Foundation of Stone by Rita Freeman

Despite the technology bust that has brought down countless Internet companies during the past year and a half, Philosopher's Stone Ventures of Redondo Beach continues to invest millions of dollars in the battered market sector. The nearly 2-year-old firm is an incubator for technology companies providing seed money, management services and software. In these hard economic times, choosing the right investment is especially tricky said CEO S. Ramesh.

"The thing that we focus on when we invest is whether the companies have a real business, whether they have a reasonable chance of making a profit and how they can suit their customers," Ramesh said. "Those companies that meet those criteria are usually the best situated."

Ramesh, who also serves as the firm's chief software architect, started the enterprise in February 2000 with chief financial officer Jenny Sakhrani. The company helps create high-tech firms that work in such area as software development, Internet infrastructure and Internet security.

Philosopher's Stone has helped create eight companies. The incubator serves as the parent of two of those start-ups: Grayhat Security and RippleImpact. Grayhat, a provider of network and software security systems, was launched in February in Huntington Beach. RippleImpact which develops software applications for various service industries, was launched in May and shares offices with Philosopher's Stone.

Philosopher's Stone Ventures is managing RippleImpact until it assembles a separate management team for the start-up, Ramesh said. But he wants to wait until the economy improves before giving the firm its own team. "We are trying to set aggressive goals for the company to meet," Ramesh said. "It is hard for us to judge because if the team fails, then we won't know if it was the economy or just them. In good economy, if the company fails then we know it could have been them."

Another company that Philosopher's Stone Ventures helped launch more than a year ago is ProcessClaims, a Redondo Beach firm that processes computerized estimates for insurance companies. "They helped us with not only financial resources, but with other investors and other technology people," said David Ferrara, ProcessClaims co-founder and executive vice president.

Philosopher's Stone Ventures invests $250,000 to $2 million on each venture.
Sakhrani said the incubator projects about a 40 percent overall return on its investments. She did not give estimated revenues for 2001.

"We look to between three to five years for them (the start-ups) to be either acquired by another company or merge with another company," Sakhrani said. "At that point we're looking at those returns."

However, since the Sept. 11 attacks in New York and Washington, D.C., some of the companies they invested in took a direct hit while some of them saw their fortunes rise. Grayhat Security became profitable in October partly due to the terrorist attacks.
Grayhat Security provides vulnerability assessments and security consulting, and establishes secure networks for companies trying to build dotcom applications. Grayhat Security CEO Ken Halbeck said that more people are looking at their network security systems as awareness of safety issues has increased.

Mark Monaghan, an Irvine-based computer consultant and former CEO of the Torrance-based Software Council of Southern California, said that a company like Grayhat Security is providing a service that is now in great demand. "It is protecting networks from intrusion, protecting from a hacker getting unauthorized access to networks," Monaghan said. "In this economic climate where cyber-terrorism is a real threat, that expertise really helps address fears."

ProcessClaims also has grown despite the sinking economy, Ferrara said. "We specialize in auto claims. People are still getting into accidents and filing claims, and that will not stop despite a falling economy," Ferrara said.

However, RippleImpact's business has not fared so well, Ramesh said. The startup has lost potential clients while existing customers are delaying projects.

Despite the ups and downs of the current economic slowdown. Philosopher's Stone Ventures continues to look for new investments. "Anytime we invest, there's always a risk some of our investments will go under," Ramesh said. "That's part of the venture business and that's us."

South Bay Business Watch

Name: Philosopher's Stone Ventures
Location: Redondo Beach
Founded: February 2000
Owners: CEO S. RameshCQ and CFO Jenny Sakhrani
Revenues: Projected 40 percent return on all investments
Services: Investment firm and incubator for technology companies
Customers: Eight companies and 40.50 clients for consulting firms
Phone: 310-316-3100
Address: 1874 S. Pacific Coast Highway, #722
Web site: www.philstone.com