Major changes are coming to the nanotechnology sector in the near future, including a sharp rise in acquisitions, failures and mergers among the roughly 1,500 companies worldwide involved in nanotechnology research and development, experts told United Press International.

If you look at any transformative event in business -- be it the rise of industrialization or the emergence of computers and the Internet -- there's the idea of a tipping point, Matthew Nordan, vice president of research at Lux Research, an industry analysis firm in New York, told UPI. There are signs of it getting close with nanotechnology -- 18 to 36 months away.

Industry giants and government researchers worldwide are spending billions to start a second Industrial Revolution using nanotechnology -- science and engineering conducted at the level of nanometers, or billionths of a meter in size. Nanotechnology promises to yield everything from smaller, faster supercomputers to scores of medical breakthroughs and potent new defenses against terrorism.

In 2004, governments, corporations and venture capitalists will spend more than $8.6 billion worldwide on nanotech research and development, Lux Research reports, with national and local governments investing more than $4.6 billion of that total and established corporations spending more than $3.8 billion. Lux expects 2004 to be the last year governments outspend corporations on nanotechnology, however, as activity shifts from basic research to development.

Unlike the Internet boom, experts said there is no bubble in nanotech venture-capital funding, despite widespread reports to the contrary.

Nanotech venture-capital funding has gone down in the last three years, Nordan noted, from $386 million in 2002 and $325 million in 2003 to a projected $200 million in 2004.

You can't have this massive bubble because nanotech isn't like information technology, he explained. A company looking at taking a pilot process to make carbon nanotubes has to scale up to supply a television manufacturer, spend about $5 million to take six to nine months to build and get up and running to get sufficient yields. The barriers to entry are very high. These very physical facilities. It's not like with the Internet. Here, you cannot attract investment with just a flashy name.

It's absolutely a good thing, Nordan said of the absence of the bubble. The real story here is the backing of the money is not going to ebb and flow due to investor fickleness or venture-capital egotism. It's going to be a measured, sustained pace of development, he added.

I would agree that there is no bubble in nanotech right now, said Lawrence Gasman, a principal at NanoMarkets, an industry analysis firm in Sterling, Va.

Part of the reason, he said, is investors are a little technology shy right now. Another is much of what is going on in nanotechnology is internal to large corporations.

I don't see a nanotech bubble this year and probably not next, but it wouldn't surprise me if we got one eventually, Gasman told UPI.

With venture capitalists unwilling to fund nanotech startups, Gasman predicted there will be a growing reliance on government funding.

With the appropriations of the (21st Century Nanotechnology Research and Development Act of 2003) in place, it looks like funding from that source will be quite widely available, he said. But it will certainly shape the kinds of products that get money -- medical, defense and energy will be a good place to be.

Some 1,200 of the roughly 1,500 companies involved globally in nanotechnology are start-ups, Lux said, with 670 located in the United States.

These start-ups are beginning to make money as nanotech moves out of the labs and onto production lines, with revenue ranges between $10 million to $20 million for those at the top of the ranks, Nordan said. They're partnering with established corporations to develop products in a pattern similar to biotech -- 10 of the 30 corporations in the Dow Jones Industrial Average have announced nanotech partnerships.

As start-ups develop over the next year, Nordan predicted a sharp rise in business failures, as well as a five-fold increase in the annual volume of mergers and acquisitions transactions over the next three to five years.

A lot of start-ups are underfunded, on a wing and a prayer, maybe part-time, and these guys are not going to be sustained, Nordan explained. "There's going to be these five to 10 massive consolidation rounds people don't see, business failures and companies picked up for a song for a patent or some process technology.

It won't be like the Internet boom and bust, which were visible busts of companies that had lots of marketing, Nordan said. It's something that's going to be invisible to the world. You'll just gradually see catalogs and Web sites disappear, and you will see transfer of patents from one tiny company to another, slightly less-tiny company.

He said he thinks it is unlikely there will be a huge rise in venture capital to prevent companies from going through such evaporation, as Lux has found nanotech's share of overall venture capital has remained relatively constant from 2002 to now, at roughly 1.6 percent.

In the near future, Lux expects Japanese firms to develop nanotech products more rapidly than U.S. companies. The United States and Japan spend roughly the same amount on nanotech, but Nordan explained they employ very different approaches to commercializing nanotech innovations.

There's just not a tradition of start-ups in Japan, he said, so the big, established companies do their own R&D, productize themselves and do in-market testing, develop volumes of products, see what sticks, and then export it out. That's why you see this wild experimentation there.

In contrast, American companies let the start-ups begin with the products, take a wait-and-see approach, he noted. The big established companies might buy research quantities of materials from the start-ups, but they wait until the start-ups show the market is validated. Then they swoop in and buy them.

In the near-to-medium term, Gasman said, the growing focus in commercial nanotech will be on how nano-engineering can generate unique or dramatic, competitive advantages and yield decent revenues.

I think folks who take that approach will be pleasantly surprised, he said. For example, cell phone manufacturers who are looking for memory chips that are non-volatile, low power consuming and high capacity are quickly going to be led in the direction of nano-engineered products. We think that nano-storage chips will be worth about $3.1 billion in revenues by 2006.

Nordan added that a killer application for nanotech right now would dramatically increase the number of applications for other nanotechnologies. For instance, carbon nanotubes have wonderful properties, like their amazing tensile strength. If they cost nothing tomorrow, everybody would want them for a lot of things, but right now they cost too much.

A breakthrough nanotech application for carbon nanotubes would demand high volumes, thereby driving down the price so more consumers could could afford them, Nordan explained.

What I expect to see are carbon nanotubes for field-emission displays, he said. Right now plasma and LCD displays are very expensive. Display manufacturers are looking to use carbon nanotubes, which can shoot electrons from their tips, to build bigger, cheaper, flat-panel displays that consume less energy.

When carbon nanotube-based displays first appear, perhaps three to five years from now, he said, you're going to open the doors wide open for other applications.

Charles Choi covers research for UPI Science News. E-mail [email protected]