The TINY Way To Invest

Published in Company Comment on 7 April 2010

When it comes to nanotechnology, UK investors have few options.

Nanotechnology is probably, as a phenomenon, the single most important new emerging force in technology – Charlie Harris

One way to invest is to identify a growing trend and get on board before the rest of the market does -- anyone who bought Microsoft shares in 1986 can attest to that. Nanotechnology, the application of manufacturing technologies at the atomic level, was often touted as "the next big thing" during the past decade; particularly during the nanotech investment boom of 2004, but since then returns for investors have been poor.

Yet the seeds are already set for another nanotechnology boom. The engineering and science are well-established whilst many products which use nanotechnology are already in the marketplace (some them are mentioned in this article). But when a wonder application appears and strikes a chord in the public imagination (anyone for cancer-eating nanobots?) and nanotechnology investments will be on everyone's radar.

Unfortunately the field of quoted companies which specialise in nanotechnology is extremely small. One of these is the American venture capital firm Harris & Harris which has been listed on the NASDAQ since 1997 (Harris & Harris' stock ticker is TINY).

Why Invest Overseas?

If you're looking for a quoted British nanotechnology investment you're out of luck. The scientific toolmaker Oxford Instruments (LSE: OXIG) has a nanoscience division and many larger firms have projects which involve nanotechnology, but that's about it.

For nanotechnology investments we need to look overseas and, as is usual for high-technology firms, America has many small nanotechnology firms with market quotations, such as Nanometrics, Nanophase Technologies and Nanosphere (you can see the pattern when it came to naming these firms!).

But rather than focus upon one company, an alternative is Harris & Harris which owns investments in over 30 unquoted companies all of which are "focused exclusively on nanotechnology innovations." Harris & Harris' companies cover all aspects of nanotechnology, from power systems and pharmaceuticals to quantum computing and nanotubes.

Why Venture Capital?

Venture capital funds invest in a large number of companies, knowing that many of them will fail, hoping that the successes will outweigh the failures. It's a tried and tested method of investing but requires that investors are able to cope with far riskier and more illiquid investment than buying shares in the likes of Tesco (LSE: TSCO).

In recent years the big problem for venture capital investors has been the poor market for selling private companies; if no one is interested in buying private companies it becomes much harder to cash in on your investment.

This contrasts strongly with the dotcom and high-technology boom of the late 1990s when you could stick ".com" on your pet cat and there'd be people champing at the bit for a piece of the action in Tiddles.com. But in recent years the market for high-technology public offerings has dried up and this has had a major effect on venture capital investments.

Why Harris & Harris?

A good time to look at an investment is when no-one else wants it. Harris & Harris' shares have languished in recent years in large part thanks to the depressed market for public offerings and investments in unquoted companies.

Harris & Harris' shares peaked at almost $30 in 1999, fell sharply in the wake of the dotcom crash, recovered to $22 in 2004 but have been on the slide ever since and their current price is around $4.90 (and very volatile).

Harris & Harris is a very conservatively financed company. As of 31 December 2009 it had just over $136 million of assets, including $78 million worth of investments (the companies), $56 million in US treasury bills and $2 million "other" (mostly cash). In contrast liabilities are a mere $2 million with no borrowings. 

The last five years performance is summarised in the table below:

Year20092008200720062005
Basic eps$0.01 loss$1.99 loss$0.30 loss$0.57 loss$0.36
Net Asset Value (NAV)$4.35$4.24$5.93$5.42$5.68

A big chunk of the NAV comes from the private companies, which means that the NAV is a fairly inexact figure and is invariably out of date. In good times companies like this will often trade at a substantial premium to their published NAV.

Furthermore when private companies are sold the price paid is often substantially larger than their NAV and the type of company in which Harris & Harris invests should attract a big premium. This is because the most valuable assets of high-technology firms are their intellectual property (designs, patents, techniques) and conventional accounting practices have tremendous problems in valuing these assets (e.g. the Coca-Cola brand name has no value in its accounts).

Harris & Harris incurs some significant operating costs for a fund of its size, $9 million in 2009, and this will put some investors off, particularly if you view the company as being similar to an investment trust. However, venture capital firms are much more "hands on" in dealing with their investments, often providing specialist expertise to the firms, and this accounts for a significant part of the operating costs.

Harris & Harris must be seen as a high risk investment in view of the failure rate for high-technology startups. The usual risk warnings apply far more strongly than usual with this type of investment.

Further Reading

You can find Harris & Harris' website here; it contains a lot of useful information about nanotechnology in general.

If the concept of nanotechnology has got your attention you might like to try Engines of Creation by K. Eric Drexler. Whilst it was written in the mid 1980s the book is still very relevant (it doesn't contain any mathematics or complex engineering).

The Open University's third-year nanotechnology course, Engineering Small Worlds, is very good but requires a bit more work!

More from Tony Luckett:

> Tony owns shares in Harris & Harris.

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Comments

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BarrenFluffit 07 Apr 2010 , 11:32am

Interesting.

Sadiesage 08 Apr 2010 , 12:05pm

Nanoco (NANO) is another one which might be of interest, as recommended by a friend of mine. This UK listed firm specialises in the commercial production of quantum dots used in LED's etc and their recent results were quite encouraging, I thought.

Worth a look for those interested in this field.

JudgeDreddd 12 Apr 2010 , 6:28pm

A bit late in replying but thanks for the heads up on Nanoco

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