High-Tech Mecca Budding Along the 101
Thirty years ago, the Santa Clara Valley was a pastoral landscape dotted by prune orchards. Today, it’s known as Silicon Valley, home of the computer chip, a buzzing industrial web founded by bright, young engineers who spun their dreams into high-tech powerhouses.
Since then many regions throughout the country have sought to emulate the Silicon Valley success story: Boston, the Pacific Northwest and San Diego among them.
In the Los Angeles area, a hotbed of high-tech activity has sprung up in the past several years in the west San Fernando Valley and the Conejo Valley in Ventura County. It’s not civic boosterism, but a heavy concentration of former aerospace engineers that has given rise to the 20-mile communications corridor straddling the Ventura Freeway, with its cluster of young companies riding the growth of telecommunications and the Internet.
The high-tech push has grown out of the “tens of thousands of engineers in Southern California writing software for 30 years,” said Jim Cole, general partner at venture capital firm Spectra Enterprise Associates in Westlake Village.
For decades, aerospace companies “took kids out of school and put them to work developing solutions to complex problems,” said Cole. “Now we have people in their 30s, 40s and 50s who have years of experience finding solutions, and they’re applying them to multimedia PCs and networking for the Internet, and how to deliver high-speed video and how to deliver voice to the desktop.”
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But for all its potential as a high-tech mecca, the Chatsworth-Camarillo corridor still has a long way to go.
Most of these local companies are competing in fast-growing markets with gadgets that help computer networks run faster, communicate with each other better and carry ever-increasing amounts of data. Xylan, MRV Communications, Vitesse Semiconductor and Xircom are among the best-known, but they are far from being household names.
All told, there are a couple of dozen smallish high-technology firms that have sprung up along this corridor in recent years. Some have received financing through Wall Street stock sales and many are quickly adding to their payrolls.
But the death toll among high-tech start-ups is inevitably high, and even the most impressive technology is no guarantee of financial success. What’s more, many of these local firms are taking on markets dominated by billion-dollar companies.
Yet the potential exists for one or more of these home-grown start-ups to be the next Cisco Systems, one of the Silicon Valley wonders that has rocketed to $2 billion in sales on demand for its networking gear.
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Even if a local superstar company never emerges, a cluster of prosperous mid-sized businesses could serve as a magnet for suppliers, buyers and employees, said Kathleen Vickland, an economist and program manager for SRI International’s Center for Economic Competitiveness. The benefit will be seen “not just in the hard numbers, but in the dynamism that it gives a community in terms of hope in the face of defense downsizing.”
One optimistic entrepreneur is Gregor Campbell, 36, who dreamed up the idea for Plasma and Materials Technologies 10 years ago while working on his PhD in plasma physics at UCLA. Now the Chatsworth company is gaining attention for its cutting-edge technique for etching tiny lines packed with data onto semiconductors, pitting it against billion-dollar companies such as Applied Materials.
So far, PMT is on a roll. It doubled its sales last year to $21 million, eking out a $118,000 profit. With money raised in its initial public stock offering last year, PMT acquired a larger British company that will help it crack foreign markets. Campbell, who never held a job before starting PMT, has recruited experienced executives from Silicon Valley, and even persuaded John Rollwagen, the longtime chief executive of supercomputer maker Cray Research, to be PMT’s chairman.
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With computer chips now going into everything from cellular phones to television sets, Campbell said PMT hopes to get its share of a market that’s expected to grow to $13 billion by 2000. “If we’re a real player, we should be a multibillion-dollar company.”
Hope is also plentiful at Calabasas-based Xylan, which is challenging Cisco with its super-fast switching systems that control the rivers of data flowing through computer networks.
Xylan was founded three years ago by Steve Kim, a former Burroughs engineer, “with the vision that switching technology would really be the future,” he said. “Everyone is moving into more powerful PCs. . . . It creates this huge demand for networking in terms of bandwidth. That will drive the very high-end, powerful switching capability.”
One of this year’s hottest new stocks, Xylan has lately taken a beating on Wall Street with this summer’s technology stock sell-off. Investors were also disappointed that Xylan’s second-quarter profit of $2.9 million, on $28.2 million in revenue, wasn’t bigger. But Xylan scored a coup last month with a deal for IBM to buy at least $30 million of its products, produce other products under license and take an option to buy 5% of Xylan.
Like PMT’s Campbell, Kim talks big. Today the U.S. market for switching is close to $5 billion, he said. In the next two to three years, he expects that to double. “We have the technology to potentially be a billion-dollar company in just a matter of years.”
Maybe. But the chips have to fall just right for high-tech hopefuls like Xylan to win big.
One concern is that the recent stock market slide chopped billions of dollars of market value from tech stocks, theoretically limiting companies’ access to the capital they’ll need to grow.
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Michael Murphy, the well-known editor of the California Technology Stock Letter, doesn’t expect that to be a major impediment in the long run. The industry’s stampede is too powerful to turn back now, he said.
“There’s a fundamental change going on from a traditional mass-consumer economy to a technology-driven economy. It’s really a massive change. There are giant, giant markets out there and that’s not going to stop.”
A bigger problem is that technology firms are often started by engineers straight out of universities, aerospace concerns or other technology companies--and can be clueless when it comes to running a business. They build sales to a point--then hit a wall.
“It’s almost always a marketing problem,” said Murphy. “They just don’t know how to do it.”
Take Thousand Oaks-based Xircom. Founded eight years ago by engineer Dirk Gates, Xircom at first had no problem selling its credit-card-sized products that connect notebook PCs to networks.
But Xircom faced its first significant competition when the big networking company 3Com jumped into the market, and it nearly tanked. In fiscal 1995, Xircom lost $58.8 million on $126.6 million in sales.
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Gates cut prices and costs, and Xircom is profitable again. “As an entrepreneur, it’s a whole different feeling, and a whole different ride when you’re creating the market,” he said. “All of a sudden, in 1995 we had to grow up.”
Martin Shum, chief executive at ACT Networks in Camarillo, worries that the same thing could happen to his company. An engineer, Shum founded ACT nine years ago after he couldn’t interest his former employer, Micom Communications, in his idea to put voice and data traffic on the same circuit. It was an untried concept at the time, but Shum figured that “you can’t be successful doing a me-too product. The more unique you are, the better is your chance of success.”
Now that ACT is growing--it had a profit of $257,972 on sales of $8 million in the quarter that ended March 31--Shum wonders if a big company like Motorola will take him on. “If they drive this business hard,” he said, “they could potentially own this market.”
Another company that nearly short-circuited is Micropolis, a Chatsworth disk-drive supplier that fumbled its marketing and product development. A year ago, turnaround specialist Larry Smart was imported from Silicon Valley to run the company.
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Earlier this year, Smart sold Micropolis’ old disk-drive business and started a new company from what was left. He renamed it StreamLogic, which sells data- and video-storage systems, and is hoping to capture part of the expanding market for storage capacity being driven by the Internet and video on demand.
“Part of what we’re doing here now is changing the culture from one that builds a product that makes engineers say, ‘Golly, gee whiz,’ to building products that we can sell,” Smart said.
StreamLogic lost $16.4 million on $24.4 million in sales in the quarter ended March 31--its “transition period.” But Smart believes the company could eventually reach half a billion dollars in sales.
Vitesse Semiconductor, a veteran among local high-tech firms, also survived a near-death experience.
Vitesse produces gallium arsenide chips, which make computers run faster with less power than the ubiquitous silicon semiconductor, but are also more expensive. When Vitesse started in 1984, their idea was to sell to makers of supercomputers. But when the bottom fell out of that market, Vitesse found a better one: telecommunications. Now Vitesse’s customers include A T & T spin-off Lucent Technologies and Alcatel of France, who are continually upgrading their networks to handle growing phone, fax and Internet traffic.
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After racking up big losses a few years ago, Vitesse is profitable again. It reported record net income of $3.8 million on $17.3 million in revenue for the quarter ended June 30.
Survival in the fast-changing technology business means “doing the right thing at the right time,” said Vitesse Chief Executive Lou Tomasetta, a former Rockwell engineer. “You can be too early. You can do the right thing but be three months too late and be behind the curve of the competition. Sometimes, it is just luck.”
But it will take more than luck to keep high-tech growth humming.
The machine must be constantly fed with new entrepreneurs. In Silicon Valley, hundreds of venture-capital firms are eager to lavish money on promising start-ups there. But for all the wealth in Southern California, there’s a startling dearth of investment capital available for early-stage companies. The Los Angeles region has been dominated for so long by the aerospace and entertainment industries that a tradition of venture capitalism hasn’t taken hold.
Said Massoud Entekhabi, managing partner at accounting and consulting firm Coopers & Lybrand in Sherman Oaks: “If we can get our hands on more of that stuff quicker, you’d see an enormous boom in the Valley.”
