Ventura Capital Market Connection Survey

Transcription

1 Ventura Capital Market Connection Survey Mark Drayse Daniel Flaming ECONOMIC ROUNDTABLE A Nonprofit, Public Policy Research Organization

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3 Ventura Capital Market Connection Survey Mark Drayse Daniel Flaming 1998 Prepared under a grant from the Economic Development Collaborative - Ventura County Economic Roundtable A Nonprofit, Public Policy Research Organization 315 West Ninth Street, Los Angeles, California (213)

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5 TABLE OF CONTENTS Executive Summary 1 1. Introduction 4 2. Ventura County Industry- Employment Trends 6 3. The Ventura Capital Market Connection Survey Defense Dependency and Sales to Commercial Markets Financial Needs Business Strategies 34

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7 LIST OF FIGURES AND TABLES FIGURES 1 Manufacturing Employment, Ventura County, Aircraft, Missiles, and Space Vehicles Employment, Ventura County, Electronics and Instruments Employment, Ventura County, Machinery and Metals Employment, Ventura County, Establishment Size Distribution in Percent of Firms by Industry 11 7 Percent of Firms by City 12 8 Year Established 13 9 Defense Dependency Employment Change Sales in Past year Defense-Linked Firms Selling Defense Products incommercial Markets Expected Sales to Defense Markets by Defense-Linked Firms Expected Sales to Commercial Markets by Defense-Linked Firms Percent of Firms Interested in Financial Assistance Percent of Firms Interested in Different Types of Financial Assistance Percent of Defense Firms Interested in Different Types of Financial Assistance Small and Medium Size Firms Interested in Different Types of Financial Assistance Business Strategies Business Stratgies, Defense Firms Business Strategies, Small and Medium Size Firms 36

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9 TABLES 1 Distribution of Survey Respondents and All Ventura High Technology Finns by Industry 14 2 Distribution of Survey Respondents and All Ventura High Technology Finns by Employment Size Class 15

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11 Executive Summary Purpose The Economic Roundtable conducted a survey of defense-linked and other high technology firms in Ventura County in February-March The survey was commissioned by the Economic Development Collaborative-Ventura County (EDC VC). The purpose of the survey was to determine: employment and sales trends in defense-related and other high technology firms; changing levels of defense dependency of defense-related firms; ongoing or planned efforts of defense-related firms to enter commercial markets; and the specific financial needs of defense-related and other high technology firms. The goal of the survey was to match the financial needs of defense-related businesses with available funding sources, and to assist them in conversion efforts. A broader goal of the survey was to increase the awareness by defense-related and other high technology firms of available funding sources, and open or reinforce channels of communication and information exchange between the public and private sectors in Ventura County. Overview A survey instrument was designed by the Economic Roundtable in consultation with the EDC-VC. An initial mailing was sent to 840 firms in February This was followed by a second mailing in March 1998 to firms that had not responded to the first mailing. A total of 185 firms returned completed surveys. An additional 93 letters were returned undelivered by the Post Office. This resulted in a response rate of 25 percent.

12 Ventura Capital Market Connection Survey 2 Defense Dependency Fifty-two percent of the survey responses were from defense-linked firms that had at least 10 percent of their total sales in defense markets in 1990 or Of the defense-linked firms, 40 percent reported high defense dependency in 1997 (at least 50 percent ofsales in defense markets). Defense-linked firms in Ventura County were less dependent on defense markets in 1997 than they were in The average defense dependency of defenselinked firms fell from 51 to 42 percent between 1990 and Likewise, the defense dependency of firms weighted by number of workers fell from 70 to 51 percent during the same time period. Employment andsales Trends Total employment in firms with low defense dependency increased by 63 percent between 1990 and Total employment in non-defense firms grew by 57 percent, and total employment in firms with high defense dependency fell by 5 percent between 1990 and Consistent with these trends, firms with low defense dependency and nondefense high technology firms were more likely to have experienced growing sales in the past year (1997). Sixty-five percent of firms with low defense dependency reported growing sales, compared to 61 percent of non-defense high technology firms and 47 percent of firms with high defense dependency. Selling Defense Products in Commercial Markets Forty-two percent of the defense-linked firms are currently marketing defenserelated technologies or products to commercial markets. Firms with low defense dependency were more likely to be selling defense products to commercial markets. Small defense-linked firms (fewer than 20 employees) were more likely to be selling defense products to commercial markets than were larger defense firms. Three in four defense-linked firms (77 percent) expect sales to commercial markets to increase over the next few years. Only 1 percent expect decreasing commercial sales. Seventy-two percent of firms with high defense dependency expect

13 Ventura Capital Market Connection Survey 3 commercial sales to increase, and 80 percent of firms with low defense dependency expect commercial sales to increase. Financial Needs Forty percent of all survey respondents indicated interest in obtaining financing to expand commercial sales. Forty-six percent of defense-linked firms were interested in financing, compared to 33 percent of non-defense high technology firms. Firms were most interested in obtaining working capital or credit. Thirty percent of all survey respondents were interested in obtaining working capital or credit, while only 13 percent expressed interest in long-term financing and 11 percent wanted high-risk capital. Only 56 percent of firms interested in obtaining financial assistance had contacted their bank. Of this group, about one-third reported that they had received a positive response from their bank. The remaining firms reported mixed or negative responses to their requests for financing. Business Strategies The dominant business strategy stated by firms was to increase the company's share of its primary market. Two in three firms stated that they were pursuing this strategy. This was the main strategy for both defense-linked and non-defense firms, and small and medium-size firms. Within the defense-linked group of firms, firms with low defense dependency were twice as likely to be following this strategy as were firms with high defense dependency.

14 Ventura Capital Market Connection Survey 4 1. Introduction Employment Impacts ofdecliningaerospace Production in Ventura County The decade-long decline in federal defense procurement has resulted in a massive restructuring of production in the aerospace industries, involving a series of mergers and acquisitions, plant closings and relocations, and large-scale layoffs. In 1988, the aerospace industries employed 6,900 workers in Ventura County. By 1997, aerospace employment had fallen to 4,500, representing a painful 35 percent decline. The economic impact of aerospace layoffs is felt by workers who lose their jobs, by businesses that lose contracts with defense firms, and by local retailers and other businesses in which aerospace workers spend their wages and salaries. An inputoutput model of the aerospace industry in Los Angeles County shows an employment multiplier of 2.65, meaning that for every aerospace worker, 1.65 workers are supported in other industries that produce inputs for aerospace firms, or sell products to aerospace workers. Applying this multiplier to Ventura County, an estimated 3,960 were jobs lost throughout the county in addition to the 2,400 jobs lost in the aerospace industry. Altogether, an estimated 6,360 jobs were lost in Ventura County between 1988 and 1996 as a result of defense industry restructuring. Because Ventura County's economy is influenced by its large neighbor to the south, it is useful to compare local industry conditions with those in Los Angeles County. The aerospace industry today employs a much lower share of workers in Ventura County than it does in Los Angeles County. For example, in 1997 the average annual employment of the aerospace industry in Ventura County was 5 percent of the manufacturing workforce. In Los Angeles County, the aerospace industry's share of the manufacturing workforce was 16 percent in In Ventura County, many more workers are found in industries linked to aerospace through subcontracting networks, including machinery, electronics, metals, and research and testing services. Firms in these industries have balanced defense and non-defense work in the past, and are now increasing their share of production for commercial markets. A major goal for the county is to assist these firms in developing and marketing products and technologies for commercial markets.

15 Ventura Capital Market Connection Survey 5 The Ventura Capital Market Connection Survey The goal of the Ventura Capital Market Connection survey was to match the financial needs of defense-related businesses with available funding sources, and to assist them in conversion efforts. The purpose of the survey was to determine: employment and sales trends in defense-related and other high technology firms; changing levels of defense dependency of defense-related firms; ongoing or planned efforts of defense-related firms to enter commercial markets; and the specific financial needs of defense-related and other high technology firms. A broader goal of the survey was to increase the awareness by defense-related and other high technology firms of available funding sources, and open or reinforce channels of communication and information exchange between the public and private sectors in Ventura County. Outline ofthe Report The remainder of the report is divided into five sections. Section 2 provides an overview of recent job change in Ventura County manufacturing industries. Section 3 describes the survey and presents general characteristics of survey respondents. Section 4 discusses defense dependency of survey respondents. Section 5 assesses the financial needs of survey respondents. Section 6 discusses the business strategies of survey respondents.

16 Ventura Capital Market Connection Survey 6 2. Ventura County Industry Employment Trends Despite experiencing layoffs during the recession, Ventura County has seen steady growth in manufacturing employment since 1983 (Figure 1). Between 1983 and 1997, manufacturing employment grew from 27,000 to 32,600, a 21 percent increase. By comparison, manufacturing employment in Los Angeles County declined by 21 percent between 1983 and Figure 1 MANUFACTURING EMPLOYMENT Ventura County, , ~ 32.60~ , , i =~ ,8--ol -Manufacturing ~Durable Goods -Nondurable Goods 10, ~ Contrary to the trend in Los Angeles County, Ventura County has gained manufacturing jobs since the mid-1980s. 7,300 5,000 -_--J O-l ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ---'

17 Ventura Capital Market Connection Survey 7 The durable manufacturing industries added 4,100 jobs between 1983 and 1997, a 21 percent increase. By comparison, employment in the durable manufacturing industries in Los Angeles County fell by 35 percent between 1983 and The job loss experienced in the early 1990s in Ventura County was a consequence of restructuring and employment decline in the aerospace industry. Recent job growth, led by the machinery industry, has more than compensated for aerospace job losses. Figure 2 AIRCRAFT, MISSILES, AND SPACE VEHICLES EMPLOYMENT Ventura County, ,000._ -_ _. 4,000 3, , ~ -..-t-_...c:lo...~;o.;::: -1 1, , _._ _.._~ !! Aircraft, missiles, and space vehicles firms cut 3,500 workers between 1987 and 1997, a 67 percentjob loss. The non-durable manufacturing industries accounted for 27 percent of Ventura County's manufacturing employment in Employment in Ventura County grew from 7,300 in 1983 to 8,800 in 1997, a 21 percent increase. By comparison, nondurable manufacturing in Los Angeles County grew by 7 percent between 1983 and The major non-durable manufacturing industries in Ventura County are chemicals Qed by the growth of the biotechnology firm Amgen), printing and publishing, and food products.

18 Ventura Capital Market Connection Survey 8 The core aerospace industries - aircraft, missiles, and space vehicles - lost 2 in 3 workers in Ventura County between 1987, when 5,200 workers were employed in the county, and 1997, when employment had fallen to 1,700 (Figure 2). The percent decline in Ventura County aerospace jobs between 1987 and 1997 exceeded the 52 percent job loss in the aerospace industry in Los Angeles County. As a result, the aerospace industry's share of Ventura County manufacturing employment fell from 18 percent in 1987 to just 5 percent in Figure 3 ELECTRONICS AND INSTRUMENTS EMPLOYMENT Ventura County, ,000 _ _ I 7,000..-'-..:...:...c ~ ~ i 6, 00 6,000 5,000 4,000 3,000 2,000 _E1;I~=~~- -=~==-=-i -D-Instruments I ~. -- -_..._--~ I 3,000 I...2..aQ-'l..! -_.._------~i I Employment in the electronics and instruments industries has declined slightly since ,000 ~--'---- _..- _ _..._-- 0-' ' The electronics and instruments industries have lost jobs in recent years, after a period of job growth (Figure 3). The electronics industry grew from 4,600 workers in 1983 to 7,000 in 1988, declining to 6,300 in The instruments industry added workers during the recent recession ( ), but lost 100 jobs between 1994 and (The instruments industry includes manufacturers of search and navigation

19 Ventura Capital Market Connection Survey 9 equipment, which is considered part of the aerospace industry, and manufacturers of measuring and controlling devices). In contrast with employment decline in the aerospace, electronics, and instruments industries, the machinery and metals industries have grown considerably in recent years. The machinery industry grew by 61 percent between 1994 and 1997, increasing its employment to 4,500 workers. The metals industry has seen slower but steady growth, adding 400 jobs between 1995 and 1997 (Figure 4). Figure 4 MACHINERY AND METALS EMPLOYMENT Ventura County, ,000 T - -, 4,500 4, t _.. _-_.. _ ~ ~.. I ~ 2,700: i 2.7~0 ~ 2000~ :M=.: ~~ 1,500 r- ---_~~ ,000 I - ~ ~ ~ J o.i. Machinery firms added 1, 700 jobs between 1994 and 1997, a growth rate of61 percent. Firms in the metals industries also added jobs in recent years

20 Ventura Capital Market Connection Survey The Ventura Capital Market Connection Survey A survey instrument was designed by the Economic Roundtable in consultation with the EDC-VC. An initial mailing was sent to 840 firms in February This was followed by a second mailing in March 1998 to firms that had not responded to the first mailing. The mailing list was compiled from the following sources: Economic Roundtable database of Southern California firms Ventura EDC-VC list of firms Economic Development Directors and City Managers of Ventura County cities 70% 60% 50% 40% 30% 20% 10% Figure 5 ESTABLISHMENT SIZE DISTRIBUTION IN Ventura Defense Survey , OAII Firms! Defense-Linked Firms ---1 OOther Firms Most survey respondents are small and medium size firms. Six in ten employed fewer than 20 workers, and one in three employed between 20 and 99 workers. 0% Number of Employees 250 or more

21 Ventura Capital Market Connection Survey 11 Figure 6 PERCENT OF FIRMS BY INDUSTRY 1998 Ventura Defense Survey High Technology Services Other High Technology Manufacturing A~ ~~~~ Metals Machinery Computers, Electronics, Instruments Aerospace A";1l:", ~~r" '! ;=J' Other Firms I' :, I. Defense-Linkedl Firms ' OAII Firms Most defenselinked firms responding to the survey are found in high technology services and the computers, electronics, and instruments industries. 0% 5% 10% 15% 20% 25% 30% A total of 185 firms returned completed surveys. An additional 93 letters were returned undelivered by the Post Office. This resulted in a response rate of 25 percent A group of "defense-linked" firms was identified based on reported sales to defense markets in 1990 and Firms reporting at least 10 percent of sales in defense markets in either year are "defense-linked firms". Firms with at least 50 percent of sales in defense markets in 1997 are "high defense dependency" firms, and firms with percent of sales to defense markets in 1997 are "low defense dependency" firms. Altogether, 91 survey respondents are defense-linked, including 32 with high defense dependency. A total of 85 respondents are non-defense firms in high technology industries. Nine non-defense firms in wholesale and retail trade industries were not included in the analysis.

22 Ventura Capital Market Connection Survey 12 Figure 7 PERCENT OF FIRMS BY CITY 1998 Ventura Defense Survey 35% -r , 30% 25% 20% 15% 10% 5% All Firms Defense-linked Firms DOther Firms One in three defense-linked firms responding to the survey are located in Camarillo. One in four non-defense firms are located in both Simi Valley and Thousand Oaks. 0% Camarillo Moorpark Oxnard Simi Thousand Ventura Valley Oaks Figure 5 shows the distribution of survey respondents by current employment. Most firms are small and medium size employers. Fifty-eight percent of respondents have fewer than 20 employees, and 34 percent employ between 20 and 99 workers. The size distributions ofdefense-linked and non-defense firms are relatively similar. Figure 6 shows the distribution of survey respondents by industry. One in four firms are found in the computers, electronics, and instruments industries. One in five firms are found in both the machinery and high technology services industries. Defense-linked firms are more likely to be found in the aerospace and high technology services industries than are non-defense firms. Non-defense firms are more highly concentrated in the machinery and other high technology manufacturing industries (e.g. plastics and electrical products).

23 Ventura Capital Market Connection Survey 13 About one in three survey respondents were established before 1980, and more than onethird were founded in the 1980s. Few firms qualify as "start-ups" Figure 8 YEAR ESTABLISHED 1998 Ventura Defense Survey ~ I OOther Firms.Defense-Linked Firms All Firms Before % 10% 20% 30% 40% 50% The distribution of survey respondents by city is shown in Figure 7. About one in three firms are located in Camarillo, and one in four are located in Simi Valley. Few survey respondents qualify as start-up companies. One in three were established before 1980, and more than one-third of the survey respondents were established in the 1980s (Figure 8). Comparison ofsurvey Respondents andall Ventura County High Technology Firms How representative are the survey respondents of Ventura County firms? To determine sample bias, we compared the distribution of firms across employment size categories and industry groups. Relative to the distribution of all high technology

24 Ventura Capital Market Connection Survey 14 Tablet Distribution of Survey Respondents and All Ventura Firms by Industry All Ventura County Survey Respondents Firms (1994) Industry Number Percent'" Number Percent'" Aerospace 10 7% 25 4% Computers, Electronics, Instruments 45 30% % Machinery 36 24% % Metals 25 17% 95 14% High Technology Services 35 23% % *Firms in the Aerospace, Computers, Electronics, Instruments, Machinery, Metals, and High Technology Services industries firms in the county, the survey sample includes a high percent of firms in the computers, electronics, and instruments industries, and a significantly lower percent of firms in high technology services (Table 1). This is expected, since the survey was focused on obtaining responses from defense-linked manufacturing firms. Table 2 shows the distribution of firms by employment size class. Compared to all firms, the survey sample includes a higher concentration of medium size firms (20-99 employees), and a lower concentration ofsmall firms (1-19 employees).

25 Ventura Capital Market Connection Survey 15 Table 2 Distribution of Survey Respondents and All Ventura High Technology Firms by Employment Size Class All Ventura County Employment Survey Respondents* Firms (1994)* Size Class Number Percent Number Percent 250 or more 2 1% 13 2% % 21 3% % % % % *Firms in the Aerospace, Computers, Electronics, Instruments, Machinery, Metals, and High Technology Services industries Summary ofresponses The responses of firms to the survey are summarized on the following pages. Pages show the responses of all firms, and pages show the responses of defense-related firms. The full survey instrument can be found in the Appendix at the end of the report.

26 Ventura Capital Market Connection Survey 16 VENTURA COUNTY SURVEY OF FIRMS IN DEFENSE-RELATED INDUSTRIES SUMMARY OF RESPONSES (ALL FIRMS) (n=176*) *excludes 9 wholesalel non- high technology firms that returned surveys Industry City Computers, Electronics, Instruments Machinery High Technology Services Metals Other Manufacturing Aerospace 26% 21% 20% 14% 10% 5% Camarillo Simi Valley Thousand Oaks Ventura Oxnard Moorpark 28% 20% 16% 15% 10% 9% Employment and Products Number of employees working at this site currently: 38 (average) Number of employees in 1997: : : 31 (based on 134 firms reporting employment in each year) Financing Needs Is your company interested in obtaining financing to expand sales in commercial markets? Yes: 40% IF YES: Please check the type(s) of financial assistance needed: a. long-term fixed asset financing: 13% b. working capital to support sales growth: 27% c. line of credit to finance receivables or inventory build up: 16% d. high-risk capital for promising new product: 11%

27 Ventura Capital Market Connection Survey 17 Business Conditions Please check the statement that is true for your company: a. Company has experienced increasing sales during the past year: 60% b. Company has experienced decreasing sales during the past year: 9% c. Company has experienced stable sales during the past year: 21 % Expanding into Commercial Markets [SEE SUMMARY OF RESPONSES FOR DEFENSE-LINKED FIRMS] Business Strategies Which of the following business strategies is your company pursuing? (check any that apply): a. increase company's share of its primary market: 66% b. focus on strengths in the defense market: nla c. acquisitions and mergers with other firms: 22% d. new markets for existing products: 44% e. new product development: 50% f. new technical partnerships with other firms: 32% Have you approached your financial institution about your financing needs? Yes: 39%

28 Ventura Capital Market Connection Survey 18 VENTURA COUNTY SURVEY OF FIRMS IN DEFENSE-RELATED INDUSTRIES SUMMARY OF RESPONSES (DEFENSE L1NKED FIRMS) (n=91) Industry City Computers, Electronics, Instruments High Technology Services Machinery Metals Aerospace 25% 23% 16% 13% 10% Camarillo Simi Valley Thousand Oaks Ventura Oxnard Moorpark 22% 22% 16% 16% 14% 7% Employment and Products Number of employees working at this site currently: 37 (average) Number of employees in 1997: : : 32 What percent of your total sales in 1997 were in defense-related markets?: 42% What percent of your total sales in 1990 were in defense-related markets?: 51 % Financing Needs Is your company interested in obtaining financing to expand sales in commercial markets? Yes: 46% IF YES: Please check the type(s) of financial assistance needed: a. long-term fixed asset financing: 18% b. working capital to support sales growth: 30% c. line of credit to finance receivables or inventory build up: 19% d. high-risk capital for promising new product: 13%

29 Ventura Capital Market Connection Survey 19 Business Conditions Please check the statement that is true for your company: a. Company has experienced increasing sales during the past year: 67% b. Company has experienced decreasing sales during the past year: 10% c. Company has experienced stable sales during the past year: 23% Expanding into Commercial Markets Are you currently marketing defense-related technologies or products to commercial markets? Yes: 38% Over the next few years, do you expect your sales to defense markets to: increase: 38% decrease: 25% stay the same: 38% Over the next few years, do you expect your sales to commercial markets to: increase: 92% decrease: 1% stay the same: 7% Business Strategies Which of the following business strategies is your company pursuing? (check any that apply): a. increase company's share of its primary market: 66% b. focus on strengths in the defense market: 29% c. acquisitions and mergers with other firms: 17% d. new markets for existing products : 46% e. new product development: 48% f. new technical partnerships with other firms: 30% Have you approached your financial institution about your financing needs? Yes: 41%

30 Ventura Capital Market Connection Survey Defense Dependency and Sales to Commercial Markets Defense-linked firms in Ventura County were less dependent on defense markets in 1997 than they were in The average defense dependency of defenselinked firms fell from 51 to 42 percent between 1990 and 1997 (Figure 9). Likewise, the weighted defense dependency of firms fell from 70 to 51 percent during the same time period. (Defense dependency was weighted by employment). 50% 30% Figure 9 DEFENSE DEPENDENCY 1998 Ventura Defense Survey Defense-linked Finns 80%,----======--:;;;- I 7(1'/~ --I I 7(1'/ % ==== (1'/0 1(1'/0 Defense-linked firms were less dependent on sales to defense markets in 1997 than they were in (1'/0 Percent of Sales to Defense IAeighted Percent of Sales Mar1<ets to Defense Mar!Iels

31 Ventura Capital Market Connection Survey 21 Defense dependency and industry was: The weighted defense dependency of survey respondents by industry in 1997 Aerospace: 33% Computers, Electronics, Instruments: 12% Machinery: 12% Metals: 30% High Technology Services: 65% This is based on all firms in each industry, including those with no sales to defense markets. Defense dependency, employment, andsales How is defense dependency related to recent trends in employment and sales? It is reasonable to expect that firms with a high level of defense dependency are most likely to have experienced below average growth (or decline) in employment and sales, relative to firms with low defense dependency and non-defense high technology firms. Firms with high defense dependency are slightly larger than other firms in the sample. They have an average 1998 employment of 48 workers, compared to 42 workers for all survey firms. The average 1998 employment of firms with low defense dependency was 31, and that of non-defense high technology firms was 46. Non-defense firms and firms with low defense dependency experienced greater employment growth than firms with high defense dependency. Of the non-defense firms reporting employment in both 1990 (the peak year of aerospace employment in Southern California) and 1998, average employment increased from 29 to 46, while total employment of these firms increased from 1,777 to 2,793, a 57 percent increase. Between 1990 and 1994, average employment in non-defense firms increased from 29 to 35, and total employment increased from 1,777 to 2,127, a 20 percent increase. Between 1994 and 1998, average employment increased from 35 to 46, and total employment increased from 2,127 to 2,793, a 31 percent increase (Figure 10).

32 Ventura Capital Market Connection Survey 22 Between 70% 1990 and 1998, firms 60% with low defense 50% dependency and nondefense firms 40% increased employment by about 60 20% percent, while firms 10% with high defense 0% dependency lost jobs. 30% - 10% Figure 10 EMPLOYMENT CHANGE Ventura Defense Survey 20% Between 1990 and 1998, the average employment size of firms with low defense dependency increased from 18 to 30, and total employment increased from 793 to 1,292, a 63 percent increase. Between 1990 and 1994, average employment increased from 18 to 22, and total employment increased from 793 to 942, a 19 percent increase. Between 1994 and 1998, average employment increased from 22 to 30, and total employment increased from 942 to 1,292, a 37 percent increase. Firms reporting high levels of defense dependency in 1997 saw a decline in average employment, from 51 to 48. Total employment fell form 1,627 to 1,538, a 5 percent decrease. Between 1990 and 1994, average employment fell from 51 to 44, and

33 Ventura Capital Market Connection Survey 23 Figure 11 SALES IN PAST YEAR 1998 Ventura Defense Survey 70% ~ , 60% +-f";- / % 30% 20% [J Increasing.Stable o Decreasing Most firms reported increasing sales in the past year; only one in ten reported declining sales. 10% 0% -'--''-- Non-Defense Firms Low Defense Dependency High Defense Dependency total employment fell from 1,627 to 1,374, a 16 percent decrease. Between 1994 and 1998, average employment increased from 44 to 48, and total employment increased from 1,374 to 1,538, a 12 percent increase. Consistent with these trends, firms with low defense dependency and nondefense high technology firms were more likely to have experienced growing sales in the past year (1997) (Figure 11). Sixty-five percent of firms with low defense dependency reported growing sales, compared to 61 percent of non-defense high technology firms and 47 percent of firms with high defense dependency.

34 Ventura Capital Market Connection Survey 24 Forty-two percent of defenselinked firms are selling defense products in commercial markets. Figure 12 DEFENSE-LINKED FIRMS SELLING DEFENSE PRODUCTS IN COMMERCIAL MARKETS 1998 Ventura Defense Survey All Defense-linked Firms High Defense Dependency Low Defense Dependency Medium-size Firms Small Firms 0% 10% 20% 30% 40% 50% During the recession years of , firms with high defense dependency lost jobs, while the other groups of high technology firms gained jobs. During the recovery, firms with low defense dependency and non-defense firms added workers at a much faster rate than firms with high defense dependency. Defense-linkedfirms: selling defense products to commercial markets We asked a series of questions regarding attempts by defense-linked firms to expand into commercial markets. Forty-two percent of the defense-linked firms are currently marketing defense-related technologies or products to commercial markets (Figure 12). Firms with low defense dependency were more likely to be selling defense

35 Ventura Capital Market Connection Survey 25 Figure 13 EXPECTED SALES TO DEFENSE MARKETS BY DEFENSE-LINKED FIRMS 1998 Ventura Defense Survey 40% 0 Low Defense Dependency.High Defense 35% Dep-endency I E:'lAIi Defense-linked Firms 30% % % 15% - 10% 5% About one in three firms expect defense sales to Increase over the next few years, and one in five expect defense sales to decrease. 0% -'----'---- Decrease Remain the Same Increase products to commercial markets. Forty-five percent of firms with low defense dependency were selling defense products to commercial markets, compared to 36 percent of firms with high defense dependency. This is logical, since these are firms that make a majority of their sales to commercial markets; many of these firms make products that are sold in both commercial and defense markets (i.e. they are not necessarily "converting" defense products for commercial use). Small defense-linked firms (fewer than 20 employees) were more likely to be selling defense products to commercial markets than larger defense firms. Forty-six percent of small defenselinked firms were marketing defense products to commercial markets, versus 31 percent of medium size defense-linked firms (20-99 employees).

36 Ventura Capital Market Connection Survey 26 Figure 14 EXPECTED SALES TO COMMERCIAL MARKETS BY DEFENSE-LINKED FIRMS 1998 Ventura Defense Survey 90% -r , 80% 70% 60% o Low Defense Dependency High Defense Dependency DAII Defense-linked Firms 50% -1--========== % % % Four in five defenselinked firms expect increasing sales to commercial markets over the next few years. 10% Decrease Remain the Same Increase Three in ten defense-linked firms (32 percent) expect sales to defense markets to increase over the next few years, while 32 percent expect defense sales to remain the same and 21 percent expect defense sales to decrease (Figure 13). Firms with lower defense dependency have a more positive outlook on defense sales than do firms with higher defense dependency. Thirty-five percent of firms with low defense dependency expect defense sales to increase, and 29 percent expect defense sales to decrease. On the other hand, 28 percent of firms with high defense dependency expect defense sales to increase, while 36 percent of these firms expect defense sales to decrease. Small defense-linked firms were slightly more likely than medium size defenselinked firms to expect increasing defense sales. Thirty-four percent of small defenselinked firms expect defense sales to increase, and 30 percent expect defense sales to decrease. Twenty-eight percent of medium size defense-linked firms expect defense sales to increase, and 38 percent expect defense sales to decrease.

37 Ventura Capital Market Connection Survey 27 Three in four defense-linked firms (77 percent) expect sales to commercial markets to increase over the next few years (Figure 14). Only 1 percent expect decreasing commercial sales. Seventy-two percent of firms with high defense dependency expect commercial sales to increase, and 80 percent of firms with low defense dependency expect commercial sales to increase.

38 _!I Ventura Capital Market Connection Survey Financial Needs This section discusses the financial needs of Ventura County high technology firms. We asked firms to state whether or not they were interested in obtaining financing to expand sales in commercial markets. If firms answered "yes", they were asked to check which of the following types of financial assistance they needed: long-term fixed asset financing; working capital to support sales growth; a line ofcredit to finance receivables or inventory build-up; or high-risk capital for a promising new product. Firms were also given the option of stating any other type of financial assistance that they needed. Figure 15 PERCENT OF FIRMS INTERESTED IN FINANCIAL ASSISTANCE 1998 Ventura Defense Survey EMPLOYMENT SIZE ,----,. ----r !-----; j All Firms 40% I Medium "_._. 39% i DEFENSE DEPENDENCY INDUSTRY Small 44% High 31% Low _, _5~% Non-Defense _ i Aerospace 50%! Computers, Electronics, Instruments! 40% i Machinery I 44~0 " Metals 40% I I I Four in ten survey respondents were interested in obtaining financial assistance to expand sales in commercial markets. High Technology Services 3~% I 0% 10% 20% 30% 40% 50% 60%

39 Ventura Capital Market Connection Survey 29 Firms expressed 35% the greatest interest in 30% obtaining working capital or a line of credit 25% to support 20% sales growth. 15% Figure 16 PERCENT OF FIRMS INTERESTED IN DIFFERENT TYPES OF FINANCIAL ASSISTANCE 1998 Ventura Defense Survey IliJAIl Firms Defense-Linked Firms DOlher Firms 10% 5% 0% Long-term Financing Working Capital or Credit High Risk Capital Firms Interested in Financial Assistance Forty percent of all survey respondents indicated interest in obtaining financing to expand commercial sales (Figure 15). Forty-six percent of defense-linked firms were interested in financing, compared to 33 percent of non-defense high technology firms. Firms interested in financing were almost half the size of firms not interested in financing, with an average employment of 25 versus 47 workers. Of the defense firms, firms with lower levels of defense dependency were more interested in obtaining financing than firms with high levels of defense dependency

40 Ventura Capital Market Connection Survey 30 Figure 17 PERCENT OF DEFENSE FIRMS INTERESTED IN DIFFERENT TYPES OF FINANCIAL ASSISTANCE 1998 Ventura Defense Survey... r....! o High Defense Dependency - Low Defense Dependency, , Firms with low defensedependency expressed greater interest in obtaining financial assistance than did firms with high defense dependency '--_ LDng~.rm FirlIndng Working Capital or Credit High Riall Capital by a 2-to-1 margin (56 percent versus 31 percent). Also, small defense-linked firms (under 20 employees) were more interested in obtaining financing than medium-size defense firms (54 percent versus 34 percent). Figure 16 shows the percent of firms interested in three types of financial assistance: long-term financing, working capital or credit, and high-risk capital. Firms were most interested in obtaining working capital or credit. Thirty percent of all survey respondents were interested in obtaining working capital or credit, while only 13 percent expressed interest in long-term financing and 11 percent wanted high-risk capital.

41 Ventura Capital Market Connection Survey 31 Both defense-linked and non-defense firms were more interested in obtaining working capital or credit than long-term financing or high-risk capital. Defense-linked firms showed greater interest in each type of financing than did non-defense firms. For example, 18 percent of defense-linked firms were interested in obtaining long-term financing, compared to 8 percent of non-defense firms. Firms with low defense dependency are much more interested in obtaining financing than are firms with high defense dependency (Figure 17). For example, 42 percent of firms with low defense dependency were interested in obtaining working capital or a line of credit, versus only 19 percent of firms with high defense dependency. Also, firms with low defense dependency were twice as likely to be interested in high-risk capital than were firms with high defense dependency. The greater interest of firms with low defense dependency in financial assistance may be explained by their limited or reduced connection to Department of Defense contracts. On the other hand, Ventura County firms maintaining high defense dependency remain tied to Department of Defense contracting networks, and are less likely to be seeking financial assistance to expand sales in commercial markets. Small firms expressed greater interest in obtaining working capital or a line of credit than did large firms (Figure 18). This is to be expected, as small firms are more likely to need financial assistance. Other Financial Assistance Several firms listed other types of financing they were interested in obtaining. These include: Equipment and building financing Federal research and development grants Funds for building/warehouse Purchase company that complements [the firm's] activities Subsidize certification costs for Boeing DI-9000 quality requirements

42 Ventura Capital Market Connection Survey 32 Small firms expressed greater interest in obtaining financial assistance than did large firms. 40% Figure 18 PERCENT OF SMALL AND MEDIUM SIZE FIRMS INTERESTED IN DIFFERENT TYPES OF FINANCIAL ASSISTANCE 1998 Ventura Defense Survey 35% % % % r-- l!j Medium-Size Firms 15% % 5% 0% l,.ong-term Financing Working Capital or High Risk Capital Credit Contacts with Banks Having asked firms about their interest in obtaining financial assistance, we asked them to state whether or not they had contacted their bank about their financial needs. Only 56 percent of firms interested in obtaining financial assistance had contacted their bank. Of this group, about one-third reponed that they had received a positive response from their bank. The remaining firms reponed mixed or negative responses to their requests for financing.

43 Ventura Capital Market Connection Survey 33 RESPONSES OF BANKS TO REQUESTS FOR FINANCING POSITIVE: Line ofcredit granted So far, our bank has allowed our financing to grow with our business. Financing available when required. NEGATIVE: Not willing to finance until company is on real solid ground financially. Then we won't need it. Uncomfortable with financing cutting-edge technologies. Uncooperative.

44 Ventura Capital Market Connection Survey Business Strategies The dominant business strategy stated by firms was to increase the company's share of its primary market (Figure 19). Two in three firms stated that they were pursuing this strategy. This was the main strategy for both defense-linked and nondefense firms, and small and medium-size firms. Within the defense-linked group of firms, firms with low defense dependency were twice as likely to be following this strategy as were firms with high defense dependency (Figures 20 and 21). Figure 19 BUSINESS STRATEGIES 1998 Ventura Defense Survey New Products New Markets Mergers and Acquisitions Focus on Defense Strengths..."IIII..IJI..II,IIIIII( IIIIIIIJIIIIIIIII!!!!IIII11. 'I!!IIIJ:~ III! OOther Firms Defense Linked, Firms DAII Firms The business strategy pursued by the greatest number of firms was to Increase market share. Increase Market Share 0% 10% 20% 30% 40% 50% 60% 70% 80%

45 Ventura Capital Market Connection Survey 35 Figure 20 BUSINESS STRATEGIES - DEFENSE FIRMS 1998 Ventura Defense Survey Technical Partnerships New Products New Markets Mergers and Acquisitions Focus on Defense Strengths OHigh Defense i Dependency Low Defense Dependency Four in five firms with low defense dependency are trying to increase market share. More than two in five firms with high dependency are focusing on defense strengths. Increase Market Share 80% 0% 10% 20% 30% 40% 50% 80% 70% 80% 90% The second most common business strategy was new product development. One-half of the survey respondents stated that they were pursuing this strategy. Fortyfour percent of survey respondents stated that they were developing new markets for existing products. Defense-linked firms were somewhat more likely to be developing new markets than non-defense firms) and small firms were somewhat more likely to be developing new products than medium-size firms. Within the defense-linked group) firms with low defense dependency were somewhat more likely to be developing new markets as were firms with high defense dependency.

46 Ventura Capital Market Connection Survey 36 Figure 21 BUSINESS STRATEGIES SMALL AND MEDIUM SIZE FIRMS 1998 Ventura Defense Survey Technical Partnerships New Products New Markets Mergers and Acquisitions Increase Market Share Medium-size firms showed greater interest in developing new products than did small firms. They were also more interested in mergers and acquisitions. 0% 10% 20% 30% 40% 50% 60% 70% One in three firms were pursuing technical partnerships with other firms. The least common strategy was acquisitions and mergers, stated by 22 percent of survey respondents. Non-defense firms were more likely to be employing this strategy than defense-linked firms, and medium-size firms were more likely than small firms to be seeking acquisitions and mergers. Within the defense-linked group, firms with low defense dependency were more likely to be seeking technical partnerships than were firms with high defense dependency.

47 Ventura Capital Market Connection Survey 37 Summary High technology firms in Ventura County were less dependent on sales to defense markets in 1997 than they were in The weighted defense dependency of defense-linked high technology firms decreased from 70 percent of total sales in 1990 to 51 percent of total sales in Firms with low levels of defense dependency and non-defense firms have grown considerably this decade, while firms with high levels of defense dependency have lost jobs. Between 1990 and 1998, employment in firms with low levels of defense dependency grew 63 percent, and employment in non-defense firms grew 57 percent. Most firms reported increasing sales in the past year. About two in three firms with low levels of defense dependency and non-defense firms reported increasing sales, as did almost one in two firms with high levels of defense dependency. Four in ten defense-linked firms were selling defense products and technologies in commercial markets. About one in three defense-linked firms expect that defense sales will increase over the next few years, and three in four expect that commercial sales will increase. Firms with low levels of defense dependency showed the greatest interest in obtaining financial assistance, by almost a two-to-one margin over both non-defense firms and firms with high levels of defense dependency. In particular, they were interested in obtaining working capital or a line of credit, or both, to support sales growth.

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