Sylmar Firm Puts Hot Idea on Market Via Canada
Like hundreds of other small companies, 3D Systems in Sylmar has been working on a technological breakthrough.
3D’s machine, about the size of a refrigerator, uses lasers, ultraviolet lights and plastics to produce models of parts--for everything from automobiles to jet engines--in hours instead of the weeks required with conventional design materials such as modeling clay, foam, metal and wood.
Next month, General Motors will take delivery of 3D’s first model-making machine to be used in computer-aided design.
Is 3D just another small company with a hot idea that is immediately swamped with funding offers from savvy American venture capitalists? Not really.
Last year, 3D Chairman Raymond S. Freed was convinced he had a great idea; what he needed was $5 million to get into production. So he contacted such venture capital firms as Hambrecht & Quist and Robertson, Colman & Stephens in San Francisco.
Volatile Vancouver Listings
But Freed didn’t like the terms offered by American venture capitalists. Instead, he went further north, striking a deal with a Canadian venture capital firm that in turn sold a big piece of 3D’s stock to the public via one of the most volatile stock markets in the world, the Vancouver Stock Exchange.
Freed couldn’t be more delighted. He hadn’t even thought of taking 3D public. “I really didn’t know how, and two, I was spending 90% of the time working on the (production) process,” he said.
For most of its 80-year history, the Vancouver exchange has been known as the favorite market of oil and gas drillers, gold miners and occasional unsavory promoters who used the exchange to peddle penny stocks and other speculative issues that often gyrated in price.
But in recent years the Vancouver exchange has developed a niche as a venture-capital arena, cultivating its reputation as a convenient financing vehicle for young companies that might not qualify for listing on the major U.S. and Canadian markets.
3D’s listing exemplifies how the exchange has changed, attracting an increasing number of American high-technology firms. 3D is one of nine California technology companies listed on the Vancouver market.
Natural resource firms still account for about 65% of the 2,080 stocks listed on the Vancouver exchange, but that percentage is down from 95% a decade ago, said Alfred Woo, the exchange’s vice president for listings. If that means the VSE remains a risky place for investors, so be it. “That’s the nature of our market,” Woo said. “If you know what you’re getting into, we’re not going to decide if it’s meritorious.”
3D chose the Canadian route after the major U.S. venture-capital firms gave a cold reception to the company’s request for $5 million in seed money. The firms were cautious about investing in an unproven technology, Freed said, and some wanted operating control in exchange for what funds they would provide.
Robertson, Colman & Stephens, Freed recalled, was willing to invest in 3D, but only with strict controls. “They’d say, ‘We’ll put in $250,000, and we’ll wait until you get to this milestone and then we’ll renegotiate what we think you’re going to need,’ ” Freed said. “This was going to be nickel-and-diming us to death.”
Friend’s Urging
At the urging of a friend, last year Freed instead contacted a Vancouver venture capital firm, Lionheart Capital. Within two weeks, the firm agreed to invest $4.8 million in exchange for 70% of 3D’s stock, yet left Freed, 60, in charge of 3D’s board of directors for four years.
“We saw a substantial product” at 3D, Logan Anderson, a Lionheart director, said. “We put our money up and let them go to it.”
It was a savvy move by Lionheart. After creating a holding company called 3D Canada to hold its stake in 3D Systems, Lionheart recouped its investment last month by selling 25% of 3D Canada to the public for $2.35 (Canadian) a share.
Any additional shares Lionheart sells will be pure profit.
True to the Vancouver exchange’s history, 3D’s stock has been volatile. Shortly after going public, the stock soared to $9 a share. It has since dropped to about $5.50, the equivalent of $4.25 in U.S. money.
But the focus of investor interest is 3D’s technique for making plastic forms of new designs.
An auto maker, for instance, even with computer-aided design, also called CAD technology, can spend weeks making several prototypes of, say, a car’s side-viewmirrors before settling on the one model that will be used in production. The auto makers “go through fits just making the ducting for the air conditioning” in cars, Freed said. 3D contends its machine can do the same job in a few days or less.
Time is money in the car business.
As H. Ross Perot, a former GM director, pointed out, it takes GM longer to bring a new car to market than it took the Allies to win World War II. Six or seven years pass between the time the Big 3 auto makers conceive of a new car and when that car reaches a dealer’s showroom. The Japanese, for a variety of reasons, can introduce a car in three or four years, Freed said.
“From the day they (a U.S. auto maker) decide to make a model until it comes to market, aside from the tooling costs, just the engineering and design is between $1 million and $2 million a day,” Freed said. “If we can pull a year out, that’s maybe a $500 million to $600 million savings.”
One of the companies scheduled to take delivery of 3D’s first machines--at an average cost of $150,000 to $175,000--is Fisher Guide, the parts-making division of GM.
Engineering Changes
3D’s machine “can significantly affect the way we do our engineering,” said Al DeWitt, an advanced manufacturing engineer at Fisher Guide. “In some cases, it might cut the time (for bringing parts) to market in half.”
3D’s technology works this way: A part is drawn on one of the sophisticated CAD computers widely used by design engineers. The design is then fed into the 3D machine, which features an ultraviolet laser that rests above a container full of plastic that is still in liquid form. The plastic is a type that turns solid when hit by the ultraviolet light.
Using the computer design as a guide, the laser draws on the liquid surface the bottom cross-section of the prototype being formed, and that cross-section turns to solid plastic. The cross-section is then dropped a fraction of an inch, and another cross-section is drawn above it. This is repeated thousands of times until the solid plastic prototype is completed and the finished model pops out.
Aerospace Uses
Besides auto makers, Freed is talking to aerospace firms, health-care concerns, watchmakers and photo companies about his product. Almost any firm that uses computer-aided design, he contends, can benefit from 3D’s model maker because it will speed up the design process.
“Avon’s got computer-aided design, Procter & Gamble uses computer-aided design to design cereal boxes,” Freed points out.
At the moment, 3D is in its infancy--the company has only 30 employees--but Freed hopes to book $12 million in sales in 1988 by selling about 100 machines.
Freed has his own designers working up improvements as well. The 3D model maker cannot produce forms much bigger than a cubic foot. Also, software must be written so that different computers will be able to transfer their designs to the 3D machine.
Although Freed is the point man for 3D, the company’s technology was developed by engineer Charles Hull while he was at Ultraviolet Products, a privately held San Gabriel firm. After getting a patent in early 1986, Hull demonstrated his system to the company board of advisers, which included Freed. “I just took one look at it and said, ‘Wow,’ ” Freed said.
But Ultraviolet Products didn’t have the financial wherewithal to develop the machine. So Freed decided to take over the project.
In forming 3D, Freed agreed to invest up to $100,000 of his own money and to pay Ultraviolet Products--which retained the patent--licensing royalties on sales (up to a maximum of $10 million). Freed also brought Hull with him--he’s now president of 3D.
At the time, Freed was looking for a challenge. For the past 25 years he had run Elec-Trol, an electronic components maker in Saugus that he started in 1961. Freed had continued running the company even after selling it in 1982 to Cambridge Electronic Industries of Britain for, he said, millions of dollars.
Merger Likely
Freed said it’s likely that 3D Systems and Lionheart’s 3D Canada will merge within the next couple of years, and that the new company will probably be based in the United States. Already Freed has the company’s lawyers working on a registration filing to have its shares listed on the NASDAQ over-the-counter market in the United States.
The new company, he says, will be owned 50% by Lionheart, 20% by the public and 30% by the group of Freed, Hull and Ultraviolet Products.
