Doing “Defense the Silicon Valley Way” Pays for Daylight Solutions
Startups that develop advanced military technologies often never come to light. But San Diego’s Daylight Solutions has managed to openly thrive in two very different markets. The company has advanced its specialized solid-state laser technology for customers in both the defense industry and commercial sector.
Paul Larson, who co-founded Daylight Solutions with CEO Tim Day in 2005, said they followed a path that was very different from a classic defense contractor, but not too different from a typical high-tech startup. “We called it ‘doing defense the Silicon Valley way,’” Larson said Thursday in an e-mail interview with Xconomy.
The reward for this hybrid strategy came earlier this month, when Leonardo DRS, the U.S. subsidiary of the Italian defense contractor Leonardo, paid $150 million to acquire Daylight Solutions. The co-founders plan to stay on, and Larson (who is president and COO) said the company’s current workforce of 115 full-time employees is expected to grow under Leonardo DRS to 175 by the end of this year.
As Xconomy reported in 2009, Day and Larson saw their opportunity in developing a specialized laser in a portion of the mid-infrared spectrum that was previously untapped by laser technology—from 3 um to 12 um. To make their “External Cavity quantum cascade Laser,” they developed a semiconductor composed of hundreds of layers of Indium gallium arsenide, with each layer only about 10 atoms thick.
Day, who worked in Silicon Valley’s optics and photonics industry, and Larson, who previously developed ASIC chips at Qualcomm (NASDAQ: QCOM), initially saw opportunities for their technology in medical diagnostics, and in environmental and industrial monitoring. Within a year or two, though, they also saw opportunities to develop their laser as a countermeasure that military aircraft could use to “blind” heat-seeking missiles. Conventional infrared countermeasures typically involve firing a series of very hot flares intended to lure a missile away from the targeted aircraft.
“We began to work with the Army and Navy, along with industrial partners such as Northrop Grumman and DRS, to develop advanced systems for protecting helicopters from shoulder-fired, heat-seeking missiles,” Larson said. “This led to an open competition for an Army contract to develop and deliver next-generation infrared counter measure (IRCM) systems. We, along with our partner Northrop Grumman, won the competition, beating out BAE in the final round. Daylight is also providing an advanced laser system to the Navy for protecting their smaller birds. Our motto with the defense industry is ‘Lux Tutamen’ or ‘To Protect with Light.’”
To advance the technology, Larson said Daylight Solutions raised less than $40 million, mostly from angel investors and family funds. Institutional and strategic backers included Switzerland’s Jade S.A., San Diego’s Life Ventures, and Chicago-based Masters Capital. Northrop Grumman led the company’s $15 million Series C round in 2011.
So what does “doing defense the Silicon Valley way” mean?
“We said what we would do and we kept our commitment to the customer,” Larson said. “We did not go back to the government to ask for additional funding beyond what was initially agreed to. We also worked extremely fast by defense standards, putting hardware in the hands of the customer early on, so that they could begin preliminary testing and evaluation. We worked with our customers in a true partnership. As a result, they came to respect our capabilities and to count on our commitments.”
In 2014, Daylight Solutions said it had developed the Spero microscope, which incorporated its specialized laser technology. It was designed specifically for tissue diagnostics and analyzing biomedical and materials research samples. “This system has won several awards for innovation and is considered by many to be a ‘game changer’ in cancer research,” Larson said.
Did Daylight Solutions expand into commercial products because the U.S. military procurement process was difficult or slow?
“The bid and evaluation process takes considerable time,” Larson said. “However, our products are designed for life-critical operations in the battlefield, which means they must be military hardened with proven capability. It takes time to develop and prove the effectiveness of such products.”
He added, “We are not a classic ‘defense contractor,’ but rather a molecular detection and imaging company that creates ‘best-in-class’ products in a number of applications.”
Under Leonardo, Larson said the Daylight Solutions team sees a number of potential synergies that could benefit customers and enable the company to expand its technology into new applications.
“They’re a defense contractor doing [some] commercial, and we’re a commercial company doing defense,” Larson said in a phone interview. While Daylight Solution’s commercial business has been growing at roughly 25 percent annually, Larson estimated that the company’s defense business accounts for 75 percent of their current revenue.
“Leonardo is interested in expanding its North American operations through its DRS subsidiary,” Larson said. “We believe this also presents an opportunity for Daylight to investigate potential investment opportunities into new, complimentary technologies, and to look for businesses with synergistic capabilities and strategies.”
(U.S. Army photo of UH-60 Black Hawk helicopter over Baghdad in 2009 by Staff Sgt. Lynette Hoke)