Harris & Harris Group, Inc. (TINY-NASDAQ)
March 23, 2012 Issue
The Most Powerful Name In Corporate News and Information
Venture Capital Firm, Harris & Harris Group, Inc. is Focused on Early-Stage Transformative Nanotechnology Companies – Where the Disruptive Breakthroughs are Occurring
Harris & Harris Group is a publicly traded venture capital firm with permanent capital and a 28 year history of successful investing.
Since 2002, Harris & Harris Group has built a portfolio of predominantly privately held companies using its expertise in nanotechnology. These and future portfolio companies are well positioned to benefit from the expansion of nanotechnology applications in industries such as LEDs, clean energy, clean water, personalized medicine, computing, touch screen electronics and high-speed semiconductors.
We believe we have first access to some of the most promising developments in nanotechnology and a balanced pipeline of investment opportunities in healthcare, energy and electronics – all future growth sectors.
Harris & Harris Group is a skilled early-stage investor. We have often been the first institutional investors or a part of the first syndicate of institutional investors that licenses technology out of research institutions, develops intellectual property portfolio strategies, builds the initial management team and attracts additional capital. We often hold membership on boards of directors or serve as observers to the boards of directors. We actively make available significant managerial assistance to our portfolio companies.
We believe nanotechnology
can be classified as a transformative technology. An innovation qualifies as
a transformative technology if it has the potential for pervasive use in a
wide range of sectors in ways that change the competitive dynamics in those
sectors. By focusing on nanotechnology, we profit from the disruptive
breakthroughs that can become the transformative products of tomorrow.
Chairman & Chief Executive Officer
Doug Jamison is Chairman and Chief Executive Officer and a Managing Director of Harris & Harris Group, Inc., a publicly traded venture capital company listed on the Nasdaq Global Market (NASDAQ: TINY). Harris & Harris Group focuses solely in making initial investments in “tiny” technologies, which it defines as nanotechnology and microsystems.
He has previously held the positions of President, Chief Operating Officer and Chief Financial Officer of Harris & Harris Group, Inc. He is also currently Chairman and Chief Executive Officer of Harris & Harris Enterprises, Inc., a wholly owned subsidiary of Harris & Harris Group. He is a member of the Board of Directors of HzO, Inc., and a Board observer in ABS Materials, Inc., Produced Water Absorbents, Inc., and Metabolon, Inc., privately held nanotechnology-enabled portfolio companies of Harris & Harris Group. He was responsible for Harris & Harris Group's investment in Solazyme, Inc. (Nasdaq: SZYM) prior to it going public in May 2011. He was also a member of the Board of Directors of Innovalight, Inc., prior to its acquisition by E.I. du Pont de Nemours and Company. He is Co-Editor-in-Chief of "Nanotechnology Law & Business." He is a member of the University of Pennsylvania Nano-Bio Interface Ethics Advisory Board, and a member of the Advisory Board, Massachusetts Technology Collaborative Nanotechnology Venture Forum. Prior to joining Harris & Harris Group, he was a Senior Technology Manager at the University of Utah Technology Transfer Office, where he managed intellectual property in physics, chemistry and the engineering sciences. He is a graduate of Dartmouth College (B.A., 1992) and the University of Utah (M.S., 1999).
conducted by: Lynn Fosse, Senior Editor, CEOCFO Magazine, Published – March
Mr. Jamison: Harris & Harris Group is an investor in early-stage transformative nanotechnology companies. This focus has not changed since my tenure as CEO began in January of 2009. The firm is almost thirty years old, but our focus on nanotechnology began in 2002. As a company, we have leveraged our core expertise in nanotechnology to participate in the expansion of nanotechnology applications in industries, such as light emitting diodes or LEDs, clean energy, clean water, vaccine development, personalized medicine, computing and even in high-speed semiconductors. These are all areas that nanotechnology is impacting, currently. As large portions of industry come to rely on nanotechnology as a fundamental enabler of next generation products, we believe we are well positioned to take advantage of the ensuing interest in entrepreneurial nanotechnology-enabled companies.
Mr. Jamison: Nanotechnology refers to technology at the nanoscale. We define nanotechnology as the characterization, design, manipulation and manufacture of materials and processes on the molecular level. The nanoscale is really a size domain, a very small size domain. To put it into perspective, if you take a piece of human hair, the width of that human hair is actually 50,000 times larger than a nanometer. There are interesting properties when you get down to the nanoscale that our portfolio companies take advantage of.
Another way of thinking of nanotechnology is to understand that science is what we call reductionist, which means that our understanding of scientific principles often occurs in progressively finer detail over time. Currently, our understanding of much of science is at the nanoscale and below. Therefore, our focus on nanotechnology places us at the center of many of the exciting breakthroughs now impacting technology development.
Mr. Jamison: Many venture capital firms are organized around industry verticals such as healthcare, medical devices, cleantech or electronics. We never organized Harris & Harris Group in that manner. We are an early-stage, active investor, focusing on nanotechnology across multiple industries. From these disruptive technologies, we can build transformative companies. We focused on nanotechnology, because it is where the disruptive breakthroughs are occurring. We built our team around three skill sets: venture capital expertise, intellectual property and technology transfer, and deep technical expertise. Our investment team contains a PhD physicist, a PhD chemist, a PhD biochemical engineer and a PhD geneticist. We are focused on early-stage companies. We are often the first institutional investors in a company. We tend to take innovations in scientific research, form a company, get the intellectual property established around it, build the first management team, and work to craft the first business plan. For us, being at the center of these disruptive breakthroughs is important. As the companies develop, we syndicate with other investors, who tend to be organized around a specific industry vertical. It truly takes a village to raise a company.
Mr. Jamison: What we do is interesting and exciting, because forming these companies is very difficult. We think our skill sets are important in the formation stages of transformative companies. Our approach also provides us diversification. We invest in multiple industries. Nanotechnology has many diverse applications across multiple fields, and our team has the unique ability to identify and diligence the network of discoveries that come from understanding science at the nanoscale. Not only do we work with fantastic management teams and brilliant technical founders, but we also work with other very qualified intelligent investors that really know their vertical domain well. Even as many investors have moved to later stage investments, we have had success with these early-stage companies and we have decided to stay with what we think is our expertise.
Mr. Jamison: There are many generalizations to be made about early-stage investing, but practically, each investment is different and unique in its development. We are the first institutional investor in over 70% of the deals in which we invest. We hold board seats or observer seats in over 80% of our portfolio companies. If we are the first institutional investor, we will often have at least a board seat, often two board seats. Sometimes we will actually be the early management in these companies before we build out the team, thus we may be running the company during the early stages. We are very active investors, so we spend a lot of time working on the business plans, building out the management teams and looking for other quality investors for the company.
Mr. Jamison: We love working with innovative researchers. They are brilliant, and they are on the front edge of science, so what they are doing is very interesting. That said, one adage in venture capital is that the researcher should stay doing what they do best, inventing, and management should be comprised of people that are best in management and business. Sometimes, an inventor can be a great businessperson, but often, we encourage the inventor to stay in their world-class research institution and continue inventing. Building a company is not about doing research, but taking research and technology and innovating it into a product and then selling it into a market where one can get economic return - and those are two very different things from inventing.
We will often look for an entrepreneurial PhD student or a post doc coming out of the lab. It is often the Ph.D. student or post-doc that actually knows how to tweak the different equipment to actually make or build what you are doing, which is very important in business. We will have the inventor be a founder, but often they will be a scientific advisor or they will move from a chief scientific officer role to a scientific advisor over the first couple of years of the company. Almost always, over time, this makes both the researcher happier, and it makes the company happier as well.
When looking for a new
investment, we look for disruptive technologies. But we look for disruptive
technologies that can impact multibillion dollar markets. Another venture
capital adage is, “It is really difficult to solve most problems and a lot
of times you are going to fail, so if you are successful solving a problem,
have it be a problem that matters”. It must be a large market, it must be
important and it should be able to change the world. I once heard it said,
and I agree with this, “at the end of the day, when you look back at
successful companies, it is often that the original technology is less than
5% of what you will call the value of that company”. What turned out to be
the lynchpin to success is the management. Therefore, we spend a lot of time
looking to build the right management teams.
Mr. Jamison: A third adage in the venture capital industry is, “the lemons ripen before the plums.” It is important to realize when it makes sense to cut one’s losses rather than throw good money after bad investments. There are some simple triages. I have seen a lot of mediocre technologies turn into great companies, but rarely have I seen a great technology develop into a great company without fantastic management. Additionally, regardless of how interesting it is, if it cannot attract capital, it will be difficult to be successful. In nanotechnology investing, one of the things we look for is corporate interest, because corporations have very well articulated strategies for nanotechnology. If we cannot interest paying corporate partners to help work with us to develop the technology, then we stop and ask if the market is going to be interested in this development. In early stage venture capital, the best thing you can do is feed the fat hogs and starve the lean ones. It is the few fat hogs that bring the great quantity of venture capital returns.
Mr. Jamison: 2011 was a breakout year for Harris & Harris Group. We had five liquidity events. We sold three companies. We sold Biovex to Amgen, a well known public healthcare company, we sold Innovalight to Dupont, again another house hold name and we sold Crystal IS S to Asahi Kasei. We had two initial public offerings or IPOs. NeoPhotonics (NYSE:NPTN) completed its IPO in February of 2011 and then Solazyme (NASDAQ:SZYM) completed its IPO in May of 2011.
We were the first institutional investor in Solazyme. The founders discovered a way to genetically modify algae to produce large quantities of specially tailored oils. They do it not by growing algae from sunlight, but by growing it on sugar. Solazyme uses these oils in everything from cosmetics to functional foods. In the functional food area you can think of making cookies, muffins, ice cream, but using a healthy oil while using no butter, no eggs, and ending up with low transfats, low cholesterol and much less calories. Solazyme has also developed applications in both the chemicals and the fuel space. They have multitrillion dollar market opportunities through the production of these tailored oils including in functional foods you can eat, to the fuel with which we are going to use to power airplanes, boats and automobiles. The first commercial flight using 50% biofuel ran with Solazyme’s algal based fuel from Houston to Chicago late last year.
Another exciting company in our current portfolio is a company called BridgeLux. BridgeLux is a company that has a unique technology that allows them to make more efficient light emitting diode or LED die and arrays. The LED market is growing rapidly. We believe LED lighting will come to dominate the general illumination market in the coming years as prices decline, because it is more efficient and more tunable. Currently, it is more costly, but what BridgeLux is doing is bringing down the price of general illumination lighting with LEDs. Once you do that, the lights last multiple times longer than an incandescent light and they are very efficient lighting, so they use a lot less electricity. BridgeLux is a company where we were one of the first institutional investors beside a syndicate of investors. Over the last three years it has nearly doubled its revenue every year.
A third interesting company in our portfolio is D-Wave, a quantum computing company from British Columbia. D-Wave sold the world’s first quantum computer in 2011 to Lockheed Martin. Quantum computing has the potential to change how we think about computing in the future, and is another example of how nanotechnology is transforming business.
Mr. Jamison: We have 27 equity investments in the portfolio, and we have two more ventured debt companies in the portfolio, currently. We ended the year with over $30 million in cash and cash equivalents and $30 million in secondary liquidity, which we define as publicly traded securities that are freely tradable. We will use our current cash for new and follow-on investments and for our operating expenses. We made four new investments last year, and one new investment to date in 2012, in OpGen. We continue to be very aggressive making new investments. It remains a good environment to make these investments, as the valuations are low and the opportunities remain robust. Nanotechnology is really starting to emerge commercially. In 2011, aggregate revenue of our portfolio companies was over $400 million, and many of our late stage companies had record years of revenue.
Mr. Jamison: Harris & Harris Group is unique in that we are publicly traded. We trade on the Nasdaq under the ticker symbol TINY. Most venture capital firms are private partnerships. As a public venture capital firm, we have public shareholders. We have over 16,000 shareholders, and as a public company, it is important to be able to tell your story to existing and new investors. We work with an investor relations group, LHA, and we attend investor conferences. We also spend time reaching out to retail investor, because we have a unique story for this audience. Most retail investors do not have the opportunity to invest in venture capital as an asset class unless they have $3 to $10 million to invest in a venture fund. Therefore, we allow retail public market investors to invest in venture capital in a vehicle that is both transparent and liquid. Additionally, the great majority of these nanotechnology companies are still private, so we allow a retail investor to access the emergence of nanotechnology while many of the best companies are still private.
In March of 2012, we hosted our third Meet the Portfolio Day, and the webcast of this event can be found on our web site at www.hhvc.com. Also, in January 2012, a short five minute PBS segment on Harris & Harris Group was filmed in Silicon Valley highlighting us and some of the companies I mentioned above. It will be released over the summer.
Harris & Harris Group make sense for an investor that has a long-term
perspective, and wants to play the emergence of a disruptive technology from
which we can build transformative companies. To this investor, Harris &
Harris Group offers a diversified opportunity to play the emergence of
nanotechnology and transformative start-up companies. I believe investors
should focus on the progress of the portfolio over time, measured by net
asset value per share or NAV. Investors should examine whether we are making
interesting new investments in areas they believe will be large market
opportunities. I believe investors should examine the existing portfolio to
understand which companies are maturing and to discover which companies may
become the next Solazyme or Biovex.
Harris & Harris Group is an investor in early-stage transformative nanotechnology companies. - Douglas W. Jamison
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