Harris & Harris Group s Approach for Investing in Nanotech for Electronics TM Companies

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1 Harris & Harris Group s Approach for Investing in Nanotech for Electronics TM Companies Michael A. Janse, Alexei A. Andreev, Daniel B. Wolfe, *** Misti Ushio, **** and Douglas W. Jamison***** Abstract This white paper discusses Harris & Harris Group s 1 thesis for investing in nanotechnologyenabled electronics and semiconductor companies, which we refer to as Nanotech for Electronics TM companies. Our investment thesis is driven primarily by four ideas. First, nanotechnology enables reduced manufacturing cost and increased performance of semiconductor and electronics systems as the density of components increases. This trend is described by Moore s Law 2, and nanotechnology enables the continuation of Moore s Law to minimize the cost of semiconductor and electronics systems. Second, new capabilities of semiconductor and electronic products are made possible by nanoscale materials. Third, nanotechnology offers differentiation and improved performance that allows nanotechnologyenabled electronics companies to capture value in a market with outsourced manufacturing and what is otherwise a commodity production process. Fourth, novel methods of computing, such as quantum computing, are enabled by nanoscale phenomenon. These ideas have led us to identify companies that we believe have the potential to excel in their respective markets relative to their peers due to the advantages offered by nanotechnology. This paper highlights companies from Harris & Harris Group s investment portfolio that illustrate this investment thesis. Harris & Harris Group believes its position as a leading investor in nanotechnology-enabled companies uniquely positions it and its shareholders to profit financially from the emergence of nanotechnology-enabled electronics companies. More background on nanotechnology and how it enables important advances in a number of industries including cleantech, life sciences and instrumentation are discussed in a paper titled, Why Invest in Nanotechnology: Harris & Harris Group, Inc. s Thesis. 3 Michael A. Janse is Executive Vice President and a Managing Director of Harris & Harris Group, Inc. Please address correspondence regarding this article to Michael Janse at mike@hhvc.com. Alexei A. Andreev is Executive Vice President and a Managing Director of Harris & Harris Group, Inc. *** Daniel B. Wolfe is President, Chief Operating Officer, Chief Financial Officer and a Managing Director of Harris & Harris Group, Inc. **** Misti Ushio is Vice President and Associate of Harris & Harris Group, Inc. ***** Douglas W. Jamison is Chairman, Chief Executive Officer and a Managing Director of Harris & Harris Group, Inc. 1 See 2 Moore, Gordon E. Cramming more components onto integrated circuits, Electronics Magazine, April 19, Wolfe, D.B., et. al. Why Invest in Nanotechnology: Harris & Harris Groups, Inc. s Thesis, Nanotechnology Law and Business, 69, Spring

2 Harris & Harris Group s Rationale for Investing in Nanotechnology-Enabled Electronics Companies Since 2002, Harris & Harris Group has invested exclusively in companies commercializing and integrating products enabled by nanotechnology and microsystems. We believe that the development and commercialization of nanotechnology will continue to improve product performance and reduce manufacturing cost. In 2007, $147 billion in nanotechnology-enabled products were sold, and $3.1 trillion are projected to be sold in Electronics markets are also large. In 2009, consumer electronics is forecast to be a $700 billion global market. 5 The worldwide semiconductor market is anticipated to be $196 billion in Meanwhile, the printed electronics industry, where Harris & Harris Group has made several investments (Kovio, Cambrios, Molecular Imprints, Nanogram and Innovalight), is anticipated to grow to $30 billion by Harris & Harris Group also believes that nanotechnology-enabled electronics companies have the potential for significant economic advantage. These advantages are derived from four main ideas. First, nanotechnology helps extend the trend of the rapidly decreasing cost of electronic and semiconductor components. This concept, known as Moore s Law, has driven exponential growth in semiconductor performance with a corresponding decrease in cost for decades. Second, nanoscale materials enable new capabilities and improved performance in semiconductor and electronic devices. Third, in a market where electronics and semiconductor companies are increasingly outsourcing production, companies end up having similar production processes, similar cost structures, and even build devices from the same library of components as their competitors. Nanotechnology helps these companies differentiate their products and improve performance even in a fabless or outsourced manufacturing environment. Fourth, nanotechnology enables quantum computing, which is a novel form of computation for more efficiently solving certain complex problems and addressing problems which are now considered too difficult to solve. Nanotechnology Helps Extend Moore s Law Gordon E. Moore, then director of Research and Development at Fairchild Semiconductor, is credited for predicting the exponential scaling of integrated circuits in a prescient article published in This increase in the number of devices per circuit has had an impact on the 4 Katz, J. Nanotechnology Boom Expected by 2015, Industry Week, July 22, Consumer Electronics Association, Press Release, Global Consumer Electronics Industry Will Grow to $700 Billion by 2009, CEA/GfK Study Finds, July 9, Semiconductor Industry Association, Press Release, SIA Forecast, June 5, Printable Electronics Market Outlook: An Applications-Based Assessment, NanoMarkets, February,

3 performance of electronics. However, Moore was also concerned with reducing the cost of integrated circuits through this exponential scaling process. As he later said: Now what [I was] trying to do was to get across the idea that this was the way electronics was going to become cheap. It wasn t true of the early integrated circuits, they cost more than the bits and pieces that you could assemble, but from where I was in the laboratory, you could see the changes that were coming, [that could] make the yields go up, and get the cost per transistors down dramatically. 8 Thus Moore s Law is as much about cost as it is about device performance, and the idea has been driving the cost of electronics lower over the decades since While the semiconductor industry has relied on Moore s law to reduce cost, others have turned to radically new production techniques, including printed electronics. Whereas traditional semiconductor manufacturing attempts to fit more components on a silicon wafer so that more components are produced per each expensive production step, printed electronics seek to dramatically reduce the cost of production altogether. Squeezing more transistors onto a semiconductor wafer is critical to the cost of traditional production, but when low cost substrates and inkjet or other low cost printing techniques are used, instead of costly optical lithography, the cost paradigm changes dramatically. Through printed electronics, low cost devices can be made that have a different component density at the lowest cost point. Another of the challenges facing traditional semiconductor manufacturing is that the cost of succeeding generations of optical lithography equipment is increasing rapidly. These new generations of lithography equipment are required to continually increase component density. A technologist at Advanced Micro Devices notes: Although exposure tool prices have increased significantly with every generation, the throughput and the number of resolved pixels per area has increased more strongly. Thus, the lithography cost per transistor has gone down exponentially with each generation this trend will now stop for the first time in history. 9 The semiconductor industry has sought to reduce cost through increasingly expensive lithography equipment that offered the lowest cost per transistor by printing more transistors per chip area. However, another approach is to dramatically lower the cost of the lithography tool. This change would allow the semiconductor industry to further shrink component sizes, or could allow the minimum cost per transistor to exist at a larger feature size. Nanoimprint lithography 8 Excerpts from A Conversation with Gordon Moore: Moore s Law, 9 Lithography Steps Up to the Challenge, March,

4 significantly reduces the cost of patterning semiconductor and electronic materials. By changing the semiconductor manufacturing process through printed electronics, and by replacing costly optical lithography tools with nanoimprint lithography, nanotechnology-enabled companies are helping continue the trend of decreasing component and electronic system cost. Two companies from Harris & Harris Group s investment portfolio that are developing and commercializing these technologies are Kovio and Molecular Imprints. Kovio 10 Kovio is using silicon-based nanoinks to create electronic devices using standard printing technologies rather than expensive lithography technology. The company has demonstrated what it believes is the first all-printed silicon-based transistor (see Figure 1). 11 Kovio is in the process of commercializing radio-frequency identification tags that are made through printingbased, additive processing techniques. Kovio believes this additive approach will enable it to manufacture disposable intelligent devices such as RFID tags, electronic transportation tickets and library cards at significantly lower cost than is currently possible through standard subtractive manufacturing techniques. Figure 1 - Image of All-Printed Silicon Thin-Film Transistor Reprinted with permission from Kovio, Inc. 10 See 11 Kovio Press Release, Kovio Achieves Printed Electronic Milestone With World's First All Printed High- Performance Silicon Thin Film Transistor, November 13, 2007, 4

5 Molecular Imprints 12 Molecular Imprints is addressing the need for lower cost lithography by commercializing a technology called Step-and-Flash Imprint Lithography (S-FIL ) (see Figure 2). 13 S-FIL is conceptually very similar to the transferring of ink to a surface in a desired pattern using a stamp. Using this technique, a rigid plate that contains the negative image of a desired pattern (i.e., the stamp) is placed into contact with a substrate. The resulting voids between the two surfaces are filled with a liquid material that cures under irradiation from ultraviolet light. The stamp is then removed to yield the material with the desired pattern. The minimum feature size attainable is not limited by diffraction because the features are defined by the stamp rather than light. The size of the area that can be patterned in one step is defined only by the size of the stamp, and the overall speed of the process is similar to that of optical lithography. The hard disk drive market may be the first to adopt the S-FIL technology for high-volume manufacturing because next-generation hard disk drives require patterned magnetic materials with nanoscale dimensions that are not attainable with optical lithography. 14 It is ultimately possible that S-FIL will be used in the manufacturing of CMOS 15 -based electronic devices as that market progresses to feature sizes smaller than 22 nm in width (see Figure 3). 12 See 13 See generally Molecular Imprints, Home Page, (last visited Mar. 9, 2009); Colburn, M., et al. Step-and-Flash Imprint Lithography: A New Approach to High-Resolution Patterning, Emerging Lithographic Technologies III Proceedings (Yuli Vladimirsky ed.) 1999, available at 14 See generally Resnick, D., et al. Patterned Media Could Enable Next-Generation Hard-Disk Drives, SPIE Newsroom, Mar. 13, CMOS stands for complementary metal-oxide-semiconductor and is a class of design and manufacturing processes used to make a large number of electronic devices. See generally R. Jacob Baker, CMOS: Circuit Design, Layout, & Simulation (2nd ed.) (2007). 5

6 Figure 2 - Schematic Diagram of the S-FIL Process Reprinted with permission from Molecular Imprints, Inc. Figure 3 - Scanning Electron Micrograph of 30-nm Lines Made by S-FIL Reprinted with permission from Molecular Imprints, Inc. Nanoscale Materials Enable New Capabilities and Performance in Electronic Devices As described in an earlier white paper written by Harris & Harris Group, the properties of materials are different at the nanoscale, and this feature can lead to novel properties and to novel behavior of materials. 16 An example of novel capabilities enabled by nanotechnology is the ability to manufacture transparent conductors using a mesh of nanowires. Cambrios is 16 Wolfe, D.B., et. al., Why Invest in Nanotechnology: Harris & Harris Groups, Inc. s Thesis, Nanotechnology Law and Business, 69, Spring

7 addressing the need for a novel transparent conductor in the rapidly-growing touch screen market by exploiting the electrical and optical properties of metal nanowires. Cambrios 17 Transparent conductors are used in applications such as solar cells, touch screens and flat-panel displays. The incumbent technology is based on thin films of ceramic materials made of transparent conductive oxides, particularly indium tin oxide (ITO). 18 Although these ceramic materials have attractive properties for these applications, the raw materials are expensive, and the techniques used to deposit the films require large, expensive capital equipment. Any replacement for ITO technology requires similar or better transparency to light and conductivity of electrons. Bulk metals are good conductors, but are not transparent to visible light. Nanowires made of metal also conduct electricity well, but are transparent to visible light because of their diameter (less than 100 nm). Additionally, the incorporation of nanowires, into a bulk material can impart unique properties to the matrix. Cambrios uses these properties of nanowires to create meshes of metallic nanowires embedded in a polymer film that serves as an alternative to ITO-based transparent conductors. 17 The nanowire-based mesh structure creates a conductive path for electrons through the matrix while allowing light to pass through the thin film. Additionally, these polymer-dispersed meshes can be coated onto flexible and rigid substrates using wet-coating processes rather than vacuumdeposition processes. Wet-coating processes are preferred in the electronics industry because the capital equipment and running costs are substantially less than those associated with vacuumdeposition processes. Cambrios approach is advantageous because the materials are less expensive than ITO, the polymer films are less fragile than those of transparent conductive oxides, and the films can be manufactured using a wet coating manufacturing tool, including very high throughput roll-to-roll processes. Nanotechnology Helps Fabless Semiconductor Companies Capture Value Because nanotechnology can impart novel properties to semiconductor devices, as previously described, it can also help fabless semiconductor companies differentiate their products and earn significantly higher margins and revenue. To reduce manufacturing costs, an increasing number of semiconductor manufacturers are outsourcing production. This is known as fabless manufacturing. In other words, fabless semiconductor companies outsource manufacturing to a third party fabrication facility, or fab, rather than funding their own in-house fabs. This growing trend is depicted in Table See 18 See generally Exarhos, G. J. and Zhou, X-D. Discovery-Based Design of Transparent Conducting Oxide Films, 515 Thin Solid Films 7025 (2007); NanoMarkets, Indium Tin Oxide and Alternative Transparent Conductor Markets (2009). 7

8 Table 1: Worldwide Semiconductor and Fabless Revenue Worldwide Semiconductor Revenue ($million) Worldwide Fabless Revenue ($million) % of Revenue in Fabless 1998 $126,600 $7, % 1999 $149,400 $10, % 2000 $204,400 $16, % 2001 $138,900 $13, % 2002 $140,800 $14, % 2003 $166,400 $22, % 2004 $213,000 $33, % 2005 $227,500 $38, % 2006 $247,700 $49, % 2007 $275,500 $51, % 2008 $258,600 $50, % Source: Global Semiconductor Alliance, Semiconductor Industry Association. Outsourced fabrication allows semiconductor manufacturers to lower the cost of production because they can avoid building dedicated fabs and making very large investments in the latest generation of equipment. However, it also means that competitors often share the same large outsourced semiconductor manufacturers, or foundries, since very few foundries can afford to have the latest generation of processing and lithography equipment. As a result, competitors may use roughly the same manufacturing process and have roughly the same cost of goods sold. Often, they also choose from the same limited library of proven components and circuit building blocks to manufacture their devices. These similarities tend to commoditize a fabless company s products and make capturing the value of their design more difficult. This idea has also steered many investors away from traditional, undifferentiated fabless semiconductor companies despite the large size of the semiconductor market and the potential for startups to revolutionize the space. To address the difficulty of differentiating fabless products, companies are developing proprietary processes and materials that increase performance and lower manufacturing cost. These proprietary manufacturing steps, inserted into an otherwise-commodity fabless production line, can highly differentiate the final product. Three examples of companies using nanotechnology to dramatically improve their semiconductor products are found in Harris & Harris Group portfolio, Adesto Technologies, SiOnyx and Nantero. Adesto Technologies is using the properties of nanoscale silver in a highly-differentiated memory device that is faster 8

9 and lower power than traditional flash memory. SiOnyx extends the useful range of silicon for the detection of visible and non-visible light, which highly differentiates its products from traditional silicon-based photodetectors. Nantero uses properties of carbon nanotubes to store bits of data in novel memory chips. The ability of nanotechnology to impart novel capabilities and performance to the products of fabless semiconductor companies can enable them to excel in an otherwise commodity market. Adesto Technologies 19 Adesto Technologies is a fabless semiconductor memory company that is developing scalable, ultra-fast, low-power, non-volatile memory (NVM) devices. The majority of Adesto s manufacturing process can be completed using the standard CMOS processing used by numerous foundries. However, Adesto s NVM is differentiated by the inclusion of a small number of processing steps that enable the use of solid-state ionics, electrochemical control of nanoscale particles, to store data. The nanotechnology component of Adesto s NVM devices enables unique performance and features. First, Adesto has the ability to embed blocks of NVM in a standard CMOS chip, which is not cost effective using standard flash memory. Second, Adesto s technology enables lower cost manufacturing because Adesto s NVM intrinsically requires less silicon real estate than standard flash memory. Third, Adesto s NVM offers higher speed and lower power consumption than traditional flash memory. SiOnyx 20 SiOnyx is using a laser-based process to generate highly doped, nanocrystalline domains of silicon called Black Silicon. 21 Black Silicon is a unique form of silicon because it 1) absorbs visible and infrared light (see Figure 4), and 2) is able to convert light from each region of the spectrum into electricity at low voltage with higher efficiency than can standard silicon (see Figure 5), and 3) performs comparably to more expensive non-silicon materials. These properties are a direct result of the composition and morphology of the nanocrystalline domains created during the process. SiOnyx aims to use these properties to create low-cost, silicon-based photodetectors and image arrays that have the same or better performance as that of detectors and image arrays made of expensive compound semiconductor materials. Meanwhile, SiOnyx can manufacture its products in traditional silicon foundries, where costs are significantly lower. 19 See 20 See 21 See SiOnyx Inc., Home Page, (last visited Mar. 9, 2009). See also Huang, Z., et al., Microstructured Silicon Photodetector, 89, Applied Physics Letters, , (2006). 9

10 Black Silicon may also provide benefits to silicon-based solar cells. The sun emits approximately 50 percent of its energy in infrared light. 22 This light is not converted to energy by standard silicon solar cells because silicon does not absorb the infrared light. SiOnyx is exploring the possibility that thin-film, Black Silicon-based solar cells may operate with higher efficiency than that of other thin-film silicon alternatives due to its ability to absorb infrared light. Figure 4 - Schematic Diagram of Absorption of Light by Silicon and Black Silicon Reprinted with permission from SiOnyx, Inc. Figure 5 - Plot of Responsivity Versus Wavelength of Photodetectors Reprinted with permission from SiOnyx, Inc. 22 See generally Carnegie Mellon, The Sun & its Energy, (last visited Mar. 16, 2009). 10

11 Nantero 23 Nantero is a fabless semiconductor company developing a technology called NRAM (Nanotube-based/ Nonvolatile RAM) that the company believes may have the capability to be a form of universal memory. This feature results from the properties of NRAM including the ability to switch at high speeds (like DRAM), to be patterned at high densities (like SRAM) and to retain data even when power is removed (like flash memory). The technology is based on using an electrically driven voltage to force suspended single-wall carbon nanotubes (CNT) to move in and out of contact with an electrode. These positions are inherently stable since in one state they are at the mechanical force minimum (not bent and therefore out of contact with the electrode), and in the other state they are in the van der Waals force minimum (bent and in contact with the electrode.) Therefore, NRAM does not require power to retain memory. Nantero believes the nanoscale dimensions of the carbon nanotubes will enable it to build memory chips with hundreds of times more storage capacity on it than anything that is possible with existing technology. 24 In addition, NRAM does not use standard semiconductor junctions so it is highly immune to heat, cold, magnetic fields and radiation, potentially opening new market opportunities for use of its memory in harsh environments. Despite the unique properties of NRAM, Nantero can use standard semiconductor foundries to manufacture its wafers, with the addition of its proprietary NRAM process steps. 25 Nanotechnology Enables Quantum Computing Traditional computers use digital data, bits representing either an on or off state, to perform logical operations. In contrast, quantum computers use principles of quantum physics such as superposition and entanglement to perform their operations. The two phenomena of quantum physics are exploited by quantum computing to analyze a large set of potential answers to the problem simultaneously, unlike conventional digital processors which calculate sequentially. These quantum nanoscale phenomena allow operations to be performed upon qbits (quantum binary digits), which are the basic units of quantum information. Since qbits cannot only store an on or off state, but can represent a superposition of these states potentially for all qbits on the chip, they allow quantum computers to perform multiple operations simultaneously. 23 See 24 Tom Rueckes, Chief Technology Officer, Nantero, excerpted from 25 See 11

12 D-Wave Systems 26 D-Wave Systems is developing a quantum computer based on superconducting Josephson junctions. A Josephson junction is an electrical junction that passes electric current through a thin insulating layer between two superconducting materials. The Josephson junction (JJ) is the basic switching device in superconductor electronics. Josephson junctions operate in two different modes: switching from zero-voltage to the voltage-state and generating single-flux quanta. 27 The company expects the first wave of quantum computing deployments in scheduling and logistics, integer programming, image recognition and financial portfolio optimization, where quantum computing has the potential to solve problems orders of magnitude faster than traditional computing. Conclusion Harris & Harris Group is focused on investments in nanotechnology and microsystems, and it believes that nanotechnology-enabled electronics and semiconductors have the potential to revolutionize their markets. Our investment in nanotechnology-enabled electronics companies is based on four main ideas. First, nanotechnology enables reduced manufacturing cost and increased performance as predicted by Moore s Law. Second, nanoscale materials lend new capabilities and performance to semiconductor and electronic products. Third, nanotechnology helps nanotechnology-enabled electronics companies capture value in a fabless semiconductor model by differentiating products. Fourth, the nanoscale phenomena of quantum physics enable quantum computing which promises to efficiently solve certain complex problems. We believe that nanotechnology-enabled electronics companies have the potential for market success, and that Harris & Harris Group and its shareholders are uniquely positioned to profit from the success of these companies. This article 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 current beliefs of Harris & Harris Group, Inc. (the Company ), and a number of important factors could cause actual results to differ materially from those expressed in this article. Please see the Company's Annual Report on Form 10 K for the year ended December 31, 2008, as well as subsequent SEC 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 references to the website the websites of our portfolio companies and other web based sources have been provided as a convenience, and the information contained on such websites is not incorporated by reference into this article. Harris & Harris Group is not responsible for the contents of third party websites. 26 See 27 Superconducting Technology Assessment, U.S. National Security Agency, August