In this month’s interview, we talk to Doug Jamison, Chairman of the Board, Chief Executive Officer and Managing Director, Harris & Harris Group, Inc. Mr. Jamison has served as Chairman and Chief Executive Officer since January 2009; as President and Chief Operating Officer from January 2005 to December 2008; as Treasurer from March 2005 to May 2008; as a Managing Director since January 2004; as Chief Financial Officer from January 2005 to December 2007; and as Vice President from September 2002 to December 2004. He has been a member of the Board of Directors since May 2007. Since January 2009, he has served as Chairman and Chief Executive Officer of Harris & Harris Enterprises, Inc., a wholly owned subsidiary of the Company, since 2005, he has served as a Director; and from January 2005 to December 2008 he served as President. From 1998 to 2002, Mr. Jamison worked as a Senior Technology Manager at the University of Utah Technology Transfer Office, where he managed intellectual property for the University of Utah. This included assessing technologies in both the biological sciences and the physical sciences, working with patent attorneys to develop patent protection, and developing and marketing these technologies with industry. He is a Co-Editor-in-Chief, Journal of Nanotechnology Law & Business and Co-Chair of the Advisory Board, Converging Technology Bar Association and a member of the University of Pennsylvania Nano-Bio Interface Ethics Advisory Board. He was graduated from Dartmouth College (B.A.) and the University of Utah (M.S.).
In this interview, we talk to Doug about the state of the venture capital business and how it is impacting the nanotechnology community. We also explore some of the nanotech investments Harris & Harris Group have made over the past decade and discuss the firm’s strategic direction. We hope you enjoy the interview. – Steve Waite
SW: We are delighted to be able to speak with you today, Doug, and appreciate your time. There is a lot to discuss. Let’s start off talking about the structural changes witnessed in the public capital markets over the past decade and what that means for companies bringing nano-enabled products to market. What are the big changes we’ve seen and how have they impacted the venture capital business and the nano community in particular?
DJ: There have been multiple structural changes in the public markets over the past decade, but the ones we are most concerned about are the changes that have occurred in the market for companies with less than $500 million market capitalizations. David Weild and Edward Kim recently detailed some of these structural changes in an article titled, “Market structure is causing the IPO crisis – and more.” The rise of online brokerage has destroyed the incentive for brokers to discover small capitalization companies and to help these companies communicate their stories to the public markets. Decimal pricing for stocks and options, while making the greater market more liquid has eliminated the incentive for market makers to put their capital at risk, creating less liquidity for the smallest public companies. Regulation Fair Disclosure devalued stock research. Capital markets infrastructure for the smallest public companies has continued to erode. Initial Public Offerings (IPOs) that raise below $50 million have declined precipitously after 2000. IPO candidates now need to be larger and more mature before accessing the public markets. The result of these structural changes has been a steep decline in publicly listed companies on U.S. based exchanges (NYSE, AMEX and Nasdaq). The authors above trace this decline in listings to 22 million potential jobs that have been lost across the economy. For the United States, the problem is compounded by the fact that these changes are happening in an environment in which other countries’ exchanges have been increasing the number of listed companies and the number of public companies listing outside the United States is increasing.
The impact for the U.S. venture capital community is that venture capital as an asset class is now experiencing negative returns. This will result in less capital flowing to venture capital as an asset class which may translate to less capital being made available for small, innovative, high growth companies. Nanotechnology companies, which are naturally capital intensive, will need more capital and need to be more mature than was historically the case before the potential for an exit opportunity emerges. These companies could be required to identify alternative sources of capital than the venture capital community. That said, there are a number of nanotechnology companies that have successfully raised significant amounts of capital which says a lot about the quality of these nanotechnology companies.
SW: Harris and Harris Group (H&H) continues to be laser-focused on nanotechnology despite the lack of activity in the IPO markets to date. Has there been a drop off in the number of U.S.-based venture firms engaged in nanotech financing activities due to these structural changes?
DJ: From the beginning, there hasn’t been nanotechnology-focused venture financing. Venture capitalists have remained focused on industry verticals and end markets applications. This has been beneficial for us, as we have been able to become a leader investing in nanotechnology while being able to partner with some of the best venture firms in their respective industry of expertise. Additionally, in the areas we invest in, such as energy, healthcare, electronics and semiconductors many exciting breakthroughs occur at the nanoscale. As an early stage venture investor, that has led to significant interest in some of the early stage companies we have financed. For instance, in our cleantech portfolio, we are the first institutional investor or a member of the first group of institutional investors in eight of our 12 investments, many of which have raised additional capital from top-tier institutional investors. That said, the active venture capital community is getting smaller, and fewer venture capital firms are making new investments in all markets, not just those enabled by nanotechnology.
SW: You mentioned in a previous conversation that we are seeing a bifurcation in the venture capital sector. What is the significance of this and what are the implications for companies for the nanotech community?
DJ: We are seeing venture capital firms with under $200 million in assets under management becoming more focused on investment opportunities that will require less than $15-30 million in invested capital over their lifetime. This means that these firms may invest less with the larger venture firms and partner with other smaller firms that have the same venture economics. Larger firms with capital to invest are currently in a better position, because these firms can write the large checks required for companies that need to be more mature before reaching an exit opportunity. I think this bifurcation is positive as it is forcing venture funds to find a business model that works for their respective asset sizes.
For the nanotechnology community, this bifurcation means that entrepreneurs need to be knowledgeable of their investors’ assets under management and how much available capital these investors have, what we call “dry powder.” This will dictate the strategy of the investor and the direction the investors will force the company to take. Entrepreneurs will need to make sure their vision of the company, their investment requirements and the time to exit are compatible with their investors. Ultimately, because increases in valuations are more difficult to achieve even for companies that are executing flawlessly against their business plan, entrepreneurs will also need to find ways to grow their companies with greater capital efficiency.
SW: Despite the structural changes and the evaporation of all the nano hype on Wall Street we saw earlier in the previous decade, one gets the sense that nano as an enabling technology is ready for prime time. What’s your assessment?
DJ: By this point in the interview, the reader is probably horrified by the future prospects of venture capital investing. However, even in a very difficult venture investing climate and in a very difficult economy over the past two years, companies enabled by nanotechnology have been maturing. I will focus on our portfolio because I know it well, but the maturing of nanotechnology-enabled companies is occurring across the board.
In our portfolio, we classify our investments into three maturity baskets early stage/technology risk, mid stage/ market risk and late stage/expansion risk. We have eight companies in the latter basket. Of these, Solazyme, Xradia, NeoPhotonics, Bridgelux, Molecular Imprints and Metabolon all had record revenue years in both 2008 and 2009. Five of these companies could each generate more than $20 million in revenue in 2010. NeoPhotonics recently reported record second quarter 2010 revenue of over $45 million, and the company was over $2.5 million net income positive in the second quarter alone. In this late stage/expansion risk basket, we also have BioVex, which is in Phase III clinical trials in malignant melanoma.