Lemons Ripen Faster Than Plums

Anyone who works in the produce industry or who spends any time in the kitchen will tell you that our headline is wrong -- plums always ripen faster than lemons. And they'd be right.

However, the phrase comes from the CEO at Harris & Harris (Nasdaq: TINY  ) in its recent third-quarter report, referring to investments in lemons (companies it loses money on) versus plums (companies it makes money on). I love that phrase and recommend it to our Rule Breakers members: Your losers will always ripen first, but wait for those juicy plums, mmmmmmmm!

Harris & Harris is a publicly traded venture capital company with a 97% focus upon what they call "tiny tech", i.e., nanotechnology.

So how many lemons has it had and how many plums? Since its inception, Harris has invested a total of $40 million in 38 transactions in various companies and returned over $108 million. However, 21 of the 38 lost money, which goes to prove that you only need a few winners from a basket of early-stage companies to show very nice returns.

When you invest in Harris, you have an opportunity to immediately buy into a basket of nano stocks -- all private companies -- so you are very dependent upon Harris' expertise in identifying potential commercial opportunities from very new science. As it is, the fruit pickers at Harris do better than most, with an average of .447. It is a very nice validation of the choices the company has made.

Success that seems likely to be continued. Included in its current orchard are Nantero, recently nominated by Scientific American as the 2004 winner as the business leader in the nanotechnology category, and Molecular Imprints, winner of the Small Times "2004: Best of Small Tech" award.

Nantero has recently partnered with LSI Logic (NYSE: LSI  ) to develop the use of carbon nanotubes in semiconductor processes, notably NRAM (next-generation memory chips). Molecular Imprints has also received venture capital from Motorola Ventures, the VC arm of Motorola (NYSE: MOT  ) , with which Molecular has a strong working relationship.

Valuing Harris is not an easy task, as the metrics of sales and profits are not relevant to a publicly traded VC company. Rather, it is judged on net asset value (NAV), which has risen from $2.11 per share to $4.44 per share in the past 12 months. The actual share price has risen from $8 to $14. The disparity is explained by its increase in share dilution due to a share offering in 2004. That raised $36 million for future investments and allows Harris to be seen as a bigger player in becoming first-round major investors rather than being grouped with the minor players in the second round.

All in all, Harris has a nice fruit farm being developed. We see more plums on the trees than lemons.

Carl Wherrett owns Harris and prefers red plums over yellow ones. John Yelovich also owns Harris and likes lemon only in his tea. You can reach them both by email. The Fool has a disclosure policy.

If you're looking for the next growth company in groundbreaking industries like nanotech, then try our ultimate growth service,Motley Fool Rule Breakers.

Do you have high hopes for the nanotechnology sector? Share your views with Carl (TMFBreakerCarl) and John (TMFBreakerJohn) in the Nanotechnology discussion board.


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