In no other area does rapid technological obsolescence make investment more hazardous than in electronics. This is especially true of small, early-stage companies where replacement of one technological skill by another might make or break the business.

An excellent way to reduce risks of this kind is to buy a package of electronics stock. Better still, let an expert do the buying for you. And it's easy to arrange.

Diversification-type investing in electronics has been made possible for small investors by the emergence of a new investment institution called Small Business Investment Companies. (The SBIC is, of course, not restricted to electronics. See Chapter 10.)

Late in 1959 there emerged an obscure, new company named Electronics Capital Corporation. The stock was then quoted around 9½-l0, though it had first come out at 10. It hit a 1961 high of 65½ and low of 20w.

ECC (Electronics Capital Corporation) was the first publicly held federal licensee created under the Small Business Investment Company Act of 1958, designed for the creation of a new kind of investment company for channelizing private capital into promising, young businesses.

The growing popularity of ECC's type of operations is understandable. For one thing, it filled a very definite need for investors seeking to participate in the mushrooming electronics business. It had been increasingly obvious that potentially the most profitable way of participation was through buying into small electronics companies, preferably during their early-stage development. ECC was organized for the purpose of pumping financial life-blood into small electronic companies that are long on engineering but short of cash. Help to the struggling companies was to be given in the form of cash and marketing advice. When ECC invests, it does so mainly through the purchase of convertible debentures, which mature in five to ten years. The debentures are convertible into 333 to 68 per cent of the selected companies' common stocks.

The question is, of course, how you can be sure ECC will get into the right companies. Naturally there is no foolproof guarantee. After all, ECC is a venture capital setup. All one can do is bet on the best possible management to get the best possible results.

ECC's highly competent management team included President Charles E. Salik, who headed the enormously successful Electronics Investment Management Corporation; Executive Vice President Richard T. Silberman, who had turned a Cohn Electronics subsidiary into a big success; Dr. Heil H. Jacoby, Dean of Graduate School of Business Administration, University of California; Dr. Joseph M. Petit, Dean of the School of Engineering, Stanford University, and others.

Even a first-class management team cannot exempt a company from making wrong decisions. You may have heard of a closed-end investment firm, American Research and Development, which specializes in buying into scientific and technical firms. It has an excellent record over-all, though it has made errors. Per-haps the same will be true of ECC. I£ the majority o£ its future investments prove as successful as its past ventures, ECC will provide an excellent vehicle for investing in privately owned electronics companies before they are offered to the public.

So far, ECC has made twenty commitments, including Potter Instrument Co. (magnetic tape recording); General Electrodynamics Corp. (space traffic control and closed-circuit television); Vega Electronics Corp. (precision electronic magnetic tape storage system); Cain & Co. (first nationwide sales engineering corporation); Electronic Energy Conversion Corp. (electronic conversion equipment); Duncan Electronics Corp. (multi-turn precision potentiometers); Electro Radiation, Inc. (electroluminescence, molecular electronics, solid-state physics); Ultronix, Inc. (high-reliability resistance and trim potentiometer components); Remanco, Inc. (microwave test equipment); Craig Corp. (electronic and photographic consumer-product distributor); Communications Control Corp. (electronic data-handling systems); Alloyed Electronics (specialized electron beam equipment); Quan-Tech Laboratories, Inc. (frequency and noise measuring instruments); Neíf Instrument Corp. (DC amplifiers and strain gauge power supplies); Canoga Electronics Corp. (data transmission); Transistor Specialties (digital instrumentation); Universal Microtron Corp. (microminiaturized components); PM Electronics (miniaturized telemetry amplifiers); Regco, Inc. (missile batteries); and Behlman-Invar Electronics Corp. (power supplies).

At the end of 1961, ECC's assets were reported at $39.59 million, of which approximately $25 million was committed in the above companies chosen from about 875 applications received at the rate of twelve a week. They were chosen, according to John M. Eager, Hayden, Stone & Co., by "a policy of seeking out companies that operate within specific pre-selected branches of the electronics industry that offer a potential for technological innovation, and, particularly, fast-growing profits. This policy thereby provides the shareholder with a package-type of investment, which is designed to provide broad coverage in areas in which ECC's experienced management discerns opportunities for profit.
 
Another favorable aspect of such policies is that ECC's close ties with its family of companies provide a further opportunity to originate and develop ideas that will be of use to other client companies, a concept which management calls ‘cross-polleniza-tion.' "

The profit to ECC stockholders is expected to materialize when the selected companies grow enough to conduct a public offering of their stocks. At that time or after, ECC hopes to sell all or part of its interest in the companies at a projected ten times what it had originally paid for the securities.

For example, as a result of the technical know-how and contacts supplied by ECC to the management of its first portfolio firm, Potter Instrument Company, certain large stock underwriting houses as early as November 1959—one month after ECC's purchase of Potter convertible debentures—offered to underwrite a stock sale for the company which would make ECC's interest worth some $5,000,000 instead of the $750,000 originally invested.

Undoubtedly, some of ECC's portfolio companies have very interesting potential; a few of them might well be found in the forefront of tomorrow's electronics. For instance, a first-rate technical company, Electro Radiation, has been termed the most exciting member of the ECC family. Advanced research and development is done in the areas of electroluminescence, molecular electronics, solid-state physics, and other areas dealing in the application of materials to electronic principles. These areas are among the new frontiers of electronics technology, and the company is considered to have more than adequate technical competence to explore, develop and exploit them.

Investing in small electronics companies has, of course, become increasingly competitive since the days when ECC started off as its sole entry. Hundreds of venture capital firms have entered the field, with more likely to come. With more venture capital around, small electronics firms are now better placed to bargain with their prospective purchasers. However, as the first publicly held of such setups, ECC got a big head start and should be in a pre-eminent position.

Among other promising venture capital firms which offer a package of electronics stocks are Electro-Science Investors and Great Washington Industrial Investments.

Great Washington Industrial Investment was originally sponsored by Atlantic Research Corp., a fast-growing maker of rocket propellants. It was established to invest in small firms in the Washington, D.C., area, with specialization in scientific and industrial technology. Two investments were made in 1960. The first was 8 per cent convertible debentures of C-E-I-R, Inc., at a cost of $900,000, C-E-I-R is the country's largest computer service organization, created to service small and medium-sized concerns which cannot afford to buy computers.

Since there are far more concerns which find it less advisable to buy computers themselves than to utilize the renting services of companies like C-E-I-R, the growth potential for computer service organizations is deemed excellent. The market value of Great Washington's interest in C-E-I-R has considerably exceeded its original cost. GWII's second investment was 8 per cent convertible debentures of Human Sciences Research, Inc., at a cost of $30,000.

Electro-Science Investors, Inc., was organized by James Ling, head of Ling-Temco Electronics and Hathaway Instruments, and Joseph F. McKinney, former research chief at the Philadelphia branch of Reynolds & Co. In the middle of December 1960 the firm acquired over 80 per cent equity in Knapic Electro-Physics, Inc., Palo Alto, California, for $2 million in convertible debentures and common stock. Knapic Electro-Physics manufactures silicon and germanium crystals for use in semiconductor devices, such as transistors, rectifiers, diodes, solar cells and infrared application.

Late in November 1960, Electro-Science acquired a 30 per cent interest in Communications Industries, Inc., Dallas, a manufacturer of industrial communications and automation equipment, for over $1 million. Previously, it invested $400,000 in Rawco Instruments, Inc., Fort Worth.
 
The Bermuda-based Electronics International Capital, Ltd., was organized to invest primarily in privately owned electronics companies outside of the United States.

For the investor with little time to follow the market carefully, a Small Business Investment Company can be a lifesaver. Certainly it should be seriously considered before you make any electronics purchases.

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