When Vladimir Putin, prime minister of Russia, says "da," or yes, then the country’s system lines up in support. So when Putin is handed a prototype of an electronic reader from a revolutionary new form of semiconductor specially loaded with articles he might like, and he does, then it puts the seal of approval on perhaps the most significant cross-border venture capital deal of the past decade.
And in the final weeks leading up to Christmas, his approval, along with Russian president Dmitry Medvedev and Anatoly Chubais, the architect of a swathe of privatisations by the country and now in charge of one of the largest technology investment programmes anywhere in the world, helped seal the survival of the e-reader’s developer and manufacturer – Plastic Logic.
Survival, however, came with a hefty price tag – $700m. But this planned investment is a rounding error for a Russian state-backed investment group expected to invest $15.3bn between 2008 and 2015 to improve Russia’s technological standing.
That the Chubais-run Russian Corporation of Nanotech-nologies (Rusnano) is interested in Plastic Logic reflectswhat it hopes will be the next revolution in computing from silicon to plastic – or inorganic to organic – materials.
The journey Plastic Logic has taken from a research laboratory in Cambridge, UK, to a new special economic zone just outside Moscow, Russia, via the US, Germany and a swathe of investors from all avenues and geographies says much about how technological innovation is developed and funded in a globalised world.
Que & answers
In 1988, just about the time Mikhail Gorbachev, general secretary of the Communist Party of the Soviet Union, was pushing through reforms at the 19th party congress that would bring multi-candidate elections and greater openness to the world’s largest bloc of countries, in Cambridge a lecturer managed to make a transistor from organic molecules.
Richard Friend, who was subsequently knighted and made Cavendish Professor of Physics at the University of Cambridge, had started work on semiconductors – materials that conduct electricity under some conditions but not others – out of organic molecules containing carbon atoms linked in specific patterns a few years before.
Putting semiconductors into light-emitting diodes (LEDs), solar panels or integrated circuits (chips) allows power to switch an item on or off, such as a pixel in a television or laptop screen, and is the linchpin of the information technology revolution over the past 60 years.
All the current chips in commercial use are made using silicon, or a more rarefied inorganic material, such as germanium, but come with a drawback – modern chips are made by depositing the silicon, etching away unwanted material using lithography and then baking it at several hundred degrees Celsius.
The high temperatures warp organic materials – if flexible plastic substrate were to be used – and stop the silicon-based chips working, which is why semiconductors are laid on solid material, such as glass, metal or silicon.
Friend’s work with fellow researchers promised flexible semiconductors and is the basis of several spin-outs to come from his laboratory, including Cambridge Display Technology for LEDs, Plastic Logic for organic chips and Eight19 for solar power panels.
The attraction behind plastic electronics is the idea that a solvent can dissolve the polymers so they can be painted on to a surface at room temperature as a semiconductor. This means the organic chips can have the advantages of plastic in being lightweight, flexible and shatterproof.
After the initial breakthrough, the next came in 1997, when Henning Sirringhaus travelled from Princeton University in the US to join Richard Friend at the Cavendish (pictured together – Friend on the left – holding the Que reader) as a lecturer. Once there, Sirringhaus and Friend, with help from PhD student Takeo Kawase, on secondment from Japan-based inkjet maker Seiko Epson, took the next two years to build a better plastic chip.
With the breakthroughs of improved mobility and a way to print the plastic chips, Friend and Sirringhaus could think about applications and potential commercialisation. For that, Friend’s first call went to legendary investor Hermann Hauser.
Austria-born Hauser had done his physics PhD at the Cavendish laboratory in 1977, a year ahead of Friend, and became a seminal figurein UK technology through his pioneering work at computer company Acorn, before launching into the world of venture capital.
Uniquely in Europe, Hauser has provided venture capital to four companies worth more than $1bn – ARM, which was a spin-off from Acorn, Illumina, GlobespanVirata and Cambridge Silicon Radio. He had also kept close to Friend during the development of the professor’s first major spin-off company using plastic electronics, Cambridge Display Technology.
With Hauser’s appreciation of the potential for the disruptive influece of plastic semiconductors in electronic displays or radio frequency identification (RFID) and other tags, seed money was found to launch Plastic Logic in January 2000.
But Friend and Sirringhaus said the Cavendish laboratory was still involved with Plastic Logic as plastic electronics was still at a stage where science and engineering could be pursued in parallel.
Sirringhaus, who remains chief scientist and a non-executive director at Plastic Logic, called it "a mode of mutual benefit" while Friend added: "It is often misunderstood how much science is discovered after technology."
Stuart Evans, the firstchief executive of Plastic Logic, who remains a shareholder, said: "A real attribute to Plastic Logic was the quality of the original team and, from a scientific point of view, that the company is still tapping into the continuing innovation at Cavendish and Cambridge. If the first invention for a university spin-out is the last then the company is doomed."
With Plastic Logic promising a platform applicable globally and potentially in multiple products, Evans and the professors relied on technological developments and analysis of market opportunities to shape the company’s business plan.
The plan was then buffeted by investors’ appetite to continue funding a company generating increasing losses over the past decade. With developing a refined inkjet print production technique proving a stubborn problem, using organic semiconductors for RFID tags was put to one side and the company concentrated on making flexible displays.
By 2006 crucial breakthroughs meant Plastic Logic could produce a display with a million organic transistors, albeit ones still with lower mobility than silicon-based equivalents.
The technology improvements were so rapid because the history and expertise of silicon chips and their developers were available. This in turn allowed Plastic Logic to work on making applications for the displays, such as readers.
After nearing collapse in 2005, by the end of the following year technological breakthroughs meant Plastic Logic was able to gain $115m in funding to start a factory in Dresden, Germany, building its first reader, the Que.
The Que was shown to the world at the Consumer Electronics Show in January last year ahead of an expected launch in April, but weeks later the market shifted with US-listed electronics group Apple unveiling its iPad.
Hauser said: "The reason I remain excited about Plastic Logic is it is ‘paper 2.0′ – it has the only technology that can offer storage and retrieval of information with a similar experience to paper. People hate writing on glass or chunky electronics. A true e-paper differentiates Plastic Logic from the iPad."
Although the market remains potentially big, behind the scenes severe technical issues remain and were an important reason behind the Que’s product launch being stopped. Some Ques lasted only a few months before the screen failed, while production at the factory in Dresden was painfully slow, with just a handful of chips working to the required standard per 1,000 made.
Seamus Bryne, head of display at Plastic Logic, admitted there were difficulties, which nearly killed the company before a near-$50m emergency – or bridge – six-month loan could be provided at 9.5% interest by Russian bank MDM in June last year.
Bryne said: "We always had aggressive plans but it has taken longer than originally anticipated to get manufacturing up and also the market has changed. Yield is an issue being addressed and reliability was a situation in the past as displays died after a few months."
Bryne said: "We were helped as Dresden has a high-tech background and people there knew what to look for [in a semiconductor plant]. But there will be improvements for the Russian factory [in Zelenograd] in designing equipment for it and the layout."
Richard Archuleta, chief executive of Plastic Logic, said: "Internally, we have zero doubt that this technology will scale, be cost effective versus alternatives, and be reliable."
Archuleta declined to reveal official yield figures but an insider aware of its production reports said if the company could achieve yields of 20% to 30% and resolve the reliability issues this year it would be a great achievement.
An investor in Plastic Logic said: "It is still a binary outcome for Plastic Logic – if the technology works it can sell a million units against iPad’s 40 million estimated for 2011 (its second year). Or it is stillborn. And, like any consumer electronics company, it is hard to predict what will work unless you are Apple."
Another investor added: "The Que is late to the game now, so the bet is less than 50:50 it will succeed."
In Plastic Logic’s favour, the Russian government is prepared to throw enormous resources behind the second factory expected to start being built later this year. This is because, as Georgy Kolpachev, managing director of Rusnano, put it: "Plastic Logic is the industry’s leader in the development of this technology for commercial purposes. Plastic electronics is a semiconductor replacement technology, and it has the potential to revolutionise the design and production of electronic devices across the globe."
As well as investing heavily in Plastic Logic, Rusnano has backed a swathe of businesses using similar nano-technology – matter manipulated on the atomic or molecular level.In trying to help Russia’s economy catch up with and overtake the US, Rusnano and its political backers have entered a global competition for innovation and capital and taken on China.
Plastic Logic’s selection of Rusnano over the $200m from Beijing’s mayor, who wanted the second factory built in his region, reflected the reality of its financial position – choosing the state that could invest quickest.
The long-term future of the company might well be decided in terms of whether Russia develops as quickly as the world’s most populous nation and now the second-biggest economy.
Gerald Chan, co-founder of Hong Kong-based family office Morningside Group, which invested in Plastic Logic in 2005 through its Technology Ventures unit, said: "China was not quick enough to win, but in retrospect it could be that building in China would be better as it has 11 semiconductor fabs [fabrication plants], a display and contract manufacturing industry and is good at building an industry from the ground with informal public-private partnerships.
"Governments all round the world are doing it [investing in innovative companies] and that is a good thing as their motivations are different from venture capitalists. They are thinking technology is seminal to the economy, with lots of derivations [spin-off companies] from Plastic Logic to build a whole local economy."
Spreadsheet jockeys dismounted
Investing has been divided into two camps – growth and value, with optimists often falling into the first camp and deriding the latter as financial spreadsheet jockeys rather than people following their passion and conviction and trying to change the world.
The founding team behind Plastic Logic wanted to change the world. Friend said: "It is shattering how little ambition most people have, who just want to make marginal improvements. Why be a clever person doing a useless app for the iPhone when you could be developing tech to blow Apple out of the water? It might be egregious, vain and ambitious, but there is something in the water of Cambridge [that encourages this larger ambition]."
But in order to do this, Friend and Sirringhaus needed to find investors prepared to back their vision and deal with the opportunities and problems the technology offered.
For that, they found the perfect partner in Hauser. Hauser’s commitment to Plastic Logic has been absolute, even using his personal wealth through his Providence investment company to invest when his venture capital firm, Amadeus Capital Partners, which was named after another of Austria’s famous sons, had reached its limit.
Friend said: "Hermann is a remarkable person and his impact on the UK is underestimated. Hermann’s attitude is about how to change the world."
The initial investors providing £1.75m were a mix of Amadeus, Cambridge University’s Research & Innovation fund and Dow Chemical’s corporate venturing unit, which invested because of Plastic Logic’s potential strategic and financial importance using advanced plastics.
Hauser was also instrumental in encouraging Plastic Logic to act as a global company. He said: "If you have a very fundamental breakthrough you have to do it on a global basis and have management that can play on that level so [Plastic Logic brought in serial entrepreneur and executive] Stuart Evans, who was my neighbour [in Cambridge]."
Evans ran Plastic Logic from 2000 to 2006. After an interregnum period, the present incumbent, Richard Archuleta, joined from Hewlett-Packard, where he had been a senior vice-president.
A further swathe of the world’s best companies and investors followed the seed round, including Bank of America, Siemens, BASF, Mitsubishi, Morningside, Oak Investment Partners and Intel Capital, the world’s biggest corporate venturing unit with more than $9.5bn invested as venture capital on behalf of its US-listed semiconductor parent.
Abdul Guefor, a managing director at Intel Capital, said it categorised the Plastic Logic investment as "eyes and ears". This means supporting companies developing interesting technologies not under development inside Intel, helping them where the corporate venturing unit can and monitoring their impact on the technology sector.
He continued: "We felt Plastic Logic’s technology had application in many interesting areas, such as displays, RFID tags and flexible interconnects. Displays were always going to be the primary application and we have a long history of similar investments, including E Ink, [an MIT Media Lab spin-off producing e-paper], Iridigm and many more. Displays are important to Intel as they often consume a majority of a laptop or handset’s battery budget. So we are very motivated to findways of extending battery life via low-power display technologies.
"Second, we were intrigued by their manufacturing technology. We wanted to know whether their plan to print semiconductors, essentially as an inkjet printer prints characters on paper, could work in high volume instead of the traditional, and much more expensive, lithography method employed today.
"Unlike many commentators, we never felt plastic semiconductors would replace silicon outright – that is not why we invested. We still believe plastic is unlikely to catch up with current silicon technologies for a decade or more. Plastic has significant materials issues to address, but progress is being made."
By 2006, Evans said he had five of the world’s top 50 most respected companies as investors, as well as top-tier venture capital firms after two further funding rounds of $18m and $25m in 2002 and 2005 respectively.
The euphoria of the first successful prototype of the Que in 2006 attracted a different category of investor and allowed Plastic Logic to be even more ambitious in its business strategy.
Hauser’s network built up over the past 20 years meant Plastic Logic could explain its ideas to an elite group of investors, including Bandel Carano, a legendary partner at US venture capital firm Oak Investment Partners, one of a handful of firms able to raise more than $1bn for its funds because of their performance record.
Evans said: "Oak got involved as Bandel was visiting Hermann and chatted to Richard [Friend] in November 2005. We were already raising a $20m round so had fresh paperwork and they signed by December 19. I wrote him a letter of thanks that day and by the next I got an email back saying Oak had only invested as it wanted to put in $30m to $40m.
"There are two types of guys – spreadsheet jockeys and guys with passion and conviction. That is the best test of growth or value investing. Passion and conviction appear to be Rusnano’s approach, too."
Oak’s involvement allowed Plastic Logic to shift its business plan from the one followed by Cambridge Display Technology, licensing, to manufacturing a consumer product. The shift remains controversial.
For early investors, with smaller funds than Oak’s, the decision to shift has meant the company has incurred heavy operating losses of £70m and £84m in 2008 and 2009 respectively, and some have been diluted or washed away by the wave of new money.
After 2005’s $25m so-called down round, when the company was worth an estimated $10m to $15m as a restart, Oak’s appetite to invest and its size meant it had a powerful influence.
Oak provided an estimated $40m at the end of 2006 and beginning of 2007 during booming stock markets, and there was a similar sum from a new investor, Tudor, a US hedge fund and at that time one of the world’s most powerful financial investors.
However, as with most financial investors, Tudor was affected by the credit crunch and it curtailed its venture investments.The crunch meant when Plastic Logic needed more money to continue building its Dresden factory, as well as relying on German government help it had to turn back to existing investors and there was no chance of using stock markets to attract institutional support.
Geoffrey Love, head of venture capital at Wellcome Trust, a UK-based medical foundation and one of the largest investors in the indsutry both directly and as a limited partner in venture capital (VC) funds that have backed Plastic Logic, said: "Plastic Logic shows the difficulty in raising serious money for technology in this country and the difficulty of finding deep pockets and long-term syndicates.
"There is not the appreciation of technology or enough European money as private equity firms will not touch a company without a product, and those that know of Plastic Logic’s disruptive potential have no money.
"VC ambition is being reined in and firms are going for capital-light areas, which has got to be a problem because it opens the door to China or Russia to come in and establish their country as a hub for this sort of development."
Friend said: "On VCs, it is a relevant question for the ecosystem to look at the ways society shares risk to take chances for big pay-offs. There is no national [UK] strategy to generate manufacturing that goes on in Asia and it is bizarre if the risk is entirely with VCs.
"Having faith the market will deliver the right solution is naive as it does not exist in isolation. When you apply this policy on an international field, you lose.
"A search by [financial consultancy] KPMG of 90 locations on the criteria of speed of action, amount of financial support and access to trained workforce found Dresden [as the site of Plastic Logic’s firstfactory]. But if the factory had not initially been in Dresden, six hours away [from Cambridge] by flight,but in, say, Singapore, it would have been inevitable that research and development would have gone there [from the Cavendish], too.
"The role of universities is primarily to teach and at Cambridge increasingly this involves graduates. With Plastic Logic, the students have access to a leading-edge company, which is a competitive advantage for starting a company here. Universities are not about investing early but turning out the best people.
"Universities should not have too confusing a mission but instead have an obligation not to let things go to waste if they can file patents and give appropriate resources so a commercial operation can hire the best people."
Teri Willey, chief executive of Cambridge Enterprise, said one of the lessons from Plastic Logic was the need for "a long-term effort requiring continuity and support from 1986 and who better than a university to do this".
As 2009’s losses hit, and with the Que’s launch pushed back at least to this year, Plastic Logic was facing collapse. But, as Hauser said: "Times like the 2005 company restart and 2010’s frustrating delay are always very worrying but par for the course. It is the way venture capital is."
As the burn of cash to support the company continued without a product being launched, Plastic Logic hired US investment bank JP Morgan to undertake a global search for prospective partners. This search drew limited interest until KPMG introduced Rusnano, which already knew Plastic Logic after Kolpachev left Intel Capital to become a managing director of the Russian investment company in late 2008.
Archuleta said this crucial early interest from Rusnano allowed both sides to get comfortable with each other, for meetings to be set up with Chubais and for a Que to be prepared for Putin. He said: "Rusnano had been engaged with us for more than 18 months [by the time the investment was agreed]. It has been a very long process. One advantage they [Rusnano] had over the Chinese was their interest so early on and way before we started our world search.
"And when you do reach the 11th hour of a deal and you need a commitment from one partner or the other, the fact that we had met Rusnano’s key people, such as Anatoly Chubais, several times helped. It is true we provided a Que reader to Chubais who gave one to Putin. Those contacts do help at the approval stage. That we knew Rusnano so well because of this history was vital, especially in something this big and relatively complex – a UK-started company with headquarters in the US and a factory in Germany.
"For the round, we had high interest everywhere, but the state of the financial markets and the fact that commercialisation requires a fair amount of capital to build clean rooms for transistors means it is very different from internet start-ups.
"So we found investors with a long-term view that share our vision for the next five to 20 years and have the resources to support us. These were sovereign or state-backed funds in the Middle East, China, Singapore and Russia, and every group has their view, but we think we found the best partner in Rusnano."
Of the $700m total for the round, Rusnano is investing $150m initially, while partially guaranteeing $100m in loans, for an expected 34% stake. Oak is investing $50m to retain a 52% holding, and the other shareholders are being proportionately diluted, leaving Tudor and Amadeus on about 3% each and Intel at 1%, investors said.
Rusnano has also agreed to future long-term debt financing but declined to say how much. Deal sources said Rusnano’s equity investment would involve $230m, including the original $150m, and it might take about $70m of a further potential $200m needed about December this year.
The agreement required a 60 to 70-page term sheet – "the longest I have ever seen", according to one person at the negotiating table. The deal also gave Rusnano two board seats – one for investment manager Sergey Prikhodko and the other to Kolpachev.
Half the money from Rusnano and Oak is being used to support Plastic Logic’s research and development in Cambridge and its Dresden factory, with the remainder going on the second chip plant in Zelenograd. State backing means Rusnano can play a role similar to that of the authorities in Germany when Plastic Logic set up the first plant in Dresden.
In a video posted on YouTube, Chubais laid out Rusnano’s strategy when talking to US-based VCs in October. As well as debt and equity, he said Rusnano could offer "administrative" support in helping companies get through Russia’s bureaucracy and avoid concerns about corruption.
The ambition is to be generating $20bn in revenues from Rusnano’s nanotech portfolio by 2015 by using its natural resources to pay for the transformation of the economy.
As Chubais said, in 1998, during the depth of the Russian crisis, average monthly earnings were $30. The past decade’s boom in oil and gas prices have created a wind-fall – 70% of Russia’s exports are in natural resources.
This has taken average monthly earnings to $700. Now, the country is looking at how South Korea, Singapore and Taiwan rebuilt their economies through manufacturing from the 1950s by taking the idea of cheap, more basic technologies and gradually improving them.
If successful, therefore, Plastic Logic’s role as a trophy development could materially affect a country’s standard of living as well as form the next chapter in the story of the information revolution.