Benefiting from federal research dollars.

The latest budget for the NNI (National Nanotechnology Initiative) is out, and although it is “only” several billion dollars worth of funding, relatively nothing anymore, and it all goes to government agencies, it can still be a benefit for investors of all sizes. Why? Because the budgets for 2 government programs are not released yet that will impact small businesses in the technology field, and this budget may provide clues to where that money is going to go.

The two government programs are the SBIR (small business innovation research program) and STTR (small business technology transfer program), and their budgets will be coming out later this year. Where does this money go? To quote from the latest NNI budget: “SBIR and STTR programs fund innovations in small businesses and forefront research infrastructure for use by all nanotechnology researchers, including those from industry.”
And to quote from several government websites:

“SBIR targets the entrepreneurial sector because that is where most innovation and innovators thrive. However, the risk and expense of conducting serious R&D efforts are often beyond the means of many small businesses. By reserving a specific percentage of federal R&D funds for small business, SBIR protects the small business and enables it to compete on the same level as larger businesses. SBIR funds the critical startup and development stages and it encourages the commercialization of the technology, product, or service, which, in turn, stimulates the U.S. Economy. “

“[STTR} funds to support nanotechnology research and commercialization activities”

I am sure everyone is aware of the massive amounts of federal funds that go toward university research. But this budget brings to light a new trend that many may have not caught onto yet. As federal funds have been increasing to the “entrepreneurial sector”, so has the number of “breakthroughs”. To once again quote the budget document:
“While many of the nanoscale breakthroughs occur in university settings, the rapid transition of these advancements to industry partners is a crucial aspect of the timely enhancement of homeland security capabilities....Most investments involve a commercial industry partnership in order to help focus and more rapidly transition any technical advancements into manufacturable devices and systems”

So how do we benefit from this? I am hoping that this budget for the 2010 will give us a hint on what sectors and specific technologies the government feels is most important, and will fund the most later this year.

Lets dig into the budget...

No doubt about it, the government wants to focus on energy (and national defense, which will be focused on in a later article).

On page 14/44:

“Much of the increase for 2009 and 2010 stems from increased investments at DOE's (Department of Energy's) Office of science for basic research on energy applications of nanoscience and at NSF.”

On page 19/44:
“The administration's goal of developing a “comprehensive plan to invest in alternative and renewable energy, end our addiction to foreign oil, address the global climate crisis and create millions of new jobs”. Potential contributions from nanotechnology towards this goal are:

- Nanoscience research for energy needs (http://www.nano.gov/nni_energy_rpt.pdf) outlines opportunities for major advancement in energy conversion, storage, and utilization. Eg. In developing inexpensive, high efficiency photovoltaic solar cells and dramatically improved batteries.”


The budget goes on to list several specific technologies that government agencies are focused on, among them are: Nanolubricants, spintronics, “improved solar cell performance with quantum dot inclusion in standard space solar processes”, “improved solar cell efficiency with carbon nanotubes” and “carbon nanotube weaves replacing copper conductors”.


To start our search for companies that may benefit from these 2 government programs, lets first look at the requirements to receive this federal money:
guidelines from sba.gov:

“Small businesses must meet certain eligibility criteria to participate in the STTR Program.
 
American-owned and independently operated
For-profit
Principal researcher need not be employed by small business
Company size limited to 500 employees”


In my opinion, by far the most intriguing area is quantum dot solar cells. They promise to be more efficient and cheaper than silicon based solar cells out now. And whats better? Steve Chan, of Suntech Power Holdings estimates that an increase of 1 percent efficiency leads to a 1.5 percent improvement in gross margins. These quantum dot solar cells now are at an efficiency around 18-20%, but the technology theoretically allows efficiencies much higher than standard silicon based solar cells, upwards of 60%! That means an astounding increase in profit margin for these companies. Silicon based solar cells simply can not achieve that efficiency.
Investing opportunities in companies involved in quantum dot solar cells is very limited. The bigger name companies surely are researching in this technology, but anyone could easily find the big name solar companies in the market today with a little google search. There are several small companies that would fit within the STTR program's guidelines for federal money. Among the ones that I was able to find are:

Solterra Renewable Technologies Inc. (OTC: HGUE), Wakonda Technologies and Stion Corporation.

The other option for investing in these companies is finding a publicly traded venture capital group, that is invested in these (and other) technologies. A couple of examples are Harris and Harris Group (NYSE: TINY) or ArrowHead Research (NYSE: ARWR). Though to my knowledge, Harris and Harris group is not currently invested in any quantum dot solar companies. But they are invested in many emerging nanotechnology companies. Keep up to date on many of these venture capital groups, most of them show their portfolios on their web pages.

Investments in spintronics are also limited for the average investor. The “heavyweights” in the industry, such as IBM or Intel are easy picks and have the most money for research. However, you are also investing in much more than just spintronics. NVE Corporation, (NYSE: NVEC) is a company that caught my attention . NVE Corporation is profitable, has a relatively low PE of 20, at a 5 year high and focuses exclusively on spintronics compared to IBM or another big-wig. It also fits into the guidelines for federal funding.
It may be worthy to note however, that Intel is saying that any real commercial uses are a decade away.

The 44 page budget proposal discussed can be found here:
http://www.nano.gov/NNI_2010_budget_supplement.pdf