have invested in a variety of startups with indium phosphide developments but it picked Nanovation.<<

Good point. Motorola is a class company. However, I wonder how much Motorola leveraged the synergies they have--internal semiconductor capability plus some great fiber-optics-market people at General Instrument. If you are one of these people at GI and you are reading this and were at all consulted, please post here. I have met several knowledgeable technical people at GI who could have kept Nanovation on track. Were you guys ever involved? There's one guy with a hoary-head of hair there who should have been given thumbs-up, thumbs-down say-so on an investment. Bet he wasn't.

Also, for Motorola, $4M isn't a lot of money, so if they gain some exposure to some of the technology (and keep in mind that some of the technical team was local, in Chicago), this isn't a bad investment for a large company. From Motorola's perspective, the technology was sound, there were enough technology people involved that knew what to do. Nanovation falls down on a "business execution" thing. We can debate the merits of their technology, but as I mentioned earlier, Nanovation's bet was plausible, the issue was one of how far in the future they might take to execute it--six months or six decades?

As I wrote, this wasn't a 100% sham, there were elements here that were for real, just a lot of basic, "blocking and tackling" items such as product management, product development, manufacturing, and sales missing.
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.
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?
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!

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.

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.
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.
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