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Charles Harris Interview March 2002
The following is an interview with Charles E. Harris of Harris & Harris Group. Charles Harris has served as Chief Executive Officer of the Company since July 1984. Prior to then, he was Chairman of the investment advisory subsidiary of Donaldson, Lufkin & Jenrette, Wood, Struthers and Winthrop Management Corp. He is a trustee of Cold Spring Harbor Labs and of the Nidus Center. He is a graduate of Princeton University (A.B.) and Columbia University Graduate School of Business (M.B.A.).
Regarding investing in companies developing nanoscale technologies, here are the Questions:
1. Given the vast [and growing] plethora of nano-this and nano-that companies, how does one go about investing in a company with real potential?
One should approach small tech including nanotechnology the same way that one picks through the many opportunities in other, more mature areas of venture capital. Although no one has a crystal ball, and it is always difficult to pick the long-term winners in any group of early-stage companies, the same fundamental analysis applies to nanotechnology as to all other fields. Thus ideally, a nanotech venture capital investment should feature a great management team, solid business plan in a large market space that does not involve competing head on with the elephants, and proprietary intellectual property as an organizing principle -- and all at a reasonable valuation! If the investment is past the seed stage, the co-investors should also be first rate.
2. About what percent of this year's venture capital will nanoscale technology companies receive?
Small tech, including nanoscale, companies will get all of our new (as opposed to follow-on) capital this year. But for the venture capital industry as a whole, I would estimate that it would be a very small percentage this year – one percent or so. But we think that that percentage will increase very rapidly as soon as the first successful nanotech IPO is launched – the equivalent to Genetech for biotechnology or Netscape for the internet. And we cannot predict when that bellwether nanotech deal will go into registration.
3. Do you expect to see the same kind of frenzied investing in MNT as happened with the dotcom boom, or have we learned our lesson?
There will not be the sort of ease of entry into small tech including nanotech that there was into the dotcom companies. The better small tech companies have important intellectual property that typically has been the product of years of government sponsored research. Also venture capitalists are approaching small tech, at least so far, very prudently, because of the telecom and dot com hangover. For investors, small tech including nanotech will be more like biotech than like the dot coms -- there will be waves of relative enthusiasm by the capital markets, but the real progress will continue for decades with some great, enduring business franchises being created along the way.
4. Out of every 10 start ups that you typically fund, how many succeed past the third year?
Historically, we have only funded a few per year, although we may pick up the pace now that small tech, including nanotech, is approaching what we suspect is a point of historic investment opportunity. The last time that we did a calculation of holding periods was about two years ago. At that time, we had made a total of 37 private equity investments, 17 profitable, 16 unprofitable, four unchanged. The average holding period of all 37 was 3.29 years. The averaging holding period of the 10 profitable investments that had been completely liquidated was 2.96 years. The 14 unprofitable investments that had been completely liquidated was 4.03 years. The 13 still in the portfolio (seven profitable, two unprofitable, four carried at cost) had an average holding period of 2.75 years to the date of the calculation.
5. Is there any one nanoscale technology of special interest to you or your firm?
Obviously we like computer memory and drug delivery, given that we have invested in Nantero and NanoPharma. But we want to be diversified so we are looking at a wide variety of nanoscale technologies, excluding only the really futuristic plays.A six minute audio interview with Charles Harris on MarketDD.com. April 4, 2002 [RealPlayer software is required to hear the interview.]
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