(Third posting in a series on venture investing in nanotechnology.)
In early 2002 New York-based venture capital firm Harris & Harris Group announced it would concentrate its investments solely on "tiny tech," including nanotechnology, microsystems and microelectromechanical systems (MEMS) technology.
This was a brave move as tiny tech companies require a great deal of capital and take a long time to mature. It was not a snap decision. "In 1994, Arch Venture Partners asked us to invest with them in Nanophase Technologies Corp., which was a spin-off of Argonne National Laboratory," Charles Harris, Chairman and CEO said. "The company went public three years later, but we stayed in longer and eventually became the second biggest shareholder."
The firm thought it was still too early to focus on tiny tech, but watched the market. When they did sell their shares in 2001, they put part of the proceeds into another company, a Harvard spin-off called Nantero. After going through the due diligence process for that deal, the firms decided the time was ripe for a focus on tiny tech, even changing its URL to www.tinytechvc.com.
"By then we were convinced that there was a sufficient pipeline for tiny tech investing," Harris said, noting that up until then they had never had a specific industry focus when it came to investments. "We went out and hired the appropriate people–scientists trained in nanotechnology with experience as venture capitalists."
What gives Harris & Harris an advantage in the market is that the firm is publicly-traded (TINY) and therefore does not have to return captial to investors within a particular timeframe, such as pension funds or fund of funds. "We were never a private venture fund," Harris said, "We were a public company which then became a venture fund. We have our own permanent capital and do not manage third-party capital." This is why the fund can make investments in technology companies which may not mature for five-to-ten years, or stay in a company (as they did with Nanophase) even after it goes public.
That said, the firm does invest in syndicate with conventional venture capital funds. "We like working with the traditional venture capital firms," Harris said. "They have specialities and often bring something to the table we don´t have. We have a nanotechology ecosystem, as they often have prior experience in a field, contacts and expertise in a specific area of application."
Harris dismisses the notion that nanotech companies are receiving minimal investment from the venture community. "A lot of companies which have underlying nano-technology are not billing themselves as `nano-companies´," he said. "They´re not flying the `nano´ flag." Indeed, nanotechnology is being used in bio-tech, cleantech, engineering, robotics and more, but-like genetic algorithms to information technology-has become to be considered part of the building blocks or fabric of a proprietary technology, not the primary technology itself.
Although public, the firm´s fundamental approach to evaluating tiny-tech companies does not depart from the approach of classical venture capital funds, according to Harris. Criteria considered for investment include:
*Does the prospect have solid management?
*Does a product or service fill a real need?
*Does the company have proprietary technology and is it aimed at a market of significant size?
*What is the ease of market entry and how challenging will it be for a company to secure customers?
When investing at the early-stage, the firm also looks at a startup’s ability to attract additional investment–whether in later rounds of venture capital financing or through an IPO or acquisition–and they like to see the startup team include a CEO with proven experience launching and building a company.
At this point 25 of Harris & Harris´ 27 portfolio companies have a tiny tech focus. The firm has had one successful nanotech IPO exit, one successful nanotech acquisition and has exited five other nanotech investments at a loss.
Come back to the blog in a few days for highlights of some of the firm´s portfolio companies"?¦.
Janet’s Running List of Venture Conferences:
The Big Sky Venture Capital Conference
August 24-25, 2006
Big Sky, Montana
Midwest Association of Angel & Venture Capital Conference
Sioux Falls, South Dakota
Emerging Venture 2006, October 16-17, 2006
The Fairmont Hotel
San Jose, California
National Venture Capital Association
13th Annual Silicon Valley Venture Capital/Entrepreneur Networking Luncheon
December 7, 2006
Hotel Sofitel, Redwood City, California