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Harris & Harris Group: Introduction to a publicly traded venture capital firm

|Includes: 180 Degree Capital Corp (TURN)

Harris & Harris Group, Inc.(TINY) is (according to their statements) "an internally managed venture capital company specializing in nanotechnology and microsystems that has elected to operate as a business development company."  At first glance, that's a unique and intriguing investment opportunity.  I was interested enough to do some research, but for my taste there isn't enough publicly available information to value the company.  However, the information I gathered might help others evaluate this opportunity.

What follows comes from TINY's most recent 10K (Mar. 12, '09), their most recent letter to shareholders (Nov. 9, '09), a slide presentation available at their website (Sept. 30, '09), and a visit to the websites of seven representative companies in which TINY has invested (out of roughly 30), plus a few google searches.

From a financial perspective, as of last month they had approximately $61 million in cash and no debt.  That includes the $21 million they raised in October through the sale of 4.9 million shares.  Annual operating expenses for their 11 employees are expected to come in under $6.2 million in 2009 (not including stock-based compensation that totaled ~$2.4 million as of September).  An undisclosed amount of additional funds goes to support their investment companies.  At the beginning of 2009 they had 33 active companies.  During the year they provided funding to one new company and follow up funding to 12 of their existing investments.  As of the last shareholder letter they had 27 active companies with estimated value above zero.

In the Sept. 30 presentation (before the stock sale mentioned above) the company estimated it's NAV/share at $4.30.  The value comes from the $42.7 million cash they had at the time plus their VC portfolio which they valued at $70 million.  There is no specific information to support that $70 million valuation.  I'm sure TINY management has models to justify those valuations, but they don't share the models, or the inputs to the models.  Nor do they share how much they've invested in any individual company.  So really we just have to take their word on the value of the portfolio.  Investments in private companies are necessarily going to require estimated valuations.  And there may be competitive or legal reasons why management doesn't provide a great deal of detail on its investments.  But at the end of the day, this limited information on the value of their VC portfolio is why I don't feel comfortable investing my money in TINY.

Back to the portfolio value: their cost basis for that $70 million portfolio is $94 million.  And as a point of comparison on NAV/share, TINY estimated their NAV/share at $5.95 on 6/30/08.

On to the companies TINY has invested in.  First, I wouldn't really agree with TINY's assertion that they invest almost exclusively in nanotechnology and microsystems.  There is some of that, but there are also investments in biofuels, biotech, and advanced LED lighting and battery technologies, just among the seven companies I investigated.  Those are all exciting, potentially profitable areas, but calling them nano- or micro-tech is a stretch.  Second, I wasn't able to find any information about the size of TINY's investments in any of these companies, either on a dollar or percentage basis.  They do state that their top 10 holdings represent 68% of their VC portfolio, but it's not clear which companies make up the top 10.

Now for the specific companies.  All of the companies below are private. I assume that all of the companies TINY has invested in are private, but I do not know that for a fact.

--Adesto Technologies: Fabless semiconductor company that develops next-generation ultra-low power non-volatile memory technology.  [Seems to be a very secretive company, there's almost no information on its website or anywhere.]
--Ancora Pharmaceuticals: founded based on state-of-the-art carbohydrate synthesis for vaccines.  There is a synthetic carbohydrate vaccine (not associated with Ancora) already approved in Cuba, so the concept is proven, but this is a very early stage company.
--Biovex: Developing a cancer-targeting virus.  Phase II results in melanoma and head & neck cancer were impressive.  Phase III began in May '09.  This company looks promising and late-stage, but they raised money twice this year for a total of $110 million and TINY didn't participate either time.  I worry that TINY might have been diluted to a very small position.
--Bridgelux: developing LED lighting with lower costs than existing technology.  Products are on the market already, but they're still working on getting costs down.  TINY participated in all financing rounds since '06.
--CFX Battery:  "Advanced" lithium batteries.  It's not clear what is advanced about them.  They've raised $15 million and $26 million in 2 rounds and it's only clear that TINY participated in the first.  They're in talks with OEM's to get their battery technology into a variety of products/markets, but there are no deals yet and there's lots of competition.
--Cobalt Biofuels: Developing microbes and processes to produce butanol from a variety of plant sources.  Butanol does have advantages over ethanol, but this company seems to still be in the research stage.  TINY participated only in the latest round of funding and is listed 7th of seven VC investors on their website.
--Molecular Imprints: Technology for laying down materials in specified patterns on a very small scale; like lithography but a different technology.  They're already selling machines for making hard drives, semiconductors, and LED's.  They expect $24 million in revenue in 2009.

Like I said, exciting investments, but difficult to value individually, and impossible to independently estimate TINY's share of that value.

Disclosure: No positions