How to Profit from Nanotech and Stem Cell Breakthroughs Like A Venture Capitalist

Nanotechnologies are not some future development. The Project on Emerging Nanotechnologies estimates that nearly 1,000 products that rely on nanotech are on the market now.

Currently, most applications simply integrate superior nanotech materials into existing products. Carbon allotropes are used to produce gecko tape. Antibacterial nano-silver is used in clothing, food packaging, disinfectants and household appliances. Nano-sized cerium oxide is employed as a fuel catalyst. Increasingly sophisticated products are appearing at the rate of two-four per week.

This month, we’re going to invest in 33 nanotech companies. Almost all are pre-IPO privately held startups. And we’ll do it in one step while retaining complete liquidity.

In the process, I’ll describe how one company is altering the DNA of viruses to attack cancers. I’ll also talk about a company that gets oils from algae. Another company that we’ll be adding to our portfolio is the leading contender in the race to make your current computer as obsolete as an abacus.

It’s Time to Get into the VC Business

One of the greatest frustrations about this job is coming across fantastic startups that I can’t add to the portfolio. I’ve written at length about a few of these pre-IPO companies with enormous, nearly inevitable returns. There are many more, in fact, that I haven’t mentioned. As a result, I truly envy venture capitalists. For some time, I’ve been fantasizing about a breakthrough technology venture capital fund. This isn’t quite that, but it’s close.

The attractions of the VC (venture capital) business are obvious. One is simply the ability to go where equity investors cannot. It irks me that VCs get to buy into obviously transformational companies when we can’t. The other reason is the rate of return enjoyed by VCs is typically so much higher than the stock market’s. I really want you to get in on the high yields earned by angel and venture capitalists.

This is why I’m so pleased to have come across our newest addition to the Breakthrough Technology Alert portfolio. Buying stock in this company allows you to participate in some of the most exciting and promising nanotech startups in existence - on better than VC terms.

This company acts as a kind of VC mutual fund, investing only in privately held early-stage breakthrough technologies. Moreover, your participation in the VC market remains liquid because you can sell the fund at any time. That’s a privilege that normal venture capitalists don’t have.

Not only does the VC fund take positions in important startups, it is actively engaged, bringing its expertise to and working side by side with the management of its portfolio companies. With its broad knowledge of the nanotech industry, the fund can help portfolio companies with general strategic and operational problems, as well as business and intellectual property strategy. It helps with executive recruiting, fundraising and compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

Perhaps most importantly, it is in the position to build collaborations with strategic partners.

In the process of vetting this company, I spoke at length with the company’s CEO. I was pleased, by the way, to hear he had enjoyed reading some of my past issues of Breakthrough Technology Alert.

He took the time to explain the VC fund’s investment philosophy to my associate Ray Blanco and me. According to this CEO, the current team has grown from four to 11 members since 2002. Five have extensive VC experiences. Additionally, team members have expertise in solid-state physicists, biochemistry and other technologies that intersect and converge with nanotechnology.

This team constantly monitors the world of nanotech. Additionally, it maintains contact with nanotech scientists in academia, where much cutting-edge research is taking place. While academic research is typically too early a stage for investors, these relationships allow the fund to identify important spinoffs as they occur.

We know that the long-term promise of nanotech is world changing. The immediate challenge for nanotech investors is finding companies in the commercialization stage. As I’ve explained, we at Breakthrough Technology Alert don’t mind getting in a little early, because the eventual returns will be so high. Investors do, however, want to know that their portfolios will maintain and increase in value while waiting for those eventual huge returns. Everyone at this unique venture capital fund clearly understands this need for liquidity.

The Only Publicly Traded Liquid Nanotech VC Firm

To my knowledge, this investment is the only truly liquid nanotech venture capital company available to stock buyers. Diversification is at the heart of its investment philosophy. It generally doesn’t put more than 5% of its gross assets in any single holding.

It also maintains large cash reserves as a means of counterbalancing the inherent risk of investing in young nanotech businesses that are not yet profitable. As its CEO says, the fund offers a “diversified way to play the emergence of nanotechnology - when most of the companies are still private - in a public vehicle.”

Several of its holdings are, however, already earning significant revenues. Companies in the portfolio generated $242 million in revenue for 2008, a 22% increase over 2007. Other companies are on track to becoming revenue producers or to significantly increase revenues.

Since I recommended this unique venture capital fund to my readers last week, we’re already closing in on double-digit gains. But that’s not the first time we’ve stumbled across a transformational company that’s making good on promises to investors…

Something happened last month that I predicted long ago. Big Pharm initiated a collaboration with one of the stem cell companies I recommended to my Breakthrough Technology Alert readers. Specifically, Geron Corp. (NASDAQ: GERN) announced a partnership with GE Healthcare.

The deal is to develop and sell drug-discovery technologies derived from two stem cell lines approved by the Bush administration. The stock rose over 10%, adding about $70 million to Geron’s capitalization.

I don’t write this to crow about being right. I write this because it is critically important that you understand that this is just the tip of the iceberg. For anybody familiar with the way pharma interacts with disruptive startups, it was inevitable. New products from Big Pharma have slowed to a trickle in recent years. The old platforms have largely played out. Slowly, recognition is dawning on the world’s medical giants that it’s time to invest in the most disruptive technology the world has ever seen — stem cell technologies.

Let’s look at the implications.

Pharm is a lumbering behemoth. It may take years for the industry to change focus, but it spews cash wherever it turns. The Geron deal is only the first, so let’s consider what’s next.

Geron has had years to cultivate its Big Pharm contacts, but Geron’s founder, Dr. Michael West, was busy creating and acquiring his own stem cell lines. His inventory, as a result, dwarfs Geron’s.

He has, in fact, most of the stem cell lines approved by the Obama administration’s new funding guidelines. They comprise, remarkably, more than 50% of all known eSC lines. At last count, he had over 200 lines, and 88 had important genetic diseases.

These cell lines, incidentally, were acquired from genetic screeners who help parents who carry genetic diseases assure that they do not pass them onto their children. They include cystic fibrosis, Huntington’s, muscular dystrophy and breast cancer.

Ironically, these cell lines hold the promise of producing treatments for birth defects that currently motivate a significant percentage of abortions. This means, of course, that the utilization of these cells may produce cures that reduce abortion rates.

The story does not end there. West’s ACTCellerate platform is producing the tools for potentiating stem cells into different cell types. Currently, West knows how to turn stem cells, including induced pluripotent stem cells created from adult cells, into more than 140 cell types. Recently, for example, he announced the ability to program cells to repair cartilage and connective tissues.

Therefore, the real number of cell lines that he can produce is in excess of 200 eSC lines times 140 SC types, which is over 28,000 cell types. If only a fraction of these cell types have drug discovery potential, West will do very well, indeed.

And so will his investors… Stay tuned to the Penny Sleuth to get a lead on emergent technologies like these as they happen.

Yours for transformational profits,
Patrick Cox