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| 8-K - 180 DEGREE CAPITAL CORP. /NY/ | v184929_8-k.htm |
| EX-99.2 - 180 DEGREE CAPITAL CORP. /NY/ | v184929_ex99-2.htm |
Venture
Capital for Nanotechnology and Microsystems
FIRST
QUARTER REPORT 2010
FELLOW
SHAREHOLDERS:
At Harris
& Harris Group, Inc., we strive to follow this principle: a
company must not only hire ethical people, but also encourage their ethical
behavior. Behaving ethically in business will cause a company to miss
some opportunities in the short run, but in the long run, the business
advantages of ethical behavior are incalculable. The past few weeks
have provided a reminder of the consequences of forgetting ethical business
behavior. In a recent article in the Financial
Times, John Gapper wrote the following: “Goldman
rose to a dominant position on Wall Street through the dictum of Gus Levy, its
former senior partner, that it should be “long-term greedy.” He meant
that it should forgo quick gains for enduring profits.” The ongoing
events at some of the leading investment banks remind us of the risks of
abandoning one’s business principles.
Harris
& Harris Group is an early-stage venture capital firm investing in companies
developing products enabled by nanotechnology. Our business model
requires us to be long-term greedy. At Harris & Harris Group, it
can take our companies between five and ten years to mature to the point where
we can realize gains through initial public offerings (IPOs) or mergers and
acquisitions (M&A). It is difficult to be long-term greedy in a
market dominated by short-term trading strategies. Recent data has
demonstrated that the average age for holding a company in an institutional
micro-cap portfolio is nine months. Additionally, during the past few
years, low interest rates have allowed institutions and individuals to use cheap
money to increase their leverage and pursue investments they hope will provide
greater certainty or higher risk-adjusted returns than technology-based start-up
companies.
However,
similar to Gus Levy, we believe a well-implemented strategy of being long-term
greedy can bring enduring profits. We will continue to look for
opportunities to offset our annual operating expenses while our companies
mature, but, we will remain focused primarily on providing capital for
early-stage private and public companies with great growth
potential.
Currently,
we are in the ninth year since we focused the firm on investing exclusively in
nanotechnology and microsystems. Nantero, Inc., is our oldest private
nanotechnology company with our investment being approximately eight and a half
years old. ABS Materials, Inc., is our youngest private
nanotechnology company with our investment being approximately four months
old. The average and median age for our portfolio is 4.3 years and
3.9 years, respectively, as of March 31, 2010.
As
management, we see our investment tasks as the following: identify
quality investment opportunities from a robust deal flow; invest prudently based
on our capital base such that we have the reserves to support our portfolio
companies as they mature; work with company managements to identify and execute
on their business strategies; and, at the appropriate time, monetize our
investments. Our portfolio is comprised of a pipeline of investments
at multiple stages of development. This strategy permits us to
continue to have a robust pipeline of opportunities even after we are successful
monetizing some of our more mature investments.
1
At this
time, we believe that several of the companies in our portfolio successfully
demonstrate our accomplishment of the first three tasks. In
aggregate, our current portfolio generates more revenue and has more commercial
partnerships than at any other time in our past. In aggregate, we
believe our portfolio companies require less capital to get to exit or cash flow
breakeven than at any other time since we started investing exclusively in
nanotechnology and microsystems. We believe we have adequate capital
to get our portfolio companies to cash flow breakeven or to an exit without
raising additional capital. Many of our portfolio companies continued
their growth through the recession. We believe our portfolio and
Harris & Harris Group are positioned to succeed. Although
quarterly movements in the values of our venture capital portfolio may not be
indicative of longer term trends in the value of our venture capital portfolio,
our net asset value per share (NAV) has increased from $4.22 at March 31, 2009,
to $4.42 at March 31, 2010.
Our more
mature companies provide evidence that nanotechnology-enabled companies and
products are gaining traction in the market place.
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On
April 15, 2010, NeoPhotonics Corporation filed a registration statement on
Form S-1 with the Securities and Exchange Commission to sell shares of
common stock. The proposed offering is underwritten by J.P.
Morgan, Deutsche Bank Securities, Piper Jaffray, Thomas Weisel Partners
LLC, Morgan Keegan & Company, Inc., and Think Equity
LLC. On page 8 of the filing, NeoPhotonics reports that it had
approximately $155 million in revenue in 2009. On page 75 of the filing,
NeoPhotonics reports that it had positive net income for the second half
of 2009.
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On
April 13, 2010, Mersana Therapeutics, Inc., announced its partnership with
Teva Pharmaceuticals for XMT-1107, a fleximer and fumagillin conjugate for
applications in cancer. Within a week of the announcement,
Mersana began Phase I trials for this program. The partnership
is valued at up to $334 million for Mersana if the program is successful
in the clinic, and it includes up front and milestone payments as well as
covering the cost of the development of XMT-1107. Additionally,
if successful, the deal includes future royalty payments to
Mersana. This deal was the fourth largest pre-clinical deal
over the last 10 years.
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In
January 2010, Nanosys, Inc., signed an agreement with the
component-manufacturing arm of LG Electronics, which will use Nanosys
products to produce backlights for mobile-phone displays. Nanosys claims
its technology uses only about half as much energy as the conventional
white LEDs used in backlights, which should help extend the battery life
of mobile devices, as well as providing richer, more saturated
colors.
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BioVex,
Inc., continues successful enrollment in its Phase III study in malignant
melanoma with interim data expected to be reported in the first quarter of
2011.
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In
2009, in our private venture capital portfolio, NeoPhotonics Corporation,
Bridgelux, Inc., Solazyme, Inc., Molecular Imprints, Inc., and Metabolon,
Inc., all reported record years of
revenue.
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We
describe the venture capital industry as a “home run game.” By this we mean that
investors “swing for the fences” in the hope that a few home run investments
will create the returns for a portfolio of investments. However, it
is difficult to predict the home runs. By having more opportunities
“at bat,” we believe we increase the opportunity that a small percentage of our
“at bats” will turn into home runs. Historically, it is a small
number of Harris & Harris Group’s investments that have generated our
returns. Of the 55 investments we have made where we have realized
gains or losses, only 19 of these investments generated gains. We
invested $71,854,116 in these 55 companies and realized gross proceeds of
$143,930,719. We believe the diversification within our portfolio is
a benefit to shareholders.
2
Because
the portfolio is a pipeline of potential home run investments, it will always
contain companies with multiple types of risk. We classify 14 of our
companies as early stage, having technology risk, market risk and execution
risk. However, by value, this is the smallest portion of our venture
capital portfolio, representing $19,455,562, as of March 31, 2010. We
classify nine companies as mid stage, having market and execution
risk. These nine companies comprise $21,915,526 of the value of our
venture capital portfolio, as of March 31, 2010. We classify 10
companies as late stage. Eight of these companies are still private
companies, while SatCon and Orthovita are public companies. These
companies face execution risk. At $42,196,312, these 10 companies
comprise the majority of the value of our venture capital portfolio, as of March
31, 2010. We believe that it is appropriate that the majority of our
value be in our late-stage companies. Although maturity is not always
an indicator of time to exit, we believe that some of these private companies
have the attributes required for M&As and IPOs in the current
market.
One of
the questions our investors are focused on is whether we have enough ownership
in any one company to make an impact if that company is
successful. This is a valid question, and we have spent a great deal
of time considering it in the context of the current venture capital
market. The table we have inserted below is similar to the previous
table, except that we have categorized our companies by our ownership as
reported in our Schedule of Investments in our quarterly report on Form
10-Q. As we have discussed in previous letters, our goal will be to
have between 5 and 25 percent ownership in a company when we believe the company
is ready to be monetized.
3
Nanotechnology
companies have proven to be capital intensive. In order to own
between 5 and 25 percent of these companies, we have had to increase our
assets. Our assets have grown from $39,682,367 at December 31, 2001,
to $138,757,450 at March 31, 2010. As our assets have increased, we
have had the opportunity to increase the amount of our investments in certain
companies.
As of
March 31, 2010, among the companies we define as late stage, we have four
private and two public companies where we own less than five percent of the
voting interest of the company. In three of the four private
companies where we own less than five percent of the voting interest, the
investments date back to the early days of our focus on
nanotechnology. We have four companies that we define as late stage
where we own between 5 and 25 percent of the voting interest of the
company. Additionally, in six of our nine mid-stage companies, we own
between 5 and 25 percent of the voting interest of the company. A review of this
table in conjunction with a review of when we made our initial investments
demonstrates that our ownership has increased as our assets have
increased. However, it is also important to remember that a small
ownership in a multi-billion company can still generate a significant return to
Harris & Harris Group.
4
The
global economy is fraught with risk. At Harris & Harris Group, we
are not certain the American economy can sustain its current growth as it
emerges from the recession. We are not certain whether global fears
of sovereign debt crisis will spread through Europe and beyond, and in doing so
create responses that will challenge economic growth. We are not
certain whether financial markets will continue to permit IPOs of emerging
companies. However, we do believe we have positioned Harris &
Harris Group to be successful regardless of these external events. If
economies and financial markets stumble, it will require more time for us to
execute on our strategy, but we believe we have the required capital to be
successful. If economies and financial markets strengthen, we believe
we can execute on our number one priority, realizing returns.
To
conclude, we would like to reiterate our statements from above. In aggregate, we
believe our portfolio companies require less capital to get to exit or cash flow
breakeven than at any other time since we started investing exclusively in
nanotechnology and microsystems. We believe we have adequate capital
to get our portfolio companies to cash flow breakeven or to exit without raising
additional capital. We believe our portfolio and Harris & Harris
Group are positioned to succeed. We are and will continue to be
long-term greedy. Although it has taken time to build significant
companies, we believe that our companies, based on breakthroughs at the
nanoscale, are becoming leaders in their industries. We believe there
is potential for significant returns from these companies as they
mature.
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Douglas
W. Jamison
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Daniel
B. Wolfe
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Chairman,
Chief Executive Officer
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President,
Chief Operating Officer,
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and
Managing Director
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Chief
Financial Officer and Managing
Director
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Michael
A. Janse
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Alexei
A. Andreev
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Executive
Vice President and
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Executive
Vice President and
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Managing
Director
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Managing
Director
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May 13,
2010
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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 letter. Please
see the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2009, as well as subsequent filings, 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, the Company undertakes no obligation to update or
revise these forward-looking statements to reflect new events or
uncertainties. The reference to the website www.HHVC.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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