E224: Caroline Chapdelaine Discusses Carve-Out of North Star Photonics on How2Exit Podcast

[00:00:00] Ronald Skelton: Hello and welcome to the How2Exit Podcast. Today I'm here with Caroline Chapdelaine and she is the CEO and Co-Founder of North Star Photonics. Which is a carve out she did. And I'm excited to have this conversation and kind of figure out who you are, what you did, why you did it and how other people can follow in your footsteps. Thank you for being here today.

[00:00:22] Caroline Chapdelaine: Thanks Ron. 

[00:00:23] Ronald Skelton: Cool. So, let's always start with the origin story. The kind of running joke is you were born and now you ended up on a show, a show about mergers and acquisitions. How in the hell did you end up here? So, uh, how did you get into this space to start with? And we'll get into later.

It's like, why a carve out, right? Like that's a unique way to do this. But first of all, kind of, where do you come from and how did you get up into entrepreneurship in general. 

[00:00:46] Caroline Chapdelaine: Sure. I'll give you all the building blocks that brought me here. So I was born in Albuquerque, New Mexico, and grew up there. Then went to school in Colorado, where I originally went to become a drummer. I ended up graduating and commissioning into the army as a military intelligence officer and served for about four and a half years. I did Korea, Thailand, Afghanistan. Before getting out, I met my wife during that time. And we both left the service and traveled for a while.

It got to be zipline guides at Alaska and then toured, uh, New Zealand for a while, just had a ball. Uh, and then kind of came back to, came back to where I am now, which is Utah and started kind of my next career phase. Which was working for some of the big defense primes, Northrop Grumman, L3 Harris, Orbital ATK. And that's where I really learned a lot about how the defense side works.

So going from an operator in the service to doing contracts and supply chain for these big defense primes and understanding how that ecosystem works. And about four and a half years after starting into that career, I had the very good fortune to get to attend the Wharton school to get my MBA. And so I did the executive MBA over in San Francisco, which is where I learned about entrepreneurship through acquisition, i. e. buying out businesses. 

And during that time, I began looking for a business to buy and a classmate and I had talked many, many hours about it. And so he happened to know of a little, division of a larger company that was defense manufacturing, exactly what I was looking for, that was looking to be bought or it would be closed down. So perfect time, perfect place.

[00:02:25] Ronald Skelton: Awesome. We have similar backgrounds. I think you just said you were an officer. I was enlisted, but I went in to, I went in to get my college degree cause I was having a hard time saving money for it. And I figured that, that would be a good way to do it. They don't tell you when you, the recruiter doesn't tell you, you get to work for them for two or three years before you can even start college.

Cause of all the training at OJT. I was a sad, we don't talk about this too much on the show cause I don't want to ever share too much, but I'll go to the farthest, I was a satellite imagery guY. 

So that said, you found this company that was either wanting to shut down the division or sell it off. I'm imagining they bought, they bought this and it was a, something attached to something they acquired as that's usually how carve-outs work.

[00:03:04] Caroline Chapdelaine: Yeah, well, not quite. In this case, what had happened, this little photonics team had existed for about 20 years under a few different large companies, and it was usually dragged along by kind of a founder who liked it as his pet project, but it wasn't the core interest. Most of those companies were biomedical and this was defense.

There was a relationship between the photonics. So that made sense, but it had reached a point for that company that they wanted to be able to engage foreign investors. And as you know all too well, if you have a defense company, that's required to abide by certain U S laws called ITAR.You can't go selling your things to foreign investors.

So that's why they were finally ready to either shut it down, whatever they needed to do to get it out of that company. And they were, I guess, lucky that the, there was a few of us who were ready to take it right at that point.

[00:03:53] Ronald Skelton: That's awesome. Now for those of, uh, people out there who, save them from google time. What is photonics?

[00:03:59] Caroline Chapdelaine: Photonics. I had to Google it as well when I bought the company, but I've learned so, so much. And so little timE. 

So, um, photonics is basically the study of light. Rather than using electrons, which work through your phone, through your computer. Photonics uses light. This is used in telecom to go from tower to tower.

You use light because it travels faster. Uh, you can have more specificity in the data. So even though most of us don't use that word day to day, we are actually using that technology every day, if not every minute of our lives. And the specific, believe it or not, photonics is, is a massive industry that touches so many different things.

So telecom being one of the big ones. Our little world of photonics in the defense industry is specific to navigation in GPS denied environments. So our technology, we build these components that go into what are called fiber optic gyroscopes, which is a very unique type of inertial measurement unit that, that sits on nukes, bombers, jets, very big strategic things for the U. S. government.

So that if those platforms are flying in an area where they can't use GPS, either because it's been knocked out or because the act of pinging GPS tells everybody right where you are, you need a different way to navigate. And if it happens to be nighttime, you can't use the stars or you can't use terrain.

And so you use an inertial measurement unit. We, in fact, have these on our phones in our pockets. Some version of a very low, low levels, type of inertial measurement unit that uses mechanical rather than photonics. So everybody's using this technology, no matter what.

[00:05:32] Ronald Skelton: As I know we all have like these phones, one of the cool things that makes, a lot of the things that make cool electronics possible now. Like drones and stuff like that, come from the cell phone technology when they men are, miniaturized things like the gyroscope to get it into a phone.

So now you can tell navigation and direction and speed and feed that, but it is mechanical. I get the basic premises of it because when the gyroscope spins, if you try to, if you turn it, there's a force going the opposite direction and it can sense that. But I have to imagine with photonics, is it just looking at shadows or something? Or how is it detecting the motion?

[00:06:08] Caroline Chapdelaine: Yeah. Yeah. And I, I've loved learning it, so I'm happy to teach it. So a fiber optic gyroscope basically has a coil about 300 meters long of fiber and you send light through this fiber. And if that coil happens to change, i. e. the platform has changed direction, the coil, or the fiber, becomes longer, in a sense.

So it takes the light that much longer, or shorter, to get through. And so, through witchcraft and a lot of calculations, you can sense what that change is. And there is a coil in each of the three planes, x, y, and z, so that no matter how that platform moves, you detect it. And then in the larger inertial measurement unit, you have these coils.

Then you also have accelerometers and other types of kind of measurement units to make sure that you can calculate all those crazy things down to, um, very, very, very narrow specifications.

[00:06:58] Ronald Skelton: And that's because light travels at a constant, no matter how dim or bright, right? So it's going to be this same constant speed. That's interesting. I would have not, here, I'm guessing it's kind of, is it tossed, is the fiber thing casting a shadow? What's going on here?

I never thought about it stretches the actual fiber. So, wow. And that has to be extremely precise because it can't stretch it much, right? In the grand scheme of things, it's not like, I ate dinner and I got to let, let out one notch on my belt kind of thing here. It's, it's, you're talking, probably nano, you know, uh,

[00:07:27] Caroline Chapdelaine: Absolutely.

[00:07:28] Ronald Skelton: Yeah, cool. So let's get out of the weeds of the technical stuff. Cause most of the guys listening here rolling their eyes at this point. What is a carve out for those who don't know, basically, what is a carve out? And then we'll talk about the typical carve out. And I know yours is unique and different and I like it. So we'll, we'll go into what you managed to do.

[00:07:45] Caroline Chapdelaine: So, Carve Out, it's happening all the time, but it's lesser known, I think, in maybe the initial M& A space because it means that you've got a division of or a team or a product, something sitting under a parent company. And a carve out means to just basically come and either buy off the IP, buy off the team, buy off the assets, or some combination thereof.

In my case, uh, we were fortunate to buy the team, the equipment and the IP most, most importantly. Carve outs have a lot of different complexities, and it, and again, it depends on where you're buying it out from. In our case, because it was just sort of this forgotten project that had existed forever, it was very challenging to do due diligence, because there wasn't clear financials on that.

But then you can get into even bigger carve outs. And if you're thinking large multi billion dollar corporations, you see these carve outs get traded all the time. They get divested to become their own company. They get traded between multi corporations. So a lot of different phases a carve out can take on.

[00:08:43] Ronald Skelton: And a lot of people, if you don't understand when a company, when a billion dollar company buys another company, that's doing a hundred million and they got this little product off the side doing say five, 10, 15, 20 million. If you're a billion dollar company and that's not in your bailiwick, you're, uh, you're not, you're not doing any other business in that space.

That little five, 10, whatever, a million dollar, one million dollar, whatever the project happens to be that that company owns, is more of a distraction than it is and add value, add to the company. So it still has to be managed. It still has to have resources. HR still has to do payroll on those people.

And, it's very common that they, a lot of times they just get shut down because, it doesn't move their needle enough to even sell it. Unless somebody like you comes and says, wait a second, I'm interested in that. Please don't shut that down. And you can get these things. Now, the trick is they don't advertise very many of them. So you, the fact that you knew somebody that knew it, is a brilliant way to get in there to do that. 

[00:09:37] Caroline Chapdelaine: Yeah. And I think kind of along with that, not only are you networking, but for us, for example, as we build our reputation to having this very niche product, all the big companies know we exist. They may not think of us all the time, but when they have that little divestiture that they're thinking about maybe shutting down, they might try and at least give us a call before that happens. And so building our reputation in the industry has been helpful.

[00:09:58] Ronald Skelton: Especially when they know you acquired this and you're open to acquiring something else, right? That's a, that's a statement to put out there and say look, we acquired this one. We'd love to grow through acquisition. If you have anything, you know, it doesn't hurt to call us. All we can do, is the worst thing we could do is tell you no, right?

I guess the worst thing we could do tell you the worst thing we could do is tell you yes because, then we got to go through due diligence and a lot of homework

[00:10:19] Caroline Chapdelaine: That's right. That's right. So, for all the primes out there listening, call now. We'll acquire.

[00:10:24] Ronald Skelton: Defense contracting. I, part of me is intrigued by it because I've done it. I mean, I've been an employee of it, but part of me is, I know government red tape. So I'm thinking, man, why would you want to get into that space? I know it's lucrative, right? The government pays well, but it also, there's all this other stuff. They pay well, but they pay slow. 

You got long invoice time, it takes a long time to get the money to you. And then there's so many rules and regulations and guidelines and, depending on what you guys are working on, potentially security clearances and all this other stuff you got to deal with.

[00:11:00] Caroline Chapdelaine: Yeah. So,it is a strange space to get into, and I certainly wouldn't recommend it to somebody who doesn't already have some kind of prior experience, because it really, you can get into trouble quickly, um, with all the different regulations that you can potentially violate. Because I had, not only the operator experience in the military, but also the different, um, view points from working in the primes, I have felt pretty confident around the different requirements that the government has, and I think they're important, right?

It forces a level of quality that you don't find anywhere else in the world, which is why we have some of the best equipment there is. But I, and I think there's this, there's kind of this myth about, well if once you get in, you're made and the government is just made of money. Yes and no. Boy, it sure helps to be one of the big fish in the sea.

The Northrops, Lockheed's of the world. Cause yeah, they're going to be, they'll just get to, keep hitting play. It's really challenging when you're a small business because you're beholden to the government contracting cycle. Which means government decides they want to stand up a new program, F35. And if you're a small business and you get put on contract, it might not mean, it might mean that you aren't actually fabricating anything for years.

And when you're a small business, cash is absolutely king, and you may not survive as long as it takes for that program to get going. And you'll just keep living through these cycles until you're either big enough that you can kind of withstand that fluctuation, or perhaps you take on some kind of commercial or different industry that kind of packs in those holes the government needs.

[00:12:26] Ronald Skelton: Yeah. There'ss always this, I'm a big fan of multiple or multiple uses of product, the highest and best use. So, what other industries besides defense contracting uses these fiber optic gyroscope devices? Does normal aviation use it as a backup or?

[00:12:44] Caroline Chapdelaine: Yep. Every single Boeing Airbus, they've got some version of an inertial measurement unit. Our specific flavor is the best in the business. And I'm not trying to like toot my own horn. It's just we have carved out that niche. We've carved out that niche though of doing the government's most strategic navigation.

So we hold that part of the industry or that part of the market. But there is a whole another bunch of companies that serves that kind of middle market of commercial aviation. And then there is yet another massive market growing in their self driving cars, your UAVs, that are all using yet another version of a fiber or some type of inertial measurement unit that has nowhere near the specificity that we do, but nor does it need it to drive around San Francisco is not as specific as dropping a specific munition somewhere in a enemy territory.

[00:13:34] Ronald Skelton: Yeah. I, uh, I'm just curious as to, I understand you guys have the top niche. Are there so many players in the lower one? It doesn't, doesn't make sense to create it like a secondary product to move down there. it's just way too competitive. 

[00:13:48] Caroline Chapdelaine: It's too competitive and it's a different technology, right that we have a unique skill assembly force. That if you ask them to go build that it's like, you know asking, I don't want to be insensitive to different industries, but it'd be really kind of offensive to say, Hey, can you do this kind of dumbed down version?

They have so much more skill and ability that we don't want to have to dumb down our equipment with how much effort and how much money we have put into making the level of quality we have.

[00:14:13] Ronald Skelton: You don't want to have your, uh,your AI, you know, level engineers go out and create the next Furby?

[00:14:20] Caroline Chapdelaine: Something like that. Yeah. Yeah.

[00:14:22] Ronald Skelton: You want me to do what? You know, no, no, no, we're not doing that. I get that. So, uh,what was the transition like? I mean, I know that normal buying company need due diligence and stuff like that. Is there any type of certifications, any type of proof you had to go through to like, to be the owner of this? I mean, you've had military clearances forever.

So if you, if you needed a clearance to own it, that probably was fairly transferable. You know, so long as it's, for those of you don't know, if you let that go stale for more than two or three years, it's hard to get back. You have to start over. But, uh, yours seemed like it was probably fairly active.

But as far as the other stuff, all these other regulatory compliances and stuff like that, where there hoops you had to go through to the, to like, was there a government approval that said you could be the owner of this?

[00:15:06] Caroline Chapdelaine: Yes and no. To do the, uh, the actual purchase from the parent company, no. Government doesn't care, but to actually make product and therefore make revenue and have the company to continue to exist, there were a bunch of approvals. And that's what near crippled us at the beginning. So when we first carved out the business and I say, we, I had two other partners that, that I did this acquisition with, when we first carved it out, we had to move locations, obviously, cause we no longer belonged to the parent company.

Because as a carve out, we had to reestablish all the infrastructure that the parent company offers. So your HR, your IT, we're leasing new areas. So we have to take over all the utilities and the facility complexities that that brings. And all those things obviously cost a ton of money. Meanwhile, we did have to start meeting, re meeting, requirements that were specific to contracts and specific to government requirements.

And I'll list off acronyms for those who are interested and you can kind of google them, but ITAR is a big one. Which basically means you need to ensure that there's not a foreign threat or foreign knowledge able to see what you're building. We had to meet ISO 9001, which is just a quality system, an international regulation on, on that verifies you have a good quality management system.

And then because we are working on a DX rated program, i. e. a very strategic and important program to the government, it means you have to have somebody come in and audit the hell out of everything that you're doing. And so that took us, probably about six months to get the approval process to begin producing again.

And if for all of you small business owners out there, six months without revenue is brutal. And so I'd say I hit one of my lower moments, near the end when we really did run out of cash. And that's when we actually had to go out and find debt and sought the SBA loan to, to see us through that time.

[00:16:48] Ronald Skelton: Wow. So, uh, did, did, was it one of those things that just took longer than you planned for, or more expensive than you planned for? 'Cause I imagine it's not just you doing this. It's you, your team, you probably have some form of specialist or lawyers or something associated with this. Or, ISO 9,000 certified consultants.

Somebody's out there verifying and helping you guys get this through there. So you had additional expenses you may or may not carry throughout the normal operations of your business, right?

[00:17:16] Caroline Chapdelaine: Yeah, it was certainly took longer and was more expensive. I think none of us had quite thought moving the specialized equipment and setting up in a new facility would cost as much as it did. I looking back, you know, what would I have changed? We were working our tails off. So it's not like I could have, but I almost wish I would have brought in more outside help quicker for all those, all those specialists you just mentioned. 

Probably would have helped us get there faster, but first time through the ringer, you don't know what you don't know. And so I'm bloodied and bruised, but we're still standing and actually now growing and profitable. So I'll take my, my beatings and be better for it next time.

[00:17:51] Ronald Skelton: Talk about like, what is it like running something so highly technical? You don't just average, you don't hire your average Joe out off of, off the street. You've got some extremely technical is, extremely specific skillset you need, right? It's not only like, I need a mechanical engineer.

No, I need a mechanical engineer that understands light and fiber and, probably some form of, uh, physics and all kinds of other stuff, right? So,

[00:18:18] Caroline Chapdelaine: Yeah, it brings together a lot of the different sciences. So the company is, is made up of roughly about a third of our company or half of our company of people are some version of PhD. And they've, we have a very experienced group of people. So most have been doing this for at least 30 years, if not longer.

So it's a humbling experience sitting in their R and D meetings and listening to them talk about what the next development is. So that's kind of half the company. The other half, it's our assembly workforce. And these are typically people, maybe they only have education to me. It isn't a big deal maker or breaker, but a lot of these folks, maybe they've never been to school, never been to college at least, but they are the most talented people I've ever had to work for, and it's wonderful.

When we go to hire an assembly person, we can't, we're, I should have said this earlier, the facilities in San Jose, California or Silicon Valley, and the Teslas and the Googles are all sitting all around us. And often we can't hire those folks because well, all they've got skills of their own. The level of care that goes into building our product is just something that's so hard to find this fiber optic.

If you've never seen that before, it's about the width of a human hair and it's basically pure glass and you're playing with 300 meters of this. So you have to be so, so careful to not break it when just when you're handling it. And then all of the, the part we make is, is less than square two inches. So all of this work is done under microscope as well.

And if anyone has ever used a microscope, a microscope in their high school chem class, it's not something you want to do for eight hours a day. So we also have a workforce that takes on a lot of physicality and how they manage this product. So both sides, wildly talented in their own right. And unfortunately very hard to find replacements for those people.

So we have a bit of a key person risk. But it also means we have this dream team that we got to keep from day one that just works so well together and loves the product and what we do so much.

[00:20:08] Ronald Skelton: So I imagine this is all done. I know fiber optics is real sensitive to dust and getting dirty and that type of stuff too. So this is all done in a clean room environment?

[00:20:16] Caroline Chapdelaine: Yeah. So, yes, we dig deeper. We have a couple of different types of clean room and clean room for any listeners who haven't dealt with it before. Think bunny suits, right? You're like the old Intel days, right? You're in some kind of outfit to make sure that anything on your body doesn't get on the product and vice versa. Depending on the level of what we're building, you have different levels of cleanliness.

So we have foundry space or a space where we take raw wafers. This is very much like the semiconductor industry for anyone who's familiar with that. We take raw wafers and we put them through chemical baths, lithography, all the things that turn them into a useful chip. And that's done in a fairly clean space.

And then once it's complete, it moves over to the assembly area, which is very clean. You take those chips and start attaching the fiber optic cables and all the otherwitchcraft material that makes this thing work. So that is yet another certification or qualification we have to make sure we meet, is that level of cleanliness.

[00:21:10] Ronald Skelton: It's painted a picture here and it sounds like these devices you're building are built one, one, one by one by hand. So this isn't a robotics type of, you just sticks a roll of fiber in our, in a machine and it spits out these devices for you.

[00:21:23] Caroline Chapdelaine: Boy, would I love that? Uh, we sure save a lot of money. It's funny I was just, I had the chance to go to Taiwan a few weeks ago and finally lived out my dream of seeing TSMC and getting to do the tour of their museum. And it was so fun to see if you can Google these things on YouTube of just how TSMC and some of these really big foundries get to run their, I mean, it helps when you have trillions of dollars that you actually get to set up a very flow efficient and robotic industry or facility.

Wonderful. When we have a trillion dollars, I will definitely do it. But for now, absolutely, this is a complete hands on the entire way. And it takes probably 30 days to get through the main assembly process because of that. One person going through each step, there's a whole bunch of quality reviews as you go through. The process has to stop, a quality person has to come in and review, make sure you've done the steps you said you were going to do for that minute, it moves on and on. So very labor intensive.

[00:22:16] Ronald Skelton: Wow. Wow. Wow. I have to imagine that the majority of people that work for you by nature have to be some form of OCD. Right.

[00:22:26] Caroline Chapdelaine: They are very focused.

[00:22:27] Ronald Skelton: OCD is a, not a, uh, a disorder inside of your, your organization. That's a requirement.

[00:22:34] Caroline Chapdelaine: Yeah. And that level of care, it's so hard to, I kind of just have wrestled with this in interview after interview. It's so hard to communicate to people how much you have to be that careful every single time. There is no, I had a bad day because, I had a bad day might mean the platform this goes into doesn't fly correctly.

I'm being a little dramatic here. There are so many quality steps in between that make sure that a bad part never enters one of the platforms, but that's the level of care you have to have, otherwise this whole thing falls apart.

[00:23:04] Ronald Skelton: Let's talk about the SBA loan process. Did you raise capital by this and you've bought it with an SBA loan? Or did you actually use an SBA loan to get you some cash later, or how, what was the acquisition like? What did you, how did you struck or the structure of the acquisition? And when did the SBA loan come into play?

[00:23:20] Caroline Chapdelaine: Yeah. The initial purchase was done just with equity between me and the other partners. And we were able to do a unique buyouts or carve out scenario where we had initial purchase price and then we had an earn out over three years with the seller. It was a fortunately a very respectful relationship between us and the seller. They understood we were taking on a near impossible task to bring this company on its own. And so they kind of were like, you guys can have it and pay us if it works out. So, so the beginning was somewhat tampered in its intensity by doing that. But then, like I had mentioned earlier, we ended up spending a lot more a lot faster, and things took longer to start doing revenue again, that we did run out of cash and that's when we brought on the SBA loan.

And I'd say one thing that, the thing that saved us, I think sometime in the acquisition space people say, oh, stay away from capex heavy businesses. Do software. You'll make millions. Yeah. Sure. Good luck. But for us capex saved us because the SBA, when I call, I call the local bank here in Utah. I knew they had a lot of experience with the SBA 7a loan. You know, I was talking to the guy like, trying not to totally disclosed.

Like, I think we're out of money and we're in deep trouble here, but try not to put a good face on of like, Hey, we have a good company. We do have a good product. We have a future. We just need help through this. And the guy's like, yeah, yeah, yeah. I don't understand what you do, but tell me more about the business.

Oh, we have a bunch of scientists, blah, blah, blah. Oh. Do you have equipment? I said, yes, yes. We have tons of nerd equipment. Why do you care about our nerd equipment? I was obviously very new to the space. He said, Oh, we can collateralize all of that. Let me know how much equipment value wise you have.

And we can put together a loan that'll match that in some way. And so we assessed it was, I think, somewhere near a little over a million dollars worth of equipment, give or take. I mean, this is like hundreds of pieces of equipment. Some 30 years old, some brand new. So who knows? But, then the bank brings in an assessor to make sure that, yay, verily, you do have the equipment you say you do. 

Then they'll usually give you a debt package based on that. So we took that debt. Probably, six months after I had carved out the business and it did do exactly what it was intended to do. Gave us a runway until we could get revenue. I'll add a little bit more about the 7a loan for anyone out there who's looking to do an acquisition or you just need more working capital. There's a few hurdles, challenges with it.

When you say an SBA loan, it doesn't actually mean the SBA is loaning the money. It means you're going to go to a bank that the SBA has said. Yes, we agree this bank is worthy of dishing out a 7A loan that will be backed by the SBA. So you're still going to go through the usual rigmarole of that specific bank.

And I'd encourage you that if you are going to pursue this debt or any debt, call many banks because they all act differently and they all have different flavors of companies that they want to give debt to. So it took me a couple of banks to find the one that was comfortable with defense contracting, that was comfortable with collateralizing scientific equipment.

Once you find that kind of match, the bank will do their diligence process, which is pretty standard, no matter what kind of debt you go through. But then some of the scary things about the 7a loan, is you will have to sign a personal guarantee. There's no way around it. And that basically says that if you can't make your payments, the bank has the right to come after everything you own.

Your house, your dog, your wife, your, a lot of your assets they can come after. So it can be pretty scary and it's making sure that you believe in what you're doing. The bank wants to see that you are willing to put skin in the game if they're going to give you this loan, because usually, people are coming out to take the 7a loan.

It's their first time really doing a big debt deal or doing a business, a small business acquisition. And so the bank really wants to see that you believe and have faith in what you're doing.

[00:26:53] Ronald Skelton: Yeah. And I, and it's, intensive in that, I've actually talked to two people so far who,they did that route, business didn't work, and now they're in that states where the SBA is starting to call the loan. One case was really okay, I guess. The SBA said, look, you got to sell the business and get this loan paid off.

And so they didn't take the collateral as much as they just kind of forced her into a sell mode. So you have that overhead of, you know, and is it amortized over what, 15 years or seven years, depending on if it's asset backed? I know in real estate it can extend it further.

[00:27:28] Caroline Chapdelaine: Yeah, and that's a good point for the listeners. You can negotiate that sort of stuff with the bank. There are some limits the SBA puts on the bank itself. In our case I'm happy to, to kind of be open kimono here. But for us we did a 10 year amortization period. I think we got, for better or worse, stuck with the floating rate, but it was in rates are already through the roof.

So like whatever, the pain is, the pain. You can negotiate that rate too. You can set up a balloon payment. I think going back to your point about challenges, the bank doesn't want to come take your home. It's more work for them. They're going to lose money. So the bank will work with you. If you're having to be a small business that's struggling, you are not the first.

Sometimes they'll allow you to interest only payments for a while until you get back on your feet or offset some of those payments to when you know, you're going to have a contract again. So there's a lot of flexibility you can have with the bank. I think like any good business person, set up a healthy relationship with that banker you're working with and be as transparent as you need to be to help them understand where you are and when you think you'll be healthy again or what you would need to be to get that support. So that you don't end up in this uncomfortable situation of your own assets being at risk.

[00:28:33] Ronald Skelton: Yeah. So you, you're past that. How long ago was the acquisition? Are you guys revenue generating now?

[00:28:40] Caroline Chapdelaine: Yeah, and we were from day one. So, well, minus that little gap. So, October 22 was when we did the carve out. We did the SBA loan, I think, in April of 23 and started production shortly thereafter. And, it's felt like it's been a lot harder than what the objective evidence shows, but we have been revenue, revenue generating and even profitable since the beginning.

It just has felt like clawing tooth and nail for every dollar. And so, but you know, now as we get more financials under us, it's like, we did okay for a company that everyone just sort of thought, yeah, good luck kid. 

[00:29:13] Ronald Skelton: Yeah. And I love the, I'm a big fan of the underdog. So not only are you not a publicly traded large defense contractor, right? You don't fit the normal mode. And I'm going to call this out. Being a person of, anything but old white male in the defense contractor world stands out a lot. If you look at even the small players, they're usually, ex military, usually ex military officer, which you have on your favor.

So that's one strike for you. And then it's usually they're older guys there. And usually, like I said, it's an old community and it's the, there's a good old boy network inside of the community, right? And, um, in the defense contracting world, what they're looking for is, people who have connections who a lot of times prior military. They were colonels and stuff before, and they know all their buddies now. And they can make, make contracts and go get things happening. 

[00:30:07] Caroline Chapdelaine: And I think we should comment on this. Especially for any listeners who maybe are new to the defense industry or especially for women who are trying to battle their way in the defense industry. I have now spent a career in many industries where this is the case being the minority in the room. And I've seen it at its ugliest.

Which is pretty bad. And I've also seen it with the progression we've had, which is great. And so I don't want to necessarily disparage any of these industries for that challenge. I have certainly met more older white men who are kind, inviting, don't have that mentality than I have the opposite. It's unfortunate that the bad ones stick out loudly and are in positions of a lot more power.

Frequently. And so it can be hard. All that said though, I would not leave this industry. I'm having a wonderful time. There are wonderful, smart people working in the industry. And,if you're a woman, you've been through the ringer in some fashion of this already. You know how it goes, whether you're in the defense industry or any, any other industry.

And so, I think I'm very conscious of that bias when I walk in a room. Sometimes I know the room I'm walking into and I will bring one of my older white executives with me because I know I have to play that game as ugly as it sounds. That's what I have to do sometimes. But most of the time I really can walk in the room with my own credibility on my own two feet.

And it's, it's not a big deal and nobody's kind of questioning that sort of thing. So, yeah, it's a twisted world we live in, but, it's getting better, I think.

[00:31:32] Ronald Skelton: In the military, what rank did you make it to before you got out?

[00:31:35] Caroline Chapdelaine: Captain03.

[00:31:36] Ronald Skelton: So yours fairly, that's fairly early in the, in the phase there. I think if you made it to 05, 06, and then, now you've got a little bit of clout with, you know,I've been out of the military for 30 years. I don't know what they call an 05 or 06 in the army, but if you get to the Air Force, it's kind of got that Colonel or Lieutenant Colonel stage, right?

[00:31:53] Caroline Chapdelaine: I was gonna say, maybe we comment on that rank thing too. Just again, for the, any audience members that are thinking, Oh, I don't have military experience. Oh, I don't have an MBA, whatever. There is a space, there is a world where this, this military rank plays an important part in the defense world.

It's largely in sales. To your comment earlier, if you're a Colonel or General that got out and it's, you still have all the buddies that are in, so you can help a defense prime make sales, that's very important. But that is one small niche of the industry like anywhere. And so you, if you find yourself in cybersecurity or in photonics, very rarely does my military service necessarily come up directly.

I might have some connection with somebody cause we both serve in Afghanistan together or whatever, and that's nice, but largely that rank and service time is, is more important in the sales side of our industry.

[00:32:38] Ronald Skelton: Let's talk about, what's next? Like, how do you, you're in a space where like, anybody that buys a company in the heat and air space or one of those normal, like brick and mortar, mom and pop shops. There's a hundred places for them to get support.

There's vestige andI already call it the young entrepreneurs, all these different places where they can go out and team up and brainstorm and stuff. I don't think those communities would do you much good because it's, you're in such a unique space. 

[00:33:05] Caroline Chapdelaine: Well, uh, how nice for us that we are, that we, we finally feel stable enough, confident enough that, okay, we've got a good product here. It does have a future. This company can grow. But now very much looking at what that future growth looks like and, we have two paths that we are pursuing aggressively.

First is organic growth. As I mentioned earlier, about half the company is this R and D team. And we work through government research and development grants called SBIRs. Basically the government helps fund research and development so that there's a product that meets what they need in two, five, 10 years. So we're doing half the company, this development to make our product better, to make new products that will kind of be adjacent to that. And that is going very well and we're pretty excited about some of the doors that's opening. The other which is very common I think for a small business is just to start aggressively going through the M&A process because organic growth, it will happen but it takes so long. And there's so much more that we want to accomplish in our space that M& A will allow us to do. So we're now pursuing a few different acquisition opportunities.

And you're right. And that the world I'm in is very, very nichey. So there are not really any other North Star photonics in the U S. What we do is fairly unique where there's one or two other near competitors, that we will, we'll beat out just because of the, the amount of, funding we've put into our particular product.

But what we will go to acquire are things that are adjacent or vertically integrated to what we do. So we make a few of the components in this larger inertial measurement unit, but I had listed off earlier. There's all these other types of components we can add on, which is like the fiber optic gyroscope, the accelerometers, the electronic software package, the lasers, the power handling.

So we'll start looking at companies that are adjacent to that, that we can kind of keep stacking on. The other capability that we offer that is fairly unique in the United States is a foundry service. i.e., doing the lithography and the work on the wafer that turns it into a chip. Doing that type of foundry service and lithium niobate and silicon nitride specifically for government use is very rare. Again, because it's so expensive and you have such a small customer base, most companies won't bother you. 

Certainly your TSMC's, Intel's of the world aren't going to spend their money or time on that, but we already do and we'll continue to expand in that area. So that's going to be another, another place where you bring in funding and acquisitions to grow.

[00:35:25] Ronald Skelton: So you could be somebody that somebody has an idea for a chip. They want to make a design. They want to make a different change. It's for that industry. And you guys could, you guys can step in. You have an R and D team. You have the equipment and stuff. You can make one offs, right? You can make short runs.

You're like, okay, we need 10 chips to do this, to verify, you know, about, you know, make a, make prototypes for a contract they're working on. So that would be really cool. 

[00:35:50] Caroline Chapdelaine: Yeah. that's exactly right. That's what we are best at is this high complexity low volume, both in our products and in the development we do it. So already we've had companies and government agencies call us exactly for that foundry service that you just described. Hey, I have this weird chip. I need this weird wafer fabrication process either can you just do it?

Or can I work with your team to develop the engineering and design around it? So that's exactly right.

[00:36:14] Ronald Skelton: Awesome. What, uh,are there external support, mastermind groups or, or you're, do you guys like, how many other small defense contractors are there? There's two questions I have in that. I know that the government sets aside a certain portion of their spending that has to go to small business.

Do you get the, and it usually it's for supply and all that. You don't use the government procurement system. We talked about that before the show. Where they're using that little, there's a system where they're buying chairs and stuff like that. And they can guarantee certain portion of the, portion of that has to go to a small business.

Does that play in the defense contracting level where a certain portion of the companies, they're kind of mandated, they need to go to the smaller, smaller companies?

[00:36:55] Caroline Chapdelaine: Yeah, that's right. And that's, I'm glad you brought that up because it's kind of an important thing about people entering this acquisition space because they've heard about that. That there are what are called set asides in both large contracts. So F 35 has it. All the way down to chairs for, you know, a little government event. Where if you're a woman owned, veteran owned, veteran disabled owned, person of color owned, economically disadvantaged small business, then the government awards, the prime or awards companies more money or more credibility if they give some of that portion of the contract to that type of business. I have not found that to be a very useful method of getting deals.

And I've seen both sides of it, right? I've been at the primes where we're looking for suppliers that would check that box. And at the end of the day, it's a good intention and I appreciate the government trying to do the right thing, but what it really looks like on the inside is, we can't find a small business that has this.

Sorry, government. We're going to give it to, the usual Joe blow that that does this sort of thing because that's what we've got. So, yes, it's there. Yes, a business for sale might claim, hey, if you're better known woman owned, whatever, you're going to get a whole bunch of contracts. I don't, I have not seen that to be true myself.

If somebody is out there who can comment that they have seen it pay out, would love to hear those comments, but for me, I've never seen it actually win a contract.

[00:38:12] Ronald Skelton: I had a, a procurement company call me because they heard me on the podcast. They, you know, I'm a disabled veteran. I'm a card carrying Native American, even though I've got red hair and stuff. That's my mom's side. But, uh, you know. 

I understand what that is. And if I believe, if I know what it is, it's kind of a point system and yeah, you get a few extra points on your like, on your bids and proposals. You know, you get a slight advantage, but you're still playing a number games and some of them were off, right?

I know right now where we looked at buying a marketing agency. It was a women, she was a woman owned marketing agency. Did websites. All, almost 90 percent of her business was government contracts. She did agency websites and stuff like that. And, she was both female owned and disability owned. But that, that strategic advantage in that particular space wears off after either three or five years.

So she no longer got those points and she was losing all those contracts. It's not only to give you a headstart, not a long term type of thing on some of the, some of these programs. So yeah, if you, you hear people talk about those programs, look at them in detail. It's like anything with the government, there's lots of red tape and there's lots of, Oh, it lasts for three years or it lasts for five years, or you only get a pie point,five points on the, when the, when it's a point based bidding system or whatever. It's not as advantageous as some people like to pitch it to bE. 

I'm curious. I, the second part of the question was, is do you guys, have you started to build your own community of other small defense contractors where you know the other people playing in this space?

[00:39:39] Caroline Chapdelaine: Yeah, I've spent a lot of time trying to find groups like that, because I think if you're like in the landscape industry or the plumbing industry, it's easier to find groups. It took me a while, I'd say, actually I'll put a plug here, one of the great groups I've become a part of is 47G, which is the Utah Aerospace and Defense Association, based here in Utah.

And that organization has been incredible. Not only in bringing together a lot of aerospace and defense owners like myself that I can commiserate with more or less, but also creating an ecosystem of service providers, lawyers, CPAs, CFOs, that can help support small businesses where we are in this space. Who understand the complexity of government contracting.

So that group has been a great help. And then also just as a early on CEO and owner, I've gone out to find my own masterminds that are not necessarily related to my industry. Which has kind of been healthy to get, get my head out of the usual government space and hear some of the woes about commercial selling of, just regular products in a grocery store.

And, one, to kind of see that all of us, small business owners go through some of the same challenges, but then also to appreciate that some of my woes at least aren't, you know, as awful as some of the ones I've seen on this side of the house and back and forth. I mean, the grass is always greener, but, having those, those different groups has really been helpful as a relief valve or as a sounding board for some of the challenges that I face as a business owner.

[00:41:05] Ronald Skelton: It's brilliant you're doing that because there's something to be said. I do this a lot on the show. I'll bring somebody that's in that mid market or even the higher market. I'll bring in a private equity firm that's in a higher market or, like this, this week, it hasn't came out yet, but I interviewed an investment banker that they do big deals, like, right? 

He's starting to get down in the space a little bit, but he's got a history of big, big investment bank deals. And there's something to be said, you know, one, one, I interviewed those people because that's who we kind of want to grow up and sell our businesses to someday, right? We want to be big enough that that's who our buyer will be.

And two, a lot of the things they do, it gives us indications on how we should run with that. If that's who our end buyer is going to be, like you can look at something, it's something going off in somebody else's industry and go, how do I apply that to mine? Now you can go to a YPO, a young professional, you know, professional organization where you're, as other CEOs doing two or $3 million a year. They've got something in marketing that's really working and you go, okay, I'm in defense contracting.

How can I do what they did in my space? How would that work or how could I, and you,it helps you break the box. You know, a lot of people say think outside of the box. A lot of times you need to see something that's setting way outside of your box and go, you know what? I think that could work in here.

But attending to those things and seeing things outside of the box will help continue to broaden your horizon. Let's do one more thing before we wrap this up because I know we're, we're kind of at the hour here. You've been through this now, right?

You've learned some lessons and stuff. There are a lot of people listening to this. I talked to at least a dozen people a year that say they want to get into defense contracting because I have a veterans community. I've got veterans who I'm friends with and they're going to get into the space. What are the lessons learned you have now?

And what would you do differently? Like if somebody walked away from the show and that you wanted some key points they want to go with like, it's possible or whatever. What would be your takeaways here?

[00:42:49] Caroline Chapdelaine: Yeah, I think it, it wouldn't be specific to defense contracting. I think it's the general business ownership and what you're still getting yourself into. First, just go do it. I think the bias for action is the people that succeed in this space. You can research the heck out of these things, learning everything about defense contracting or ownership or the SBA loan, but at the day, you're not going to learn until you just go do it. And I think you have to keep that mentality up endlessly, right?

You have to just get up every day and keep doing that, doing something. So bias for action is probably my biggest lesson from being an owner. The second is, finding whatever it is for you that allows you to be resilient. So I think there's a challenge here. Call it mental health or stamina or whatever it is that makes this so dang hard, but, you're gonna have some days where you're kind of curled up in the fetal position, you're in tears, you're whatever. And you really have to take a step back and realize that working 80 hour weeks, isn't sustainable.

And it's not good for you or the business. Your business will end up being a representation of you and your mental health. And so I think finding, whether it's a mastermind, a group of peers that you could talk to, journaling, taking care of your physical health, finding just different outlets to make sure that you are at your best so that your business can be at your best is so, so important.

So that's number two, taking care of whatever it is that makes you resilient and get up every day. And three, and last, I think enjoy the hell out of what you're doing. There are so many days that have been hard, but when I look back over the entirety of it, it's been such a fun ride and it's been because of the people I've gotten to work with along the way.

I love the technology we're working with. That part is interesting, but it is only made interesting because there are wonderful, smart people that I get to work with every day doing this. So be appreciative, be grateful, if you're getting the opportunity to even do this and enjoy it.

[00:44:45] Ronald Skelton: I'm looking forward to seeing where you go with this and how you succeed. And, there's something to be said about like, doing things that a lot of people don't think you can do. Cause at the end of the day, there's a little bit of ego inside of there that you get to go, how do you like me now? Right?

Right. And you know, you don't, you never say it. You may be nice and you may be polite, but there's something inside to say, the world was against me and told me I couldn't do it. And I'm not rebel child anyway. You want to get me to do something, tell me I can't do it and I'll do it three times faster than you ever thought was possible.

I think, I honestly I would bet on you. I think you're going to show this industry, you know, what you're made of and we're gonna see you grow. I want to see you succeed. Stay in touch with me. Hang out for, we'll call that a show today and hang out for just a second

[00:45:27] Caroline Chapdelaine: All right. Thanks, Ron.