Investing In Diversified Nanotechnology With Harris & Harris Group

Feb. 8.12 | About: Harris&Harris Group (TINY)

There is a growing trend which supports the idea that nanotechnology is now in a phase of widespread adoption throughout technology platforms used for commercial use. As the world's understanding of materials operating under microscopic conditions continues to accumulate, so do the innovative and practical applications of such technologies operating on the nanometer-sized scale.

Yet not all nanotechnology applications stand as the work of concepts found only in science fiction. Even the medieval novelty of stained glass, which has been around for hundreds of years, operate on the working of metal nanoparticles. And with such practicality being the driver of small-tech innovation, many of these pragmatic modern day applications for nanotechnology are beginning to take root unnoticed in our society. For those looking to invest into the predictable future, nanotechnology-based companies could offer an untapped field of future growth in light of the unrivaled innovation slowly changing our world today.

Yet one of the greatest problems of investing in nanotechnology is the lack of pure-play options available. Many of the largest proponents of the field today operate as large conglomerates or corporations that fail to derive the bulk of their business from their nanotech operations. General Electric (NYSE:GE) and International Business Machines (NYSE:IBM) are two such companies that qualify as leaders exploring the realms of nanotechnology. Yet neither would be investment-worthy for their ongoing research alone without taking into account their primary businesses of manufacturing and information technology.

However, there exists a single investment that has managed to diversify into several companies whose primary business revolves around a specific nanotech-based application focus. This can be found in the venture capital firm Harris & Harris Group (NASDAQ:TINY). As an early-stage, active investor in "transformative" nanotechnology companies, the holdings of Harris & Harris Group consists primarily of developing private companies with unique intellectual property portfolios that are able to make significant impacts within their respective industries.

The company typically invests in minority stakes of its holding companies through pre-IPO equity investments and venture debt funding. With a maturing portfolio, Harris & Harris Group has recently seen a flurry of liquidity events in 2011, despite having had none in the last several years. Serving as a testatment to the success of the company's business model, the following is an overview of the five liquidity events that occurred within the company's holdings portfolio in the past year:

  1. BioVex Group. Holding onto technology that could serve as the first FDA-approved virus engineered to specifically kill cancer cells, BioVex was acquired by Amgen (NASDAQ:AMGN) in a transaction that could be worth up to $1 billion in cash on the basis of completing all subsequent performance markers.
  1. NeoPhotonics (NPTN). The company specializes in optical components, modules, and subsystems that allow for the delivery of video, voice and data over telecommunications networks and cable TV. Undergoing an initial public offering in early 2011, NeoPhotonics priced its shares at $11.00/sh. Unfortunately, Harris & Harris Group's cost basis for this company was $16.19/sh.
  1. Solazyme (SZYM). Operating as a renewable oils company specializing in advanced biofuels, chemicals, food, and cosmetics, Solazyme offers an algae-derived solution to several of the world's pressing problems, including diminishing oil reserves, heart disease, and food capacity. The investment in the company served as the largest investment by Harris & Harris. Solazyme underwent an initial public offering that priced its shares at $18/sh. Harris & Harris had a cost basis of $2.36/sh.
  1. Innovalight. As a leading producer of silicon ink, Innovalight specialized in optimizing the efficiencies of products made by solar cell manufacturers. The company was acquired by DuPont (NYSE:DD) for an undisclosed sum.
  1. Crystal I.S. Serving as the world-leading manufacturer of ultraviolet light emitting diodes (UV LEDs), Crystal I.S. creates products used particularly for germicidal disinfection in water, in air, and on surfaces. Impaired to an expected value of $0/sh, Harris & Harris had come to disregard the holding as worthless. Nevertheless, the company managed to close the transaction for proceeds of $1.74 million with another $288,000 still being held in escrow.

With a growing list of nanotechnology-based venture investments, Harris & Harris offers investors a diversified chance to share ownership in companies that contain industry-evolving technologies. Its recent spike in liquidity events suggest the time is right for nanotechnology in the eyes of acquiring businesses. Yet while several of these investments have slightly failed to turn a profit for Harris & Harris, the hope remains for just one or two companies to "make it big" in order to lift the profile as a whole. The effect of this was initially felt in the public offering of Solazyme in 2011.

However, investors looking for large immediate returns should consider looking elsewhere. Investments in technology for growth-oriented fields take time to mature and for profits to be realized. Those looking for a diversified approach to gain exposure to nanotechnology-based research may consider investing in TINY as a viable option. In the very least, they should be watching the individual companies that make up the holdings portfolio of Harris & Harris Group, which may one day find themselves as public entities worthy of investment.

Disclosure: I am long TINY, SZYM.