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Venture
Capital for Tiny Technology |
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FIRST QUARTER REPORT 2006 |
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FELLOW SHAREHOLDERS: |
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We
have been investing quite actively in the year to date. During the first quarter ended March 31,
2006, we invested a total of $9,412,746 in privately held companies working
at the nanoscale. Two of these
investments were initial deals, in which our Company invested a total of
$5,300,000. Two of these investments
were follow-on deals, in which our Company invested a total of
$4,112,764. Additionally, since the
close of the first quarter, our Company has invested $4,809,950 in new and
follow-on deals in companies working at the nanoscale. In summary, in 2006 to date, we have
invested a total of $14,222,714 in tiny-technology companies, versus a total
of $16,251,339 in all of 2005. |
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As
the table below delineates, not only have we been investing in more
tiny-technology companies, but also, as our net assets have increased, the
average amount of our investments has been growing, and we have been able to
act more frequently as a lead investor. |
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Investments
in Tiny Technology Since 2001 |
(To
Date)
2001
2002
2003
2004
2005 2006
Total
Dollar Investments in Tiny Technology $489,999 $6,240,118 $3,812,600 $14,926,749 $16,251,339 $14,222,714 $56,693,519
Number of New Investments 1 7 5 8 4 4 29
Number of Follow-On Investments 0 1 5 21 12 4 43
Average Dollar Amount - New $489,999 $784,303 $587,156 $921,050 $1,575,000 $2,387,637 NA
Average Dollar Amount - Follow On NA $750,000 $175,364 $359,921 $829,278 $1,168,042 NA
Number of Rounds Led 0 1 0 2 0 5 8
Net Assets at Year End $24,334,770 $27,256,046 $40,682,738 $74,744,749 $117,987,742 NA NA
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As
the table above also depicts, our tiny-technology portfolio is quite
young. All but one of our
tiny-technology investments, Questech Corporation, have
been made since August of 2001. (We
originally invested in Questech in 1994.
Today, Questech is a nicely profitable, rapidly growing manufacturer
of decorative tiles; its line of metal tiles is enabled by a patented
microscale process.) We have held the
other 25 tiny-technology investments still in our portfolio for slightly less
than two years on average since our initial investments in them. |
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The
future is almost always different from the past, and most of the investments
that we have closed out were not in tiny technology. But for lack of better data, it is
interesting to look back at the ages of our successful venture capital investments
when we sold them. Altogether, we have
completed 18 profitable venture capital investments, including four PIPES
(private investments in public equities).
As we currently have no PIPES in our portfolio, the more relevant data
is the time between our initial investments in privately held companies and
their completions of initial public offerings (IPOs) or acquisitions. |
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Historically,
eight of our portfolio companies completed IPOs, including one that we
eventually sold at a loss. Focusing just
on the seven profitable IPOs, the average time that elapsed from our initial
investment to IPO was 4.26 years.
Focusing just on the seven successful non-PIPE investments in which
our exit was an acquisition, the average time that elapsed from our initial
investment to acquisition was 3.7 years. |
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The
shortest time from initial investment to IPO was 1.39 years, in a low-tech
company that was relatively mature at the time of our initial
investment. Two other IPOs took place
a little over three years after our initial investment. NeuroMetrix took the longest time from
initial investment to IPO, a little over eight years. Six of the seven successful non-PIPE
investments in which the exit was an acquisition took less than four years,
with the shortest taking 2.59 years. |
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Thus,
our portfolio of 25 tiny-technology investments made since August 2001 is on
average roughly two years younger than the average age of our 14 successful
non-PIPE private-equity investments when they either completed IPOs or were acquired. Only four of the 25 now in our portfolio
are approximately four years old.
Moreover, of the 31 investments in tiny-technology companies that we
have made since August of 2001, we have realized losses so far on only four
of them -- half of the eight initial investments that we made in 2001 and
2002. Of the 44 private-equity
investments that we have sold, on an all-inclusive basis encompassing tiny
and non-tiny technology and PIPES as well as investments in privately held
companies, we lost money on 26 (59 percent) and made money on 18 (41
percent). We have many advantages now
that we did not have in the past, including a much larger deal flow. As a result, our current portfolio may
contain a lower percentage of money-losing investments than we have
experienced in the past. But it is too
early to know what our loss experience will be, and we certainly should
expect to realize some more losses over time from our current portfolio. |
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If
the future is anything like the past, a reasonable expectation for our
current portfolio as it matures would be for it to exhibit the
"J-curve" pattern common to early stage venture capital: i.e., more write downs and write offs
followed by some successful exits through acquisitions and IPOs. Successful exits of course cannot be
guaranteed. But the asymmetrical
potential of early stage venture capital invested in companies with
proprietary technology means that it does not take many winners to give a
very satisfactory return on overall investment. Indeed, in the 44 deals that we have sold,
we invested a total of $51,144,319 and received back a total of
$143,614,382. (The average holding
period on the 146 tranches of investments in these 44 deals was 2.85 years.) |
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The
next few years should be eventful both for nanotechnology in general and for
our current portfolio. Because it
takes time to build up an inventory of companies that are mature enough to
sell profitably through acquisitions and IPOs, it has not been a problem for
us that the market for venture-backed IPOs has been very subdued since the
crash of 2000. Our portfolio of tiny
technology investments would not previously have been in a position to take
full advantage of a robust IPO window.
Moreover, the tepid IPO market has helped to keep the wholesale prices
that we pay when we invest fairly reasonable.
But, in time, we will need a reawakening IPO market. |
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An
ideal scenario for us would be for some of our portfolio companies to be
ready for IPOs at the same time that another robust market for venture-backed
IPOs materialized. As always, we thank
our fellow shareholders for your understanding of and patience with the
cycles of venture capital and the capital markets and your continued support
of our Company's endeavor to remain in the vanguard of venture capital for
the commercialization of nanotechnology. |
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Charles E. Harris |
Douglas W. Jamison |
Daniel V. Leff |
Alexei A. Andreev |
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Chairman and Chief Executive
Officer |
President and Chief
Operating Officer |
Executive Vice President |
Executive Vice President |
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Managing Director |
Managing Director |
Managing Director |
Managing Director |
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May 19, 2006 |
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This
letter may contain statements of a forward-looking nature relating to future
events. These forward-looking statements are subject to the inherent uncertainties
in predicting future results and conditions. These statements reflect the
Company's current beliefs, and a number of important factors could cause
actual results to differ materially from those expressed in this press
release. Please see the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2004, filed with the Securities and Exchange
Commission, for a more detailed discussion of the risks and uncertainties
associated with the Company's business, including but not limited to the
risks and uncertainties associated with venture capital investing and other
significant factors that could affect the Company's actual results. Except as
otherwise required by Federal securities laws, Harris & Harris Group, Inc.®, undertakes no obligation to update or
revise these forward-looking statements to reflect new events or
uncertainties. The reference to the website www.TinyTechVC.com has been
provided as a convenience, and the information contained on such website is
not incorporated by reference into this letter. |
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(As of March 31, 2006) |
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Shares/ |
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Principal |
Value |
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Investment
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AlphaSimplex Group, LLC |
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Limited
Liability Company Interest |
-- |
$ 4,058 |
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BridgeLux, Inc. |
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Series
B Convertible Preferred Stock |
1,861,504 |
1,000,000 |
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Cambrios Technologies
Corporation |
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Series
B Convertible Preferred Stock |
1,294,025 |
1,294,025 |
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Chlorogen, Inc. |
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Series
A Convertible Preferred Stock |
4,478,038 |
785,000 |
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Series
B Convertible Preferred Stock |
2,077,930 |
364,261 |
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1,149,261 |
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Series
A Convertible Preferred Stock |
274,100 |
199,983 |
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CSwitch, Inc. |
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Series
A Convertible Preferred Stock |
1,000,000 |
500,000 |
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Series
B Convertible Preferred Stock |
5,700,000 |
2,850,000 |
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3,350,000 |
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Evolved
Nanomaterial Sciences, Inc. |
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Series
A Convertible Preferred Stock |
5,870,021 |
2,800,000 |
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Exponential
Business Development Company |
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Limited
Partnership Interest |
-- |
0 |
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Kereos, Inc. |
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Series
B Convertible Preferred Stock |
349,092 |
960,000 |
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Kovio, Inc. |
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Series
C Convertible Preferred Stock |
2,500,000 |
3,000,000 |
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Mersana Therapeutics, Inc. |
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Series
A Convertible Preferred Stock |
68,452 |
136,904 |
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Series
B Convertible Preferred Stock |
616,500 |
1,233,000 |
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Warrants
at $2.00 expiring 10/21/10 |
91,625 |
0 |
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1,369,904 |
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Metabolon, Inc. |
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Series
B Convertible Preferred Stock |
2,173,913 |
2,500,000 |
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Molecular Imprints, Inc. |
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Series
B Convertible Preferred Stock |
1,333,333 |
2,000,000 |
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Series
C Convertible Preferred Stock |
1,250,000 |
2,500,000 |
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Warrants
at $2.00 expiring 12/31/11 |
125,000 |
0 |
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4,500,000 |
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NanoGram Corporation |
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Series
I Convertible Preferred Stock |
63,210 |
64,259 |
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Series
II Convertible Preferred Stock |
1,250,904 |
1,271,670 |
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Series
III Convertible Preferred Stock |
1,242,144 |
1,262,764 |
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2,598,693 |
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Nanomix, Inc. |
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Series
C Convertible Preferred Stock |
9,779,181 |
2,500,000 |
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NanoOpto Corporation |
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Series
A-1 Convertible Preferred Stock |
267,857 |
32,490 |
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Series
B Convertible Preferred Stock |
3,819,935 |
1,110,073 |
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Series
C Convertible Preferred Stock |
1,932,789 |
842,503 |
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Warrants
at $0.4359 expiring 03/15/10 |
193,279 |
0 |
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1,985,066 |
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Nanosys, Inc. |
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Series
C Convertible Preferred Stock |
803,428 |
2,370,113 |
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Series
D Convertible Preferred Stock |
1,016,950 |
3,000,003 |
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5,370,116 |
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Nantero, Inc. |
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Series
A Convertible Preferred Stock |
345,070 |
1,046,908 |
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Series
B Convertible Preferred Stock |
207,051 |
628,172 |
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Series
C Convertible Preferred Stock |
188,315 |
571,329 |
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2,246,409 |
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NeoPhotonics
Corporation |
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Common
Stock |
716,195 |
67,736 |
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Series
1 Convertible Preferred Stock |
1,831,256 |
2,014,677 |
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Series
2 Convertible Preferred Stock |
741,898 |
878,120 |
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Warrants
at $0.15 expiring 01/26/10 |
16,364 |
164 |
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Warrants
at $0.15 expiring 12/05/10 |
14,063 |
140 |
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2,960,837 |
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Nextreme Thermal Solutions,
Inc. |
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Series
A Convertible Preferred Stock |
500,000 |
500,000 |
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Polatis, Inc. |
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Series
A-1 Convertible Preferred Stock |
16,775 |
47,828 |
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Series
A-2 Convertible Preferred Stock |
71,611 |
204,172 |
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252,000 |
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Questech Corporation |
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Common
Stock |
646,954 |
724,588 |
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Warrants
at $1.50 expiring 08/03/06 |
8,500 |
0 |
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Warrants
at $1.50 expiring 11/21/07 |
3,750 |
0 |
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Warrants
at $1.50 expiring 11/19/08 |
5,000 |
0 |
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Warrants
at $1.50 expiring 11/19/09 |
5,000 |
0 |
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724,588 |
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Solazyme, Inc. |
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Series
A Convertible Preferred Stock |
988,204 |
385,400 |
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Starfire Systems, Inc. |
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Common
Stock |
375,000 |
150,000 |
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Series
A-1 Convertible Preferred Stock |
600,000 |
600,000 |
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750,000 |
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Zia Laser, Inc. |
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Series
C Convertible Preferred Stock |
1,500,000 |
0 |
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Total |
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$42,400,340 |
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HARRIS & HARRIS GROUP, INC.® CONSOLIDATED STATEMENTS OF ASSETS AND
LIABILITIES* |
ASSETS
March 31, 2006 December 31, 2005
(Unaudited)
Investments, at value (Cost: $119,208,625 at 3/31/06, $134,026,747 at
12/31/05)...... $ 113,731,480 $ 129,438,197
Cash and cash equivalents................................................................................................ 4,470,822 1,213,289
Restricted funds............................................................................................................... 1,901,078 1,730,434
Receivable from portfolio company................................................................................ 0 75,000
Interest receivable........................................................................................................... 565,259 248,563
Prepaid expenses............................................................................................................. 452,030 2,993
Other assets.................................................................................................................... 218,654 229,644
Total assets................................................................................................................... $ 121,339,323 $ 132,938,120
LIABILITIES & NET ASSETS
Accounts payable and accrued liabilities........................................................................... $ 3,410,979 $ 3,174,183
Accrued profit sharing..................................................................................................... 210,786 2,107,858
Deferred rent.................................................................................................................. 29,302 31,003
Current taxes payable...................................................................................................... 1,354,504 1,514,967
Taxes payable on behalf of shareholders......................................................................... 0 8,122,367
Total
liabilities............................................................................................................ 5,005,571 14,950,378
Net assets...................................................................................................................... $ 116,333,752 $ 117,987,742
Net assets
are comprised of:
Preferred stock, $0.10 par value, 2,000,000 shares
authorized; none issued..................... $ 0 $ 0
Common stock, $0.01 par value, 30,000,000 shares
authorized; 22,585,085 issued
at 3/31/06 and 12/31/05.......................................................................................... 225,851 225,851
Additional paid in capital................................................................................................ 122,149,642 122,149,642
Accumulated net realized income.................................................................................... 3,016,509 3,781,905
Accumulated unrealized depreciation of investments....................................................... (5,652,719) (4,764,125)
Treasury stock, at cost (1,828,740 shares at 3/31/06
and 12/31/05)............................... (3,405,531) (3,405,531)
Net assets...................................................................................................................... $ 116,333,752 $ 117,987,742
Shares
outstanding..................................................................................................... 20,756,345 20,756,345
Net asset
value per outstanding share...................................................................... $ 5.60 $ 5.68
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