Rule Breakers recommendation Harris & Harris (NASDAQ:TINY) reported this week a $2.2 million decrease in its net asset value (NAV) for the first quarter of 2005. That decrease dragged its NAV per share down from $4.33 at the end of its financial year to $4.20 as of March 31.

The decrease was almost entirely the result of a depreciation in the value of the 1.1 million shares still held by the VC company NeuroMetrix (NASDAQ:NURO). Harris & Harris was a seed investor in NeuroMetrix and participated in subsequent rounds of financing. The value of the investments was recorded in TINY's books at $1.51 per share before the company went public in July 2004.

At the end of December, NeuroMetrix was trading at $11.75 but had dropped to $9.55 on March 31 -- a paper loss on a quarter-over-quarter basis. Since March 31, however, NURO has risen substantially and is currently trading at $13.09. If the quarter closed today, that would add back $4 million to TINY's NAV, equating to a NAV per share in excess of $4.33, and in theory would propel TINY's share price back upward. TINY management was moved to comment that the volatility of NURO has a significant impact on the value of its NAV. TINY's share price has dropped from $14 at the beginning of the year to under $11 today.

However, the value of TINY stock in relation to its NAV is not the product of a simple formula. It can ebb and flow based not only on NAV but also on investor sentiment regarding the commercial potential of nanotechnology. So despite the recent rise of NeuroMetrix shares, TINY's share price has remained below $11.

Since 2001, Harris & Harris has focused exclusively on investments in tiny tech, and by the end of 2004, it had made 18 investments, predominantly in nanotechnology companies. It is the value of these investments that promises the growth we are looking for in our Rule Breakers service, but that value will only be realized when those companies go public, as happened with NeuroMetrix, or if they are bought out before an IPO. Of course, no value will be realized if a company fails entirely -- as happened to one of TINY's investments in February, when Optiva reportedly closed its doors for good. TINY had invested $1.6 million in Optiva.

Yet in those first three months of 2005, despite the failure of Optiva (which represented just 2% of its total NAV), Harris & Harris made one new and five follow-on investments. The firm also opened a third office in Northern California to complement its base in New York and the office it opened in Los Angeles in 2004.

In terms of historical comparison, TINY's share price today is at a lower premium to its NAV than it has ever been since it began its focus on nanotechnology. Yet we would argue now that we are at the dawn of nanotech commercialization. This is the time it should be commanding its highest premium.

Carl and John both write for the Rule Breakers service specifically on the investment potential of nanotechnology. If, like them, you believe the next industrial revolution is around the corner, come and take a peek with a free 30-day trial.

They both own shares in Harris & Harris. The Fool has a disclosure policy.