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Publicly traded Harris & Harris Group (NASDAQ:TINY) provides investors direct exposure to pre-IPO investment in nanotech. The trouble for most mere mortals like me have is that it is tough to get even an idea of potential risk/reward of such a stock, leave alone analyze its fair price. You see the combination of lack of meaningful information on the pre-IPO holdings of Harris & Harris Group and lack of proven ways to identify and size potential market for companies in this space make it plain difficult to make a judgment call.

Despite this situation, the lure of nanotech is so great that I decided to take dip in to the "TINY world" yesterday. Though all of my research was through internet and I am no expert in either investment or nanotech, I believe some of these will be useful to nanotech and TINY enthusiasts among us. Here is what I found:

TINY Positives:

  1. Biggest thing about small companies is people. So I scanned through Harris & Harris Group's website as well as those of its holding companies, primarily focussed on management profile. For the most part, I found that management folks at Harris & Harris Group as well as most of its holding companies have decent, if not impressive backgrounds. The fact that alumni of MIT, GE, Applied Materials and Lumileds are leading these companies is quite confidence boosting.

  2. Another comforting factor is that for most of the investee companies, Harris & Harris Group is part of a consortium of investors - and for most part, these consortiums are diferent at different companies. So for example, Harris & Harris has investments in Crystalis and Cambrios where another common investor is Lux Capital. However, many other investments like
    Ensbio, Kovio and Innovalight are in consortium with few other investors.

    This means that Harris & Harris Group is effectively developing diversified portfolio.

  3. Similarly, the target products and markets of the investee companies have wider variety from material for display to sensors to nanotech equipments. In fact, there is a large investment in a traditional chip start-up like C-Switch as well.

Mixed TINY bag - factors that are positive or negative - depends on how you look at it:

  1. Another important thing I found that most of the companies receiving investment from Harris & Harris Group are operating in "nanomaterials" and "nanointermediates" areas. (for a quick understanding of terms like these, check out Lux Research's site at http://www.luxresearchinc.com/luxni.html). "nanomaterials" and "nanointermediates" are pure play nanotech areas!
    where I believe potential rewards are higher, though with high risk and longer time frames to gestation compared to for example "nanotools".

  2. Under a recent change in incentive and compensation method Harris & Harris Group has replaced "profit sharing" incentives for its management and employees by an aggressive stock option plan. This sure helps in getting management interest better aligned with those of investors. However, the sheer number of options available under this scheme and the fact that every one in the management is selling over last six months is and will continue to be resulting in dilution of outsider's holdings.

And yes, with my limited research, I could not find any serious red flags. Even though I was initially worried by what seems to be heavy insider selling in last six months, going through SEC filings, I realised that it was an impact of change in incentive plan from "profit sharing" to stock options and to me it did not sound any lack of conviction on management's part in the company.

All said and done, I still do not have a way to estimate a fair price on this stock, though I do know that Harris & Harris Group provides a decent (and probably the only) vehicle for holding interest in diversified pre-IPO nanotech companies. With this research and Joseph McNay's recommendation in an interview with Barron's, I will continue to treat this as speculative, long term play and to retain my small holding in TINY for a long time.

Disclosure: Author is long TINY

Source: Harris & Harris: Speculative Nanotech Play