How to Build a Profitable Space Startup in National Security
Transcript
Maggie 00:19
In this episode of the Mission Matters podcast, we’re joined by John Serafini, the CEO and founder of Hawkeye 360 and a partner at Shield Capital. Hawkeye 360 operates a constellation of more than 30 satellites that detect and analyze radio frequency signals from space, providing insights into activities that can’t be seen with traditional imagery alone.
David 01:13
Radio frequency, or RF for shorthand, is what we use to communicate with technologies like Wi-Fi, AM and FM radio, Bluetooth, LTE, and more. Anytime someone communicates using one of these technologies, a Hawkeye 360 satellite can detect their location, which provides signal intelligence for a wide range of mission sets useful to the intelligence community, the military, law enforcement, and non-government organizations, among others.
Maggie 01:45
For instance, it can help a customer monitor maritime activity like illegal fishing, or help a law enforcement agency gain visibility into trafficking routes or cross-border movements used by illicit networks like terrorists and narcotics smugglers. These actors may rely on tools like push-to-talk radios and satellite phones but can be difficult to detect using satellite imagery alone. Hawkeye 360—
David 02:11
—is the first truly scaled startup we’ve had on the Mission Matters podcast since it was founded in 2015. Hawkeye 360 has launched more than 30 satellites, achieved nine figures of annual recurring revenue from government customers around the world, and reached profitability. They’ve raised more than $400 million and grown to over 200 employees.
Maggie 02:35
John has a long history in the national security industry. After graduating from West Point, he served as an Airborne Ranger-qualified U.S. Army infantry officer for several years. He then received his MBA from Harvard Business School and joined the investment team at Allied Minds, a deep tech venture firm, before starting Hawkeye 360 in 2015.
David 02:56
I’ve had the pleasure of working with John for several years at Shield Capital on our space portfolio, and he is absolutely one of the foremost experts on how to build and scale enduring space startups. In this conversation, we dive into what it really takes to scale a space hardware company, how John evaluates space startups as an investor, the trials and tribulations of working in classified environments and with foreign partners, and along the way, John delivers some hot takes on the current state of the industry.
Maggie 03:26
Now on to the conversation. John, you personally have spent a lot of time building companies, investing in companies, and scaling companies. What would you say is the best piece of advice you’ve received over the years about building a company like Hawkeye?
John 03:45
I’ve been blessed with a wonderful chairman at Hawkeye 360, Mark Spoto from Razor’s Edge. They led our Series A round back in 2017. Mark’s been a great partner to me, and at the time, it was probably more of a flippant remark from his own thinking, but it really stuck with me. I was having a conversation with him a few years after we started the company about what metrics he really wanted me to focus on reporting to the board and what would be our quote, unquote KPIs at the time. I remember thinking through revenue or ARR or ACV, bookings and backlog, et cetera. He kind of stopped me, and again, he’d probably say it was a flippant remark, but to me, it stuck. He said, “John, just build a serious company. Just build a serious company.”
I think that was a really great piece of advice because it forced me to recognize that we’re not building widgets. We’re not building some nameless piece of enterprise software to be deployed by some nameless enterprise entity in the middle of nowhere. We’re building data and data analytics products that are delivered to the warfighter, to the intelligence analyst, to decision-makers who are operating in very difficult circumstances with no margin for error. Accordingly, our technology has to work the first time. It has to work every time. That mindset has to permeate the entirety of the organization and filter up to the KPIs that we care about.
From that small piece of advice grew my own personal thesis on how to build a real, serious company in the defense technology ecosystem. The first thing is you have to be trusted. You have to be trustworthy. This is a hard thing for young companies to understand. If you’re going to sell mission-critical functionality to customers like NGA, NRO, CIA, combatant commands, or their international equivalents, you have to be trusted. You have to do what you say you’re going to do. There can’t be any gap between what your capabilities are and what you claim you’re capable of doing. Customers have to believe not only in you as the CEO and your management team, but also in the integrity of your product.
The second thing is you have to be humble. I don’t mean humility in the traditional sense. I mean recognizing that you are one small component of many different products, services, and technologies supporting the warfighter or the intelligence analyst. They operate within complex systems that are often beyond your full understanding, systems you have to fit into, be compatible with, and interoperate with. Your technology has to be ruggedized. It has to be cyber-hardened. It has to be proverbially camouflaged to work in very austere and difficult environments. I like to say that the sun does not revolve around your startup. The sun revolves around the warfighter and the customer, and your technology must fit into the complexity of the systems they operate.
The third, and hardest for many peer companies to understand, is that you have to be sustainable. To me, that means you have to be profitable, and you can’t be dependent on one or two, or just one, source of revenue or customers. You need high-quality margins, the ability to attract sustainable and consistent capital, and a diverse set of inbound revenue to reduce exposure to any single customer or source. That’s difficult for startup companies to grasp.
When Mark said to me, “You need to build a serious company, a mature company, a thoughtful company,” it meant that we had to be trustworthy, we had to be humble, and we had to be sustainable.
Maggie 08:16
John, what’s a company that you admire, that you think embodies a lot of the principles of being serious and sustainable?
John 08:25
I think, I mean, it’s easy to say a company like SpaceX because they’ve accomplished so much in such a short period of time, but they’ve also had an ungodly amount of capital to grow with. At the same time, I appreciate that their growth has not been linear. Their first couple of years were really challenging, and they were true pioneers. So it’s easy to say SpaceX, but I also have a lot of respect for Peter Beck and what he has built at Rocket Lab. Not only did he build a national security oriented space startup company, but he’s been able to build it out of New Zealand, which is not exactly known as a bastion of defense technologies or a place with a huge local government requirements set for him to naturally fulfill. He’s had to build a company that not only has real functionality that customers can depend upon, but can also export that capability to the United States and other advanced economies where space based launch and other space based capabilities are in demand. None of that is easy.
We take for granted building space related companies today, which is a totally different environment from building a space company ten years ago when he got started. Back then, there were probably five or so venture capital firms that would take him seriously in a seed or Series A round, and even in a Series B round. Today, there are dozens, if not a hundred, that would take that meeting and sincerely consider financing his round. I’m also impressed by how he thinks ahead and how the organization thinks ahead. They’ve not only achieved a great amount of scale in the launch business, which is an extremely difficult business to be in and almost impossible when you’re competing against SpaceX and the scale they have, but he’s also been able to use that initial success in launch to move into other complementary business areas. That includes building spacecraft, building parts of the supply chain, and leveraging access to customers to contemplate becoming a constellation operator in other areas. All of these are complementary to his larger business thesis.
With a relatively small amount of capital and a public listing, albeit via a SPAC, which I think was a challenging path, and one where he could have IPO’d the company the traditional way, he’s built a lot in a relatively short period of time. So I tip my hat to Peter. Of course, I also tip my hat to SpaceX, to Gwynne and Elon, and to what they’ve collectively built. I think both of those companies are great exemplars for us to follow.
David 11:23
Yeah, John, I think that’s a great point on Rocket Lab and SpaceX. They’re certainly preeminent companies in the space economy and may be responsible for a lot of the progress that we’ve seen. You also have to mention that both have been able to orient themselves around the national security environment. You’ve been working in and around government for over two decades, both as an Army officer and now as an entrepreneur. Hawkeye 360 coincidentally started in 2015, the same year that the Defense Innovation Unit, then DIUx, got started. I’m curious whether it’s easier now to work with the Department of Defense and the intelligence community relative to when you started, and if there’s anything you’d like to impress upon other founders as they think about partnering with the department and the broader national security environment.
John 12:21
Well, to answer the first part, which is to compare and contrast the environment in 2015–2017, when we started Hawkeye, versus today. I actually started defense tech investing and company building all the way back in the 2010 timeframe. I could even tell you stories from the 2008 timeframe. Back then, defense technology as a category didn’t really exist. It was about guards, guns, and gates. That changed as commercialization of C4ISR became a thing, particularly with the advent of cybersecurity. When cyber became an investable technology area, people could put capital into what they perceived as enterprise software, see it adopted early by government entities that needed protection, and then use those bona fides to scale into the broader enterprise and into highly regulated industries. From my viewpoint, that was the beginning of the modern defense technology experience.
When Hawkeye was getting started, I would characterize the mindset as getting companies drunk on RDT&E. What I mean by that is there were a lot of RDT&E dollars—research, development, testing, and evaluation capital—sloshing around the system. Pentagon leaders and intelligence community leaders who wanted commercialization equated innovation and moving fast with simply putting more RDT&E capital into the system and seeing what would happen. Ultimately, though, that just created an ecosystem where companies were jumping from one SBIR to an In-Q-Tel work program to a DIU contract and back again. They were never incentivized or provided the capital necessary to reach production contracts, where you could actually take advantage of the value created at TRLs three, four, and five, do the productization at six, seven, and eight, and then deploy that technology to actually help the warfighter.
I like to say that back then you had a bunch of startups getting drunk on RDT&E work, skipping around, and not creating meaningful value. The naysayers would point to this and say, why are we funding all this work to get a company to TRL six, only for them to then need more money, pivot, lose an investor, or simply not be sustainable? What’s the point of the defense ecosystem, the intelligence apparatus, and the national security community starting to depend on these technologies if we can’t trust that companies will make it through the so-called valley of death?
That was the environment from roughly 2015 through 2019 or 2020. There was also a strong mindset that the U.S. government should not be in the business of picking winners. As companies graduated out of the RDT&E phase, even when there were clearly capable firms, the government was hesitant to say, this is the one we need to scale, provide a production contract, and put into a program of record to support deployment to the warfighter community. No one wanted to make that call.
I saw some change during the Biden administration. The overarching philosophy became something like “buy what we can and build what we must.” I think there was a lot of lip service paid to that, but things got much better under the current Trump administration. People really got religion. It wasn’t just a mantra anymore. It became buy what we can, buy what we can, buy what we can. If it’s out there, affordable, capable, and the warfighter wants it, buy it, scale it, and get it to the warfighter as fast as possible. There were no caveats or excessive requirements placed on companies, and far less policy friction that made it difficult to achieve a program of record. It was simply, if you can be successful, we’re going to drop the safeguards and guardrails and put capital behind you so you can create value for the warfighter. That has been exciting.
Today, I think we’re in a golden age of defense tech opportunity, but it comes with a real “peeing in the pool” risk. As the community opens its arms and says we’re going to work with commercial at real scale, if one company screws up, it contaminates the pool for everyone else. It makes it much harder for CEOs and companies doing the right thing and creating real value to succeed. If someone lies, forgets their humility, fails to recognize that the sun revolves around the warfighter, or can’t be sustainable and disappears, the U.S. government won’t trust companies with programs of record if they might not be there a month from now. Best behavior across the entire ecosystem is necessary for all of us to succeed.
So that’s my answer. Back then, it was extremely hard to scale and very difficult to get through the valley of death. Companies made bad decisions, like becoming services providers, just to survive, because there weren’t viable programs of record to allow linear scaling. Today, it’s a very different environment. With a more aggressive and interested customer base comes access to more capital. What we’re really missing now, and I’m sure we’ll talk about this later, is exit opportunities, particularly in space. That has always been the challenge for commercial space: a lack of exits. That’s a natural consequence of having a smaller base of strategic acquirers, and it’s something we’ll have to work through as an industry to be successful long term.
David 18:34
Well, John, maybe we get into it. I know we definitely want to bring things up to the present day with Hawkeye 360 and the success you’ve had working with the national security community. Although I just can’t help myself. We could be in a golden age of defense technology and space technology, or we might end up in a bit of a golden pool. We’ll see how the good actors operate to make that the case. But maybe just talking about the SPACs of 2020 and 2021, right, when we had zero interest rates and money was just flowing from the government into people’s pocketbooks, creating a bit of a market frenzy. A couple of years later, after a bit of a fallow period, we’re seeing a real uptick in the marketplace. One of our portfolio companies, Apex, has raised over a billion dollars. Two space companies raised at three billion. There seems to be some significant momentum coming forward. And of course, how could I forget SpaceX signaling that they may go public in the next 12 to 18 months at one and a half trillion, with a T. So what can this current generation of startups learn from their predecessors who SPAC’d, including Rocket Lab in 2020 and 2021, and how should they think about ensuring they don’t make the same mistakes?
John 20:03
Yeah, so there is a lot of froth in the system. I would point out that you can probably make a case that SpaceX’s valuation is defensible based on cash flows. They have very meaningful cash flows and very meaningful revenue, unlike many of the other companies we’re talking about. Going back to point number three I made earlier, you have to be sustainable. Part of being sustainable is raising capital on the right terms that you can grow into and that allow you to make your investors money and your employees money without setting expectations that are simply unachievable, particularly once the larger macro environment changes.
Some companies, and I won’t point to the ones you mentioned because we have a financial interest in one of them and think very highly of the company, are raising capital simply because it’s available. At some point it becomes, well, if I raise at this level, you need to raise above me to prove a point, and so on. That becomes a tower of cards that’s going to fall down at some point. I think there was some of that in the lead-up to the SPAC boom in 2020 and 2021, where some of these space companies had raised private rounds they were never going to be able to grow beyond just by accessing private markets. They didn’t have access to the scalable amount of capital necessary to build their constellations. They had to start thinking outside the box, and for them, SPAC vehicles enabled a relatively painless pathway to the public markets, where they could market themselves on the basis of forward-looking projections.
That’s no longer the case, but it was at the time. It became an antidote for some of the sins of the past, in a way, allowing them to preserve an up round while getting a public listing and having everyone, quote unquote, make money on paper, at least for a short period of time. Before the 2020–2021 SPAC boom, the only really well-known SPAC success story was Burger King back in the 1980s. It’s just not a sustainable vehicle for accessing the public markets, and you wear that stink as a SPAC company for a long time. No one associates Burger King with that anymore, but companies that SPAC’d and are still around have seen depressed share prices because of their origins, and that’s been very difficult for them to shake.
Probably the two exceptions in the space industry are AST SpaceMobile and their friends at Rocket Lab, who frankly could have IPO’d the regular way, but I think they saw the ease of the SPAC transaction as very attractive at the time. To me, the SPAC boom is indicative of the fact that accessing the public markets is, in some ways, mutually exclusive with too many peer companies doing the same thing. The more companies that access the public markets, the higher the likelihood that overall quality goes down. You get lower-quality companies and less scarcity value on the public exchange for public-style investors.
As more companies SPAC’d, and as more companies contemplate going public in the future, I think it has a marginally deleterious effect on companies that are already public, as well as on those that want to go public later. That’s why you saw the SPAC craze peter out relatively quickly. Some companies that clearly were not prepared for the public markets took that route in late 2021, and that’s when the PIPE market dried up, redemption rates hit 90 percent on SPAC dollars, and it all went downhill in a hurry.
I am concerned about that in today’s environment as well. As companies that may be lower on the quality curve contemplate going public again, and we’ll take SpaceX out of this conversation because it’s a very special case, how are they going to perform in the public markets? If they perform poorly, and I won’t point fingers, what does that do to the companies behind them and their ability to IPO on high-quality terms? And what does it do to their ability to trade sustainably?
Ultimately, it goes back to point number three. If you’re going to sell defense technology companies and applications that matter, you have to be stable. You have to be sustainable. If your stock price looks like a zigzag, going up and down every other day because there’s no basis for the market to value you, no cash flows for the market to associate a fair value with, that’s a problem. That leads you to being the kind of company that could be fly-by-night and gone the next day. You need slow, linear, solid growth up and to the right over time. That’s what I’m trying to solve for at Hawkeye: how we continue to grow by accessing the types of capital available to us in a sustainable manner, for our company, our shareholders, and our customers.
Maggie 25:40
I want to turn back the clock 10 years or so, back to the early days of Hawkeye 360 specifically. I want to ask about how Hawkeye 360 was really formed. I know you were previously an investor at Allied Minds, which focused on investing in companies spinning out technology from academic or federal labs, and that the initial technology for Hawkeye 360 came out of a lab at Virginia Tech. Could you tell us a little bit about the story of taking a piece of IP and turning it into a scalable business, and what some of the challenges and opportunities are when building a company this way?
John 26:22
I had a great partner, a guy named Dr. Charles Clancy. Charles and I had built two other companies together, one called Federated Wireless and another called Optia Labs, that were doing very well in the 2015–2016 timeframe. Charles ran the Hume Center for National Security and Technology, which was a University Affiliated Research Center at Virginia Tech. I did a good amount of classified work on behalf of the National Reconnaissance Office. Today, Charles is one of the senior leaders at MITRE. I believe he’s the CTO and is doing amazing things for our country.
Charles had this idea, and there were two other gentlemen we worked with who helped found the company at the time, one named Christa May and another named Dr. Bob McGuire. The four of us came up with this concept. Ultimately, if you can take pictures from space, a company like DigitalGlobe at the time, now Maxar and since renamed again, was taking pictures commercially, as was Planet, which had just gotten started, and BlackSky, which hadn’t even been around yet. If you can get a license to image from space, whether electro-optical or synthetic aperture radar, and sell that to government and commercial customers, why can’t you also do signals intelligence, which is another highly valued modality of intelligence that can be gathered from space?
From my simple viewpoint, there are three interesting things you can do from a government perspective in space. You can take pictures, you can communicate, both of which have long since been commercialized, and you can analyze signals. We had been doing that for decades, but it had never been commercialized in the way communications and imagery had been. We saw an opportunity to operate in a white space that was unique. We could create space vehicles, satellites that were relatively inexpensive, and this aligned well with SpaceX initiating its transporter missions, where rocket launches became relatively cost effective. That, in turn, began the democratization of low Earth orbit, which previously just wasn’t available because launch capacity at reasonable prices didn’t exist.
We could build satellites relatively cheaply, get them on orbit relatively cheaply, and as long as the regulatory environment was conducive and the stakeholder community was interested, meaning customers across the defense, intelligence, and national security ecosystem, this made a lot of sense for us to pursue. It took us a while to build advocacy, particularly in the intelligence community, and to make sure people were on board with a regulatory environment that would support commercial signals intelligence. We got there over time. It wasn’t immediate. It really was pushing a rock up a hill for a long period of time.
That effort was coincident with our first launch. We got our first satellites on orbit at the end of 2017, early 2018. They were commissioned, and we became truly operational around the 2020–2021 timeframe, when we had enough clusters on orbit to drive down revisit rates. That was when we started to see real adoption, advocacy, and interest from the broader stakeholder community. It took time to build that engagement base. That doesn’t happen overnight, and it’s not just about working with customers. It’s the entire stakeholder environment. It’s engaging the executive branch. It’s spending real time on Capitol Hill advocating for your equities. It’s working closely with the customer base. There’s a whole ecosystem of stakeholders whose interests have to be understood and addressed to make something like this work.
Maggie 30:11
Speaking of the customer base, I know that unlike the vast majority of startups out there, most of the work that Hawkeye does is in the classified space. How can early-stage startups even get started working with classified customers like the intelligence community, and what are some of the technical and operational hurdles you’ve had to navigate to work with those kinds of customers?
John 30:36
Well, part of our value proposition, Maggie, is that we own and operate a constellation of satellites that are ours, right, and we’ve used over $400 million to build them. They’re inherently commercial assets, meaning that the data we collect is inherently commercial and shareable. Yes, we have to get ITAR licenses to be able to sell internationally to our foreign customers, but inside the U.S., what had previously been a highly restricted group of people who had access to signals intelligence data coming from national systems, we could provide our Hawkeye shareable data to them and everyone else inside the U.S. government. Everyone else is a U.S. citizen, and our allies can access it with the appropriate ITAR licenses.
So we do engage in the classified environment because our customers have a lot of classified equities that have to be taken into consideration, and there are requirements and certain information about what they want us to perform that can only be shared in the classified environment. But what we actually produce, the data and the data analytics, nine times out of ten, is an unclassified, totally shareable work product that is sold on an exceptionally high gross margin basis. So that’s the reality of what we do.
To answer your question, though, we did start needing to do a lot of work in the classified environment, and in my viewpoint, it’s exceptionally difficult to build technologies, products, or services that are going to serve the classified environment if you’re not a practitioner. If you’re some guy waking up on an arbitrary Tuesday in Silicon Valley who’s never served, never worked inside the classified environment, doesn’t have a clearance, doesn’t understand the requirements, and thinks you can hang out with your dog in your Silicon Valley garage and come up with some new classified technology that practitioners are going to immediately adopt and say, “This is the greatest thing ever,” you’re just wrong.
You can’t put yourself, the warfighter, or your investors in a situation where you’re trying to push something that might make sense to you, something you came up with in your garage, onto the requirements or conditions of a classified customer, because they’re just going to reject it. It’s going to be a waste of capital and a waste of time. Yet we see this quite a bit, where companies that don’t understand the environment under which these operators are conducting missions try to bring technologies they think will work in the classified environment, but they just don’t know. They don’t have clearances, and they don’t understand the unique circumstances and missions these folks are working under.
So I think the first answer is that you have to be taken seriously by being a practitioner. Ultimately, if you don’t have a clearance yourself, I think it’s really difficult to try to build a capability that will be used by those in the cleared environment. Obviously, if what you’re building is valuable, customers are going to come find you. Probably the best meeting place is In-Q-Tel. If you can get In-Q-Tel to be an intermediary to help vet your technology, match it against classified users, and help secure some kind of work program by which you can further develop and productize your capability and then deliver it to customers who might consider it, that’s a good mechanism. It’s been valuable for many, many companies, particularly those that Shield works with.
But outside of having that kind of intermediary, you can’t expect that there are customers waking up thinking, “Oh, I’ve got to go find the next commercial thing that’s going to solve my problems, and I’m going to give them an FCL so they can have unfettered access to our nation’s classified apparatus.” It doesn’t work that way, and folks need to temper their expectations if that’s what they think will occur.
David 34:28
Yeah, John, that’s great. And I think one of the areas this really boils down to is trust. In-Q-Tel, the investment arm of the Central Intelligence Agency, is certainly a great way to broker trust with the end customer. One other area that’s often talked about, or at least highlighted, especially with some of our other startups, is working with defense primes. For a lot of people, they get a really bad rap. They’re going to steal your intellectual property, they’re going to move slowly, they’re going to be a challenging partner, but it seems like you’ve done a really good job partnering with them. For other startup founders, how would you coach them in thinking about engaging with the defense primes?
John 35:13
People like to use the primes, like a Lockheed or a Northrop, as some kind of proverbial whipping child that they point to as the source of all evils. And the case of the matter is, yes, they move slower. Yes, they have different incentive structures. But ultimately, what they build works. There’s a reason why the M1A2 Abrams tank works like it does. Now, compare that against other countries and their defense industrial base. They may cut corners. They may not have the quality and QA/QC emphasis that ours does, and they may not be anywhere near as effective on the battlefield as the capabilities that we deliver. So what we have to do is find a way to marry the defense industrial base, who move slow and don’t innovate very well but build stuff that works and can be trusted to work in extreme conditions on the battlefield, with the left-hand side, the Silicon Valley–esque mentality where we’re going to leverage innovation, move fast, break things, and leverage private capital and intellectual property to create new functionality. We have to marry that together, taking interesting ideas and creating them in such a way that they can be trusted to work the first time and every time. Again, this goes back to taking care of the warfighter. They need a ruggedized piece of technology that is actually going to work. This isn’t nameless widgets that we’re building for some nameless enterprise customer. So I look at defense industrial base partners as phenomenal investors and phenomenal partners for building better productized capabilities that I can deliver to meet the customer’s needs. The defense industrial base has been working with the warfighter for decades, 50-plus years. They understand the requirements, the missions, the restrictions, and what it’s like to be on the battlefield. That company coming out of Silicon Valley does not. Maybe they’ve got a couple of veterans, maybe they’ve done some work in the past, maybe they’ve been practitioners, but they don’t understand it to the extent that the defense industrial base does. So how do you take the best of the defense industrial base and marry it with the move-fast, innovate-quickly mentality of Silicon Valley? I think part of the rationale is having those defense industrial base entities invest in your companies. For each of our financing rounds, all eight institutional financing rounds that we’ve done, just about all of them included a strategic partner. Some of them led those financings. Raytheon led our A3 round. Airbus led our B round. Leidos and Jacobs were meaningful investors in our C and D financings. We had Lockheed invest materially in our D1 round, and they’ve all been wonderful partners to work with. The idea that these defense industrial base companies wake up wanting to steal some arbitrary startup’s intellectual property and people is asinine. That’s just not how they work. They wake up wanting to take care of the equities of the warfighter and the American public, just as much as this new defense technology company ecosystem does as well. So I’ve taken the perspective that they’re not competitors. To me, they’re not the boogeyman. They’re good people. They know how to build great systems, and if I work with them, they can probably get my technology to the warfighter so I can actually create value faster, better, and stronger than if I tried to do it myself. I would say that strategy has worked for Hawkeye. It’s worked for other companies that we’ve seen replicate it. Awesome.
David 38:52
Well, just for our audience members, John, you highlighted getting an FCL, which stands for facility clearance, and that allows you to do classified work. Another acronym is ITAR, the International Traffic in Arms Regulations, which is the State Department’s program to protect sensitive technology from getting into the hands of our adversaries. For sensitive tech like the stuff that Hawkeye is building, you actually have to get licenses to work with international partners. But what would typically be an impediment or a massive hurdle, you’ve used and gotten through, and now you work with a lot of our allied partners and sell to them. So maybe you can talk a little bit about what that process has been like to allow you to take ostensibly sensitive technology and sell it to our foreign partners, not through something like foreign military sales, but actually going direct to them to provide the type of service and data that Hawkeye 360 uniquely collects.
John 40:00
When I was growing Hawkeye in its incubation stage, one of the things we heard a lot from potential customers and stakeholders was, “Don’t be a ward of the state,” meaning don’t create your company such that it’s highly correlated to the U.S. government purchasing it, because if the U.S. government stops, it goes away. You can’t put the government in that kind of position. Somehow that lesson has been forgotten along the way, and now you’ve got this whole crop of single-use technology companies that, should the U.S. government stop buying certain types of functionality from the defense tech ecosystem, are just going to fall away in a hurry. At the time, if we had architected ourselves to be wards of the state, we would never have gotten dollar one in revenue because we would have been pariahs. By virtue of showing that we could be sustainable outside of government anchor customers, I had to demonstrate that there was a diversity of customers for us. Not wanting to really focus on commercial industry at the time, and I still think it’s not the right area for us to focus, I went naturally to the international markets, and that was a great decision for us. In 2018 and 2019, we were fortunate to pick up a couple of real, meaningful anchor customers early on who wanted access to commercial signals intelligence because they’d never had it before. Some of them might have had rudimentary organic SIGINT overhead capabilities, but they weren’t sophisticated, and they were excited to get access to new forms of overhead signals intelligence. They were willing to spend significant amounts of money and pay a premium on pricing in order to do so, and that’s been a meaningful achievement for our company. I’m very proud of the fact that 50 percent of our revenue comes from U.S. government sources across a diaspora of different agencies and customer types inside the U.S. government. Similarly, there are dozens of customers for Hawkeye on the international side. Recognizing that it’s not easy to do this when you’re ITAR controlled, you have to get licenses, technical assistance agreements, and DSP-5s to be able to market your technology to international customers. You’re certainly at a disadvantage when you’re competing against international entities that can market ITAR-free capabilities and will do so. But the diversity benefit, and being able to command what I would call premium pricing on the international side, is rewarded with very loyal customers. What we’ve found is customers that are very sticky and, in particular, are willing to sign up for longer contract terms than on the U.S. government side. Ultimately, our business is kind of bifurcated. You’ve got U.S. government customers across a number of different buying entities, which tends to be shorter term with very quick turnaround. The sales cycle is literally negligible. It could be hours before we’re on contract, on requirement. On the international side, it’s a longer-term sales cycle. When you sell something to a country like the Philippines, for example, it takes a long time to manage that sales process. It’s not exactly linear, especially for an American company, but the contracts tend to be longer and the pricing tends to be better. It’s an interesting dynamic between the two, and having that diversity in our revenue base has really helped us.
Maggie 43:25
Hawkeye is definitely the most mature startup that we’ve had on this podcast. I know from some other interviews you’ve done that you’re at nine figures in revenue and have several hundred employees. I really want to spend some time talking about what it actually takes to scale a defense tech hardware company in a sustainable way. One of the first questions is, what were some of the unexpected challenges you faced in scaling up your technology, going from that first cluster that you launched to the twelfth cluster you launched earlier this year?
John 43:59
As I mentioned earlier, in 2015 and even into 2020, the number of capital providers for defense technology and space technology was negligible. We are talking about maybe a dozen by the 2020 timeframe. Finding people who were willing to do a Series B round was hard, but it was especially hard for a space technology company in the 2017 timeframe. Being able to go into that Series B round having taken all the technology risk off the table was really challenging as well. If you are going to be a space technology company, the only legitimate way to show that the technology risk is off the table by the time you do your Series B, which should always be the goal, is by having space heritage, putting assets into space, and making sure they work correctly over a long period of time. Today, you are seeing companies raising exorbitant valuations in Series A, Series B, and even Series C rounds without having much space heritage to support those claims, and I think that is a challenge. That dynamic did not exist seven or eight years ago.
We had to think very thoughtfully about how we were going to de-risk each component of our technology architecture. For us, that architecture is pretty complex. You are talking about a space component, the sensor that actually collects the data, which is flying in a collection of three satellites. You have to showcase three assets working in harmony to geolocate a signal from 550 to 600 kilometers in space. You also have to demonstrate the processing of that data, which is entirely complex, including the geolocation, the analysis, and the conversion of that data into something actionable. There is a tremendous amount of different types of intellectual property that has to be proven across the entire continuum of that technology set. It was not linear for us to simply check a box and say it was done and move on to financing. That was a hard thing to work through.
When I think back on what I learned, there are four things that really helped us. The first was starting with a base of employees that was right-sized, made up of thoughtful, mature individuals who were previous practitioners and who deeply understood the technology. Just as importantly, they understood the requirements and the environment the customer was operating in. You cannot have daylight between what you are building and what the customer needs. If you are trying to invent, in your Silicon Valley garage, what you think the warfighter needs and it is not aligned with the reality of what that warfighter actually wants, that is a real challenge. I use warfighter here as a proverbial stand-in for the broader U.S. government customer. Bridging that gap is very difficult, especially if you are trying to get to program-of-record type contracts that ultimately make the entire effort worthwhile. So the first focus was having a small cadre of committed, thoughtful practitioners.
The second was being very careful not to get over our skis and being thoughtful about how much overhead we took on at each phase of the company’s life. I have a just-in-time resourcing mentality. As we achieve milestones with customer X, Y, or Z, or technology milestones A, B, and C, then we take on additional overhead. Then we add headcount, then we open an office, and so on. You do not do it beforehand. A lot of companies get into trouble by growing overhead too fast, and then they find themselves having to reverse course and do reductions in force, which is painful. I never wanted to be in that situation.
The third was the good housekeeping of having a thoughtful fundraising plan and knowing exactly which milestones you need to achieve to unlock the next tranche of capital. That means engaging with a good cadre of investors who are waiting for you to hit those milestones and then actually hitting them on the timeline you told investors you would. Nothing generates investor interest more than someone doing exactly what they said they would do. Every investor should have a logbook that says, when this company comes to me for their Series A, I will look back and ask whether, when they were raising their seed, they did X, Y, and Z as promised. There is always room for explanations like something unexpected came up and we had to work around it or find another technical path, and I will always give people credit for that. But ultimately, if you do not have a track record of achieving the milestones you set, why would I, as a fiduciary of investor capital, provide you with more capital knowing you may not be able to achieve the milestones required to get to the next financing round?
Those were the four things I really focused on: having a small, committed cadre of practitioners; being disciplined and just-in-time with overhead and resourcing; having a well-thought-out, milestone-driven fundraising plan that is executed as promised; and finally, making sure that everything we do is highly aligned with the needs, requirements, and mission expectations of the customer.
Maggie 49:13
Speaking of major company milestones, you said in an interview earlier this year that Hawkeye is officially profitable. When do you think is the right time for hardware startups to focus on profitability versus growth at all costs?
John 49:28
Somehow, we’ve gotten into a mindset that it’s an either-or thing. It’s not. If you go talk to public equity investors, they’ve become almost schizophrenic. They want both value and growth, and you can deliver on that. There’s no reason why you can’t grow at 30 to 40 percent year over year and be profitable. If you’re growing at 60 percent but you’re deeply unprofitable, how does that math work? Ultimately, valuations really should be based on your cash flows. That’s how you ground valuation in reality, on the basis of cash flows and on the basis of EBITDA. We should be valuing later-stage companies, in D rounds and beyond, on a multiple of EBITDA. The only real questions should be the range of that EBITDA multiple and which year you’re using, whether it’s trailing twelve months, leading twelve months, or even two years forward, depending on the financing. To me, a sustainable company starts with an excellent cost structure. What are your gross margins? What is your EBITDA margin? How much are you spending in capex? How is that going to change over time? Are you going to be able to achieve free cash flow breakeven, not just EBITDA breakeven, but free cash flow breakeven? In the space industry, where you’re spending a lot of money on capex, when can you achieve free cash flow breakeven? When can I value you on the basis of free cash flows? Because if you don’t have free cash flows, I can’t really utilize a free cash flow multiple. To me, a company becomes mature when you can value it thoughtfully on the basis of its cash flows.
David 51:08
So John, I think that’s awesome to hear and definitely something other startups should take into account. For Shield Capital, you’re a bit of a talisman. You’re an active CEO and also an investor with us. What are some of the things you’re looking for in early-stage deals that space entrepreneurs should exhibit when trying to raise capital?
John 51:36
There are the obvious things, like whether this is a mature, thoughtful group of people working together in harmony to create something important. You can look at the team. You can look at whether the team has been successful in the past. Do they have a track record, and do they have a track record of working together? You can see these dynamics in pitches and diligence, whether the CEO and CTO are aligned. There are also intellectual property milestones and technology milestones, depending on the phase of development of the company. But beyond the technology and the early adopter metrics that every startup wants to flaunt, all of that can be gamed. Ultimately, what I really care about is this: if you build this thing, does anyone give a shit? Is it a big deal if you create it? If you use potentially hundreds of millions of dollars of venture and LP capital to build this ecosystem you’re conceptualizing in space, and you’re able to develop a commercial product to sell to government customers and others around the world, is it meaningful? Does it solve a real problem? Is it sustainable? Is it a functionality that will exist for a period of time and then be competed away because someone can replicate it quickly or because you lose your economics? That’s what I think about. It’s less tangible and totally intangible at the same time. It’s like that Supreme Court justice who said, how do I know pornography when I see it? I know it when I see it. It’s the same way here. If I can conceptualize what someone is building and know it’s going to be meaningful, that gets me interested. It has to excite me from that perspective.
Maggie 53:26
John, as we close out here, we want to transition to a couple of rapid-fire questions. So my first one is: what is a technology that, 20 years ago, you expected would be further developed today than it actually is?
John 53:40
That one’s easy for me. We built a company at Allied Minds called BridgeSat, which later became BridgeComm. I actually think the company just got acquired by Voyager. Its purpose was to commercialize optical communications, optical comms through lasers, from free space. We pulled a bunch of intellectual property out of Los Alamos National Lab, which were the leaders in developing quantum capabilities and had amassed a significant IP portfolio. What we found was that it was really, really difficult to build high-quality, small transmitters to push optical data, and no one had really invested the time to build the optical receivers needed to support that ecosystem.
You’re seeing that today with the Space Development Agency and the SpaceX Starlink constellation using optical relay networks, and it’s working really well. But it’s not working well for the rest of the space architecture, especially smaller spacecraft that can’t fit a materially sized optical terminal, even with a gimbal. I’ve been surprised that no one has really figured out how to package a small-scale optical transmitter in a way that truly commercializes optical connectivity at the scale we need. The better it is, the faster we can get data down to the ground, and the better the mesh networks will be.
It also amazes me that when I built Hawkeye in 2015, we counted one day and there were over 100 launch companies out there that had raised some amount of venture capital. It could have been seed dollars or something, but still, you would think that with all that innovation, all that capital, all that focus, and with the demand signal being what it is, there would be a lot more fully vetted and highly commercialized launch companies. Instead, you have this kind of monopoly of just a handful. It’s SpaceX, Rocket Lab at a premium, because it costs a lot to use a Rocket Lab dedicated launch, Firefly coming up, and people talk about Stoke, but I haven’t seen it yet because they haven’t demonstrated it. It’s just like, wow, with all that capital that’s gone into the sector, we really haven’t seen the results we were expecting 10 years ago.
David 56:00
Maybe for our next rapid-fire question, launch is certainly an area where we do seem to see a lot more pitch decks, and we’ve sort of stayed out of it given the trials and tribulations of others. What are some of the white spaces in the space domain that you see could be addressed by emerging startups, or what gets you excited about areas that have yet to be tackled?
John 56:24
Yeah, I mean, go back to the optical relay question. I think that’s interesting. There’s a fundamental problem with getting data down to the ground leveraging RF technologies alone. There’s only so much RF, only so much bandwidth, and only so many ground stations. The answer can’t always be ground station densification. The answer has to be more onboard processing in space in order to sort the data, process the data, and only bring down what you really need. And then we need better relay networks. We need better mesh networks that are available to all to get that data to the ground faster, because ultimately constellation companies’ value is highly correlated to speed. The faster you can get that information to the warfighter, the better and more valuable it is. That’s certainly the case from Hawkeye’s perspective, and I’m sure it’s the same for many other intelligence modalities. So I think there’s white space to be developed around trusted relay partners and onboard processing technologies that can be leveraged by constellation companies and would be of interest.
David 57:30
Okay, and for your last rapid fire question, you can plead the fifth, though we’re hoping for the spice. The fate of Hawkeye 360 rests in the hands of working with one specific customer. Are you taking A, the United States Space Force, B, the intelligence community, or C, other?
John 57:50
I mean, obviously that’s a hard one to answer. I think ultimately there are a lot of different stakeholders that have to be addressed. It’s not just the warfighter. It’s the appropriators, and it’s the executive branch. To me, the ultimate customer is those stakeholders on Capitol Hill and in the White House, and the international equivalents for our other customers. So it’s a multifaceted customer situation. I like to say that when we’re doing international sales, we have to sell twice. We have to sell bottom up to the actual warfighter and the person who wants to build the spacecraft and the functionality, and we have to sell top down to get political support. So I’d say that political engagement really matters, and making sure that everyone is aligned with the interests of commercial technologies.
David 58:49
Well, John, you’ve been a successful investor, a great entrepreneur, and clearly maybe you could be a politician moving forward in life with an answer like that. Maggie, over to you to close us out.
Maggie 59:02
Yeah, John, thank you so much for coming on the Mission Matters podcast. We really appreciate your time and all the learnings from the past few years of working with you.
John 59:10
Thank you, guys. Great to spend time.
Akhil 59:13
Hey everyone, thanks for listening to the Mission Matters podcast from Shield Capital. Tune in again next month for another conversation with founders building for a mission that matters. And if you’re looking to build in the national security space, please reach out to us.