Amid Confusion, Nanotech Industry Awaits Boom

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Like a mother hen waiting for her eggs to hatch, Charles Harris hovers anxiously over the 26 nanotech companies in his portfolio. His impatience is palpable. As he says, “All we need is for one investment to come through in a big way.”

Harris & Harris Group is a publicly traded venture capital company, with the appropriate symbol TINY, which, since 2001, has invested only in nanotech firms. The company is small, with a total market capital of $238 million at yesterday’s stock price of $10.30. It is, however, one of the largest venture capital outfits focused exclusively on nanotech properties. Consequently, the firm has the opportunity to invest in almost every significant deal that comes along — and to pick the ones that appear most promising. “We see almost a deal a day,” Mr. Harris says. “We reject most of them out of hand.”

Nanotechnology has been talked about since the 1950s, when physicist Richard Feynman gave a talk titled “There’s Plenty of Room at the Bottom.” Over the years, the concept has become a reality, as inventors and companies have harnessed the capabilities of units measured in nanometers, or billionths of meters. In fact, the commercial applications of the science today are numerous, in fields as diverse as pharmaceuticals, semiconductor manufacturing, and fabric design. “There are over 500,000 pounds of nanomaterials being used each year by GM alone,” Mr. Harris says. “There are billions of dollars of sales of mundane things that use nanotech.”

What has been lacking is a wave of nanotech initial public offerings, which would herald the industry’s arrival to investors. The disappointing pace of deals in the sector reflects problems in the IPO market, according to Mr. Harris, as much as the sometimes confusing evolution of nanotech products.

Last year only 56 venture capital-backed companies went public in America, down from 250 in 1999. Venture capital has been upstaged by private equity in recent years, in part because the latter sector has profited better from the liquid credit markets. Private equity deals have become increasingly leveraged and have consequently produced outsized returns for investors, while venture capital firms have traditionally been loath to add to the already risky nature of their investments by borrowing. Also, the huge and ultimately catastrophic boom in technology venture capital in the late 1990s left a distinctly sour taste in the public’s mouth. Needless to say, the current seizing up of the credit markets could change the playing field.

Mr. Harris also points out that nanotechnology has evolved awkwardly. “It’s not an industry but sets of enabling technologies,” he explains. “The technology is applicable to most traditional industries.” As a result, for instance, Wall Street has had trouble deciding who should cover the emerging companies.

Because breakthrough designs, such as the development of carbon nanotubes, can be used in many ways, even the government has been confused. “The patent office has issued patents which it should not have,” Mr. Harris says. “They came in with different applications through various disciplines, but it was the same technology.”

That nanotech has an exciting future is without question, as far as Mr. Harris is concerned. Those carbon nanotubes, for instance, are 100 times as strong as steel and weigh only one-sixth as much, while also conducting electricity. “The implications for sustainable development are very important,” Mr. Harris says. “Nano is all about building things at the molecular level, which is the opposite of the normal way of doing things.”

In other words, instead of chopping down a tree to make a chair, with all the attendant waste of energy and materials, nanotechnology is about building things up from the molecular level.

Indeed, it may be the “green” aspect of nanotech that finally vaults the companies into investor consciousness, and into successful IPOs. Six of the companies in Harris & Harris’s portfolio are developing products using nanotechnology to create energy-efficient lighting, cleaner water, and commercial solar energy, and to convert waste heat into energy.

Mr. Harris has been a nano enthusiast since his first investment in the sector in 1994. The company, Nanophase Technologies (NANX $7), went public in 1997, at several times the price Mr. Harris had paid. At the time, the field was still relatively new. As he did due diligence on the deal, Mr. Harris says he realized he had stumbled onto “a whole new world.” His enthusiasm led him to search for the next nano firm, but it would be seven years (and investigations into innumerable “science experiments”) before he found the next suitable investment, Nanogram Devices, which was sold 13 months after it was founded.

These first two successes were enough to sell Mr. Harris on nanotech: “I thought it was going to be the most important development in my lifetime and that it would be possible to establish a leading position.” Since 2001, Mr. Harris has made investments in the sector totaling $73 million, and has taken write-offs of $18 million. He warns investors that write-offs are inevitable, and that venture capital by its nature is “all about asymmetries.” He also cautions that to be successful, the venture capitalist requires considerable patience.

The early wins fueled a nine-fold increase in TINY’s stock price between 2001 and 2004. However, since hitting a high of $24 in 2004, the trend has been mostly downward. Investors are waiting for the next big score. Mr. Harris argues that many of the companies in TINY’s portfolios are nearly ready to launch, both in terms of age and revenue generation. Last year, the firm’s nanotech portfolio companies cumulatively generated $158 million in sales (one firm accounted for more than half the total), and two were profitable.

While waiting for the market to turn more welcoming for venture deals, Mr. Harris continues to search for the next big winner. The company has no debt and is financially in good shape to take advantage of opportunities that come along. In the meantime, Mr. Harris feels he is doing “the most constructive kind of work in the financial world. People do it as a labor of love. It takes every facet of experience — the companies are so fragile.”


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