O.C. Firm Prospers, but Without Profit
Curious twin misjudgments persist about technology and California. For many people, especially in the Eastern states, the technology companies and entrepreneurs now driving the U.S. economy are insubstantial and short-lived phenomena who--like Californians enjoying their weather--haven’t earned their riches through hard work.
But anybody who works in technology or in California knows that the work is hard and the riches are long in coming, if they arrive at all. The example of a single company, Irvine Sensors, speaks volumes about the development of technology, the central role of military research, the lure of California and the flow of capital that undergirds today’s economy.
Irvine Sensors--based actually in Costa Mesa--has been in business for more than 20 years, with a public stock for 18 years. It has raised $100 million in private equity capital in that time and has a total market value today of $232 million. Yet it has never shown a profit.
“We are now at an inflection point and about to take off,” says John Stuart, the chief financial officer who has raised equity for the company through years of traveling to sources of private investment in the U.S. and abroad.
His hopes rest on new consumer products the company has developed from military technologies it has worked on for more than two decades. Irvine Sensors got its start trying to invent an electronic system as sharp as the human eye so that a spy satellite could spot the launch of a ballistic missile in the Soviet Union.
The company--then named Carson-Alexiou after John Carson, who is the firm’s chief technology officer, and James Alexiou, its now- retired chairman--devised a way to stack microcircuits to get a lot of surveillance into a tiny space. “We put a mainframe computer on a sugar cube,” Carson says.
The Defense Department, for other strategic reasons, didn’t buy the device. But it was sufficiently impressed that it and other government agencies have continued to use the company as a research contractor.
As a result, Irvine Sensors, the formal name adopted in 1980, has developed a lot of capabilities, such as: how to make electronic processors so thin they can be wrapped around a finger and monitor heart rate and other vital signs; how to take digital photographs with tiny devices that can fit inside conventional cameras; how to construct tiny photonic and electronic switches for the Internet and cellular telephones, and many more.
“This company has dozens of high-tech ‘garages’ within it,” says James Evert, a former IBM manager who was brought in as chief executive three years ago when Irvine Sensors was in dire financial straits.
Until now, the company hasn’t earned a profit from any of the commercial products developed from military work. But that may be about to change because of several factors.
Markets have changed. The newest commercial developments--cellular telephones, the Internet, digital photography--adapt technologies originated in the 1960s and ‘70s for the military. “We used to be decades ahead of our time, now we’re only two years ahead,” says Carson, 61, a physics graduate of Massachusetts Institute of Technology who worked in spy satellites for Hughes Aircraft in Boston in the ‘60s and later migrated west “for the sun.”
Laws have changed. In previous decades, defense contractors were forbidden to develop commercial products from government research. But in 1992 the Defense Department changed its policy completely and made it mandatory that contractors try to develop commercial adaptations of their research.
Money has changed. There is an abundance of private financing available for technology today. The Silicon Film division of Irvine Sensors, for example, raised $5.6 million in February through a convertible preferred offering by OffRoad Capital, an online venture capital company backed by Charles Schwab, Mayfield Fund and Robertson Stephens.
Ultimately Irvine Sensors sees Silicon Film doing an initial public offering and becoming a partly owned separate company. It also envisions spinning off other divisions that make components for Palm Pilot computers, gyro sensors for automobiles, cameras and toys, and a division named RedHawk with software that can produce a poster-quality picture from a single frame of a camcorder video.
“We’ll become a holding company, with a core in government research but participating in commercial markets through our partly owned technology companies,” says Evert, who managed mainframe development and other operations in 30 years with IBM. He was brought to Irvine Sensors in early 1997 by Alexiou after the firm got in financial trouble by borrowing to set up an unwise semiconductor manufacturing operation in Vermont.
Now out of debt, with a pipeline of products coming to market in the next three years, Irvine Sensors has recovered its confidence. But not over-confidence: When its stock price spiked up in March, due to news that the company had an advanced switch for Internet routers, Evert, Carson and other directors cashed in some of their stock options. The stock, which touched $18 a share at that time, has retreated to just over $6 a share.
The future: With the financial success it hopes for in the next three years, Irvine Sensors will build a new headquarters in Orange County. “We’re going to have to recruit from Silicon Valley and Boston and other high-tech areas,” says Evert, acknowledging how competitive the area has become for talent as companies and resources have multiplied.
Far more than sunshine built up those resources. “We have research ties to Caltech and to UC San Diego,” Carson says.
So universities and business organizations have formed a technological complex in this region, spurred by decades of governmental research funding.
What that says is that Southern California’s technological stature and its prosperity are neither insubstantial nor short-lived phenomena--whatever misperceptions persist elsewhere.
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James Flanigan can be reached at jim.flanigan@latimes.com.
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Perils of Technology
Irvine Sensors’ stock price has almost disappeared at times, as in the early ‘90s when defense budgets fell. And it has jumped at times, as in March on news of an Internet-related product. The gyrating stock price reflects the fact that the company has always been unprofitable financially but inventive technologically. Quarterly closes and latest:
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At a Glance
* Ticker: IRSN
* Headquarters: Costa Mesa
* Employees: 107
* CEO: James Evert
* Market value: $232 million
* 1999 revenue: $11 million
* 1999 net loss: $9.8 million
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Tuesday: $6.44, up $1.06
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Sources: Bridge News, Bloomberg News
Researched by NONA YATES/Los Angeles Times
