Caroline Chatelain, welcome to Acquiring Minds. Will Smith, thanks for having me. Caroline, you wrote me saying, "Since buying this business, I have had days more stressful than my combat tour in Afghanistan, but I am still happy I did it." Exclamation point. That was a great lead, uh doing my work for me. Your acquisition is unusual among my guests in that it's a carve-out, meaning you bought a business unit from a larger company. It's also in the defense contracting space. I haven't haven't had anybody in that industry yet. So, we're going to hear all about that and much more, but start us off, please, Caroline, with a little bit of background on you. Okay. Thanks, Will. Um so, born and raised Albuquerque, New Mexico. Uh I commissioned out of University of Colorado at Boulder uh as a US military intelligence officer um for the US Army. And I spent my first tour in Korea, some time in Thailand, before coming back stateside um to Washington, where I met my now wife. And she was in the service, too. We ended up going to Afghanistan together um for one of our combat tours. And when we came back, we both had finished our uh service for the Army. So, we left. Uh we traveled for a while. We were vagabonds in Alaska and New Zealand. And then we finally came back to where we are now, which is Salt Lake City, Utah, and got our now adult jobs. Um landed in corporate America. I ended up in the defense world um working for a few different uh the major prime companies, Orbital ATK, Northrop Grumman, L3 Harris, um doing a a whole bunch of things, operations, supply chain, um all which kind of gave me the the foundation for what this business we're going to talk about is. And in about uh 2019 or 2020, uh I was accepted to Wharton for the EMBA program, which uh was an amazing opportunity, great education. And it exposed me to ETA. Um I, like many MBAs, went in knowing I wanted to do something entrepreneurial and only thinking there was the startup way and quickly finding that I am not a startup person. Although, ironically enough, this company ends up being sort of a startup-esque thing. And so, finished Wharton and started my search back in at the end of 2021 and then finally landing this company last year. Awesome. Caroline, just um higher education gets beaten up a lot these days. And And you know, I was taken with how when when we spoke on the pre-call, like you thought Wharton was amazing. And Wharton, of course, is one of the most illustrious business schools on the planet. I just like hearing, you know, people speak positively about about the the the fancy schools rather than always kind of putting them down, even though I have plenty of guests on on the pod who went to the fancy schools. Just share with the audience your history at Wharton, what your experience at Wharton. Yeah, sure. So, um I came up through like the Albuquerque public school system. So, I never really thought I belonged to an Ivy League. I think I tried for Yale and definitely got shot down for undergrad. And so, when I was accepted to Wharton, I thought at the time and I still think that they're probably not actually going to give me my degree. I am not worthy. But, I got there and find out many people have this self-doubt about themselves. Many people come from all walks of life. It's not all silver spoon folks. Some from my background. A lot of great veterans were part of the cohort. And not only is it a collection of great people who've done amazing things with their lives and can teach you so much about different industries, but the education itself really was for me huge. The professors are world-class. They not only teach you the concepts, but they're they're really ingrained in each of their industries and so, they understand the ups and downs of what's happening in business day-to-day. They're not just stuck in research papers. And so, you can go talk to them after class um and walk through like the problem you're having business for because I was part of the executive MBA. This allows you to stay in your work um and then go to class 2 days out of out of every week. And this is uh super helpful with the cohort because that means you can go apply whatever you learned in class that day for the next couple weeks, try it out, see what breaks, bring it back to class, um challenge the professor with "Hey, you said this this is how it's done. Why didn't it work?" Which makes such an interesting conversation with professor and the other students. And so for me developed um so much more knowledge than I ever knew I was missing. That's great. Thank you. And then how did you all choose Salt Lake? Yeah, I should say well, my wife's family is from here. She grew up here. I my heart's still in Colorado, and so um we both decided whoever got a job first applying to our respective states, that's where we would stay, and uh she won out, and and ultimately it's been wonderful. Um don't tell your audience, but Utah's such a cool place when it comes to skiing or mountain biking and everything else. So over time I'm I'm grateful that my wife was was faster at the draw. Okay, Caroline, so you learn about ETA at Wharton, and you but you both get jobs um and end up in Salt Lake. And so how does take us from there to this the notion that you'd buy a business uh and this particular opportunity that you did go after? Um Yeah, so um like I said, I was still working in the corporate job um while finishing out Wharton. Once I took the ETA class with Bob Chalfin, um it became clear that that was the only future for me. And so I you know, like many of us who end up in ETA started gobbling up all the resources out there, the Stanford study, um the the Harvard book. I went to Sam Rosati's um Tampa Bay collection of ETA education, which was very cool. And um as I learned more, I you know, figured out I just needed to to jump in head first. And so I went about this search self-funded searcher still working thinking I was going to do what what I had thought was the very typical way of find a business get the SBA loan and then make millions and and get to brag about it, but things don't quite work out that way. This particular business um I I ultimately would have ended up buying it with two partners. One was a former Wharton classmate. And another was was working as the head scientist of this spin-out that I ended up buying. And I had actually done some consulting work for them about a year prior before this buyout option came up. So we all knew each other sort of. And last spring in spring of yeah of last year they approached me and said, "Hey, we want to spin this out. The parent company needs needs to get this little defense company off its books cuz parent company is a biomed company that doesn't fit their portfolio. So you think you want to buy it out?" And and I was on the search so absolutely and and you know, full steam ahead started looking into all the usual things that we're supposed to do when we buy out the business, right? Get the LOI written, go secure the SBA loan. And one of the first interesting snags in this was I called Lisa at Live Oak who's popular for for the this community and explained to her the situation like, "Hey, I know this um this small photonics business um it's got great technology. It's got good customers. We're spinning it out of this parent company." And she stopped me dead in my tracks. She's like, "Look, spin-out we call it a carve-out or a uh uh division of." She said, "Most most banks won't touch this because essentially what you're doing is you're you're going to do a startup." And to me in my head I didn't think so, but I now you know, looking back I kind of I very much understand why a bank would view it this way. When you pull a spinout out of a parent company, you lose all those um those infrastructure parts that you take for granted like IT, HR, um just the day-to-day basics. And while those aren't necessarily hard to reestablish, it's one more thing and it's one more cost. And so, after that conversation with Lisa, kind of you know, tried a couple more banks, ah this isn't going to work out. And then fast forward about a month or two, one of the partners got cold feet um for a myriad of reasons. And so, by that summer I thought, the deal is dead. I will go back to scouring for um some other deal. And And Caroline, let me let let me stop you there for a sec. The um prior to getting introduced to this opportunity, how had your search been been going and what were you looking for? Yeah, good question. Um it had gone fairly well, actually. I think just before that or right after that, um I'd gone to check out a defense machine shop out in Colorado. Um I was leaning towards the defense industry because I've been in it for so long. I knew I had some edge. Um I understand the technology, I understand the contracts, um and I understand the relationships that exist in there. And so, I was looking very much for that, but there it is challenging to find a good defense contractor because all of the big fish gobble them up. I mean, this is like the the usual play in this space. TransDigm did it I think as far back as the '80s or '90s, where you roll up a few good companies that own IP and are built into, you know, you build the one screw that goes into the 747 and now you're on that contract forever. And so, these big primes or or even medium-sized primes will gobble up little companies very quickly if they see that they've got useful IP or somehow can help their company even in the slightest. So, it's not easy to find a half-decent defense contracting business. But nonetheless, I found, you know, an interesting machine shop, didn't quite scratch the itch that I was looking for, didn't didn't check all the blocks. So, there there was nothing as interesting as this one on my search. Okay. Um but you did have kind of this an industry thesis for lack of a better word that you were going to go after you were going to go after defense. Um it Carolina, I'm going to ask I may throughout ask some pretty basic questions about defense contracting as a guy who lives uh you know, half a mile from the Pentagon, I should be I should be smarter about this stuff. But indulge me, what's a prime? Oh, prime contractor usually refers to well, it it is the the company that has the direct contract to the US government. Um so, when we talk about primes, the the big ones that come to mind right away are Northrop Grumman, Boeing, L3 Harris, Lockheed Martin. Those are some of the big primes. And so, when Lockheed Martin has a contract to build, I don't know, 10 cutting-edge um airplanes for the for the jets, thank you, for the for the defense department, there's going to be dozens, if not hundreds, of other suppliers that go into that that they subcontract to. Thousands. It is incredible yeah, how much the US economy runs on the defense market. It's There's so many small companies that in every state you're in, every city you're in, they're all around you. You you might not know it. They build something as small as a screw or some type of composite part. And um you probably know many people that are in the defense industry, and they may not even know that they're ultimately delivering to the US government to build an end product, but it's such a foundational part of our economy. If you look at how much of our GDP goes towards the defense industry, it's going towards a lot of jobs throughout the US. Yeah. Yeah. And is the terminology like in the automobile industry industry, you have tier one, tier two, tier three based on kind of like this the um degrees of separation from the end user. Okay. Exactly. So, a tier a tier one would be a prime? Or the tier one would be the one under the prime? usually prime, tier one, tier two. And now I'm probably going to be shamed by all my former defense mates saying like you should know better, but um for I'll just be the expert here. Prime, tier one, tier two. Okay. Great. Just a a little bit more on Well, actually to your point about how it's hard to find a a small defense contractor as an acquisition entrepreneur to buy because they're snapped up by private equity or larger businesses that kind of roll them up and then sell that to an even larger uh business or private equity concern in in the defense contracting space. So, fast forwarding back to this acquisition opportunity that landed in your lap, that sounds kind of like a a amazing. Like that fits right in there that you because it's a small defense contractor, which as you're going to tell us had this like amazing, pretty pretty differentiated technology, um and hadn't been out there independent for others to learn about because it had been under the auspices of this other company, right? So, is that part of the reason why you were pretty excited about it? It seems like it's um a perfect candidate to buy, grow, and then sell to a larger a larger concern later. Yeah, that um all sounds good on paper and certainly is what my thinking was, but uh boy, it's a bumpy road getting there. Um I know that we have the premium level of this technology in this space. Um largely why I bought this, which is goes against everything we're we're supposed to do is was just conviction of the people that I was buying it with, that they were good people with smart heads, um and it came with a bunch of employees with which I didn't know at the time, but I've since learned are really, really smart folks. And um those sort of checked a lot of the blocks, but you know, the other thing was I didn't want to wait around for anything that looked better. I I I took some of Lisa's notes and then kind of was like, "Shoot, maybe this is a bad idea. Maybe this is not how we're supposed to do it." But I also have heard enough stories about not closing on a business that I thought even if this crashes and burns, at least I can try. And so, it was a bit of eagerness, a bit of trust and conviction, and then yeah, it checked a few of the blocks. Perfect. Yeah. Well, also you had you had work as you said you'd worked with them as a consultant, so you knew the players. Okay, maybe you didn't know everything about them may and happily they turned out to be even more competent than you thought, but you already had some a lot more knowledge about the team that you'd be working with than most of my guests do. True. And you understood the product and you you had rapport I mean you'd already built this rapport. They reached out to you. I mean there was all these reasons that in in some sense it had been de-risked compared to the the businesses that my that that that my guests often buy. Mhm. And so, I don't I don't think you've said. So, tell us just the the bullet points about the business. What exactly does it do? What's its history? How many people are on the team? Why is it differentiated? Just all the the relevant points. Sure. So, when we ultimately ended up buying it out, we call it and it is named now North Star Photonics. It builds Photonics? North Star Photonics. It builds the premium component that goes into fiber optic fiber optic gyroscopes which are on everything that flies for the government and helps jets, missiles, satellites navigate in the absence of GPS. So, pretty important element. Absence of GPS as in sometimes GPS can go away or sometimes you need you can't use GPS because somebody will know you're using it and so that's where fiber optic Yep. So, that's where fiber optic gyroscope comes in and since we have the component that is most important to it and make it the best in the industry. Um we're on a few of the the big programs out there, which is pretty cool. Um there are a few about four different product lines we have, um each that can kind of grow in different ways on the platform. The company itself, when we spun it out, we actually got to keep all employees that were involved in the photonics business, so that was 13 at the time. Uh we've grown to 14 now and soon 15. Mhm. Uh the business roughly speaking, because this is a spin-out, it wasn't like I got a clear financial picture. Um So roughly speaking, it was about um 2 million in revenue and and 300k in EBITDA. And to to Lisa Forest's point, that 300k does not include a lot of the the overhead that was going into the business that was that was basically feeding the business that wasn't included on the on the list of costs like Right. Right. HR functions and internet, etc. Um so there was going to be You you in in your pro forma, did you bake in having to absorb basically have all these new costs as you carve this business out? Yeah, I didn't I didn't do a half bad job actually of understanding what those costs were. Um what I didn't um factor in what me and the partners didn't factor in was what came after buying the business. We knew um the So we end up closing on the business uh September 1st uh October 1st October 1st, the business becomes ours, and we know at the end of the year the parent company has to actually move out of their location, which means we need to move out of the location and find our own space. And the product that we build has to be built in a certain type of environment, a clean room, um with certain levels of cleanliness. And so there are only so many buildings uh that are possible for us to rent. Um so we know we need to, you know, we close, start on October 1st, got a brand new business, get the employees jazzed, and oh by the way, in 2 months we have to move um this entire very complex clean room space um and find real estate in one of the most expensive places on Earth in in California. And uh hopefully get back up and running. And that's um some of the snags that I hadn't foreseen was just how expensive that was going to be, and then what the impact it had on our existing contracts with customers. Mhm. Yeah, cuz I imagine renting that was like the rent the clean room was one of those costs that was not on the P&L of the business. And so that was going to be a new cost. And that's going to be that's going to be expensive cuz you can't just rent any old place. You have to What do you do? You rent a place and then inside you you convert it into a clean room? Or are there clean rooms for rent? Pre pre pre-ready clean room for rent? Good question. I've learned all this stuff really fast. Um we had both. And and we had an evaluation of about four different places um in the similar within like a 5-mile radius of where we were currently living so that we or where we were currently um working out of so that we didn't put any strain on our employees if we moved too far. And there was a mix. Some were it's office space and you've got to build a clean room up from the ground up. Um and that was going to be massively expensive. We knew that was going to not only be just outright CapEx expense, but time consuming um to get back up and and operational. A clean room has a lot of different utilities to to get it where it needs to be. And then there were a couple others in one that we ultimately landed on that already had some variant of clean room in them. Um so that makes means a faster runway for us to get back up and and going, but in all cases and and certainly what we found with this, these clean rooms are in some level of of disrepair because the landlords it's it's not really their job to maintain the clean room itself. And so as soon as a tenant moves out, it's they're not going to keep up on on all the different filtration systems and cleanliness it needs to be in there. So we still had to come in and do a lot of work. Okay. Um well, Carolina, I want to just step back a couple um minutes. Back to the product itself. So, it's a technology that it a device that includes technology that's I guess proprietary technology that allows a an object or a vehicle to know where it is without the use of GPS. So, it's basically a location inject technology that's an alternative to GPS. That sounds pretty um like as a layperson, we all like I just assume that GPS was was the invention of being able to know where you are on the planet surface and that that was kind of the only technology that that that offers that. So, the fact that there is this other technology and it and it can be that that that can work without a reliance on satellites is um you know, it's eye-opening. It sounds kind of pretty badass to me. Um Yeah. We think so. Yeah, I know you're excited about it. I I'm actually surprised that it's only 2 million it was only $2 million in revenue. That for you know, such an if you said this this this technology sits on vehicles up and down the DOD armed services already. Is that Is that what you said? That's correct. Yeah. We don't So, that the challenge here I think you're getting at if I can steal the words out of your mouth is that we build the premium component of what's already a very expensive system and only the government is willing to pay this price. So, we won't yet see Teslas throwing in a fiber optic gyroscope just yet. Until reality strikes that GPS can be unreliable or we can bring down the costs of of all the componentry that goes into fiber optic gyroscopes, we're still only working for the government. Now, the question is why isn't North Star Photonics on every platform the US military makes? I'd like to know as well, but there is one other major competitor in this space. Northrop Grumman builds basically like the Camry Toyota of this of the entire fiber optic gyroscope, and most platforms in the military can get by with that with good enough. We build the Ferrari or the nicest one. I'm not really a car person, but it seems like a nice metaphor. Um Yeah, we build the premium. So, when you need to get when you need to land a jet on a particular runway in a particular country at a particular time, you want to use ours. If you just need to get within, you know, 100 miles or so, you could use Northrop Grumman. Mhm. Okay. Great. And can you share what a single unit costs or or a ballpark? Yeah, so our unit um the the chain of events the the what we call the IOC photonic component is I probably won't share a particular cost cuz it's a fairly competitive space, but is in the sub 20,000 for a single component. You need three because a fiber optic gyroscope works in all three planes. Um and usually government systems they they build if you think the F-35, I think they have a few hundred if not thousand out there that would need something like this. There's different missiles, different satellites that all need these types of components. Um But as you go up the food chain, which is something we thought about doing, right? From going our component, the IOC, that's got the semiconductor and the fiber optics, you go into the fiber optic coils, then you go into the inertial measurement unit and on and on and on. That's where you really can start charging a lot, but that's where we start getting into Northrop Grumman's turf and and won't win. They're they're too big, and they can do things they can eat us with with costs all day, so. Okay. Okay. And just really quickly on the story, it was a biomed company that had developed this internally. Why had they developed internally? It was Yeah, it was one of the founders sort of pet projects. He has and I don't know quite the history. This this entity has sort of existed in over a couple parent companies for over 20 years. Um so the technology has been around for a while and I think one or two founders in that chain of events had some particular interest in it and then the their parent company grew out of it. And so it it kept getting sold and this is the first time this photonics business has got to stand out on its own without any impact of different industries affecting the business. Mhm. But actually it had it had changed hands before more than once it sounds like. Oh, okay. Well, that was that that actually also is a little bit of a de-risk because you know that it can survive a transition and some of the folks on the team have been through this before so they're not maybe not totally freaking out when Yeah. when when they're having to move offices or or what have you. True. Okay, tell us a little bit about the terms of the acquisition. I know it happened that it almost happened and didn't happen and then did happen. So give us an abbreviated version of that and what and most especially what did the ultimate deal look like terms, acquisition price, so on. Yeah, so it fell apart in the spring and then came back aggressively. I think the partners called me in August and said, "Hey, deal's back on. We're going to close within a month. You still in?" So it was a bit of oh my god, there's so many things we need to do like the LOI and all the due diligence and ended up kind of scrapping the book on all the things I learned on ETA. We got the LOI in place and and a little bit of negotiation back and forth but truthfully the parent company wanted this off their books badly. Because if they if we didn't buy it, they're at the position where they were just going to have to throw it out, which would be a waste of incredible technology, sad to lose the employees that had all worked so hard and expensive for the parent company, right? Because they're going to have to pay for the the destruction of all of this lab equipment they could never use. So both parties were highly motivated to do this quickly and to do it well and to treat each other well. So the final terms of the deal ended up being the three partners, me, the head engineer and and then what becomes a board member who's the head of sales at at the parent company. We end up buying the company for 600k up front with a $1 million earnout over 3 years. Um And the important part that I don't think we always talk about as much in the in the ETA community is the balance sheet which ends up being hugely important when I run out of money here in a few months. We got about over a million dollars worth of assets, different types of lab equipment. Um Something that got me spooked at the beginning cuz I've you know in in ETA I I I've read and and probably my own failure to to buy into it so much. Everyone always says stay away from these asset heavy businesses. Look for SAS, look for something that doesn't even have a footprint. And it ends up being actually wonderful that we have these assets because it allows us to get a loan later on. So we ended up not funding this. We didn't need debt up front. We got to transition most of the customer contracts and so we knew we'd have revenue coming in at some point. Um And yes, sure enough we ended up closing at the end of September as planned and off to the races. I'm sorry. You said you didn't get end up getting debt? So not in the beginning because we we used equity to do that first 600k of the buyout and then the $1 million earnout over 3 years we knew we could cash flow with the existing contracts of customers. So we didn't need it. We thought. So as we'll we'll hear more about that. So so you I guess I guess the acquisition price is technically 1.6. Mhm. Right? Yeah. And with a million dollars in assets, I mean that's your your again, and arguably pretty de-risked. I mean, you're not going to you're not going to want to liquidate the company, but if you had to, you have a million dollars and Mhm. a million dollars in assets, as you said, right? Yeah, right. So, you'd have Yeah. So, the 600,000 you had to bring up front, the three partners, the three of you pooled to your own cash to to do that. Mhm. And how did you guys decide to split up the equity? Is that something you can share? Yeah, actually I I think it's worth talking about. Um so, we ended up splitting the equity um the the chief scientist came in. He said, "Hey, look, my only rule here is that I get to be the majority share owner. So, I've worked for 30 years making other people rich who get to make the decisions. I just want to make sure that I can call the shots if need be." So, fair enough, he took the majority share. Uh the second partner had made the deal happen and had far more equity, so he took the second share, and I actually have the minority share, but um my desire was just let me lead a company and and, you know, show that I can do this and also, I don't know that either of one of them had any interest in leading a company, so it it was an alignment of interests, and um as as well, I guess we're only 6 months in, so we'll we'll see if this is true, but at no point has our ownership portions been a contentious issue or really um changed how how we make the business happen. So, the majority share owner, he's not trying to throw his weight of being the owner because he just wants to be part of this really cool technology. I don't really need to be, you know, the CEO waving the flag at the top of the mountain. I just want to like resource all these people so they can do all the cool stuff they're doing. And so, this ownership breakout uh is not really impacting how we work as a board. Mhm. And um I went into this and and maybe they did, too. Uh we haven't really unpacked it yet fully, but not counting on this to to make me millions. I mean, it'd be really cool if it did, but even if this is just something interesting that we all get to do together for a few years and we don't get to, you know, run off with with all the the money at the end, such a great opportunity to get to work with these two. Mhm. Mhm. And so, does that mean that when you had initially considered ETA, um were you envisioning kind of something that was going to be more beneficial than this deal is likely to be to your balance sheet? So, in other words, you you were willing to kind of accept less, you know, let's assume this is whatever, a success but not an absolute grand slam, you make millions thing, but a good success. Um but it's probably, given your minority stake, probably less overall money to your balance sheet than if you had, you know, bought a you know, bought a defense a machine shop defense contracting machine shop yourself and then sold it. Right? And so, you and you were willing to take a take some less because you just really enjoy the people and you think the technology is really cool and you think the team is really strong. Is that a good encapsulation or what? And certainly when I started this ETA journey, I was adamant about not having partners. I wanted to go do this by myself and prove I could. Um boy, naive me back then has learned a thing or two. You know, we were kind of forced into this partnership, all three of us, because this just deal couldn't happen without each other. And I've come to learn as the months have passed just how thankful I am that I do have smart partners to work with. Um that sure, I could have done something on my own and maybe owned more of a company, but I would not have been as successful as I am owning a small part of a company with really smart partners or in many ETA case, investors. Having um people to work through some of these challenges with, people who think differently, people who are willing to challenge my assumptions is has made me more successful and hopefully them as well. And so, however this this company ends up will probably be more successful financially, spiritually, whatever, than had I done this on my own. So, I I have since fixed my ways of saying no partners, I'm doing this by myself, and accepting that turns out a strong team can can make everyone better together. Mhm. And why do you think you were so committed to to doing it solo initially? I don't know. It's like, you know, you just want to Right. Yeah. Yeah, maybe it is something that shallow that I want to prove I can do it and that I didn't need anybody's help along the way. And boy, is that misguided. In every step of every journey, you need people along the way. And and whether you actually call them partners, investors, or mentors, whatever, you're going to need a team along the way. And so, yeah, this this worked out well. Mhm. That's great, Carolyn. Cool. Um Let me just just a a little bit more what what I want to get into kind of what has happened and how kind of rocky it's been. Yeah. But I do want to just talk about risks a little bit more. We already talked about the all the attributes of the carve-out and stuff. Um the How did you feel about um like not understanding the technology yourself? So, you you you know, you're putting all of your faith in these really smart people, which is great, but like and and let me just compare it to what a lot of people do in in our world is, you know, let's say just as a stand-in, they buy a plumbing company not understand knowing the first thing about plumbing. Yeah. So, this isn't unheard of, but it's also always a big risk. And and and we we often talk about like buyer business fit. Like ideally, it's not that opaque to you as the buyer, and you do understand the business well. You have some, you know, kind of um domain expertise if possible. How do you How did you wrap your head around it? It was humbling. Uh Um I really there um both partners spent a couple hours of education um with me for the first few weeks to help me understand how this technology works, why it works the way it does, why it's the best there is. Um and it's been very cool to learn it um and recognize that okay, I'm going to own this business and I will not be able to jump on the assembly line. Um I will not be able to step in if if times get tough cuz I just don't I mean we have PhDs who have at least 30 years of experience who have they know Yeah, like there's just no way I can I can catch up. Um but hopefully I can get smart enough that I can do the business side of the house that I can talk to our customers, talk to our vendors, and make the business stronger while they actually do the the technology side of the house. But it didn't scare me off in the beginning because uh every part of my life has been learning technology and things I don't understand and and making using whatever skills that I do have to make that a success even if it's not being the the expert in the room. And so it it was okay um to have to to still have a very steep learning curve in what this technology is and can do. And a couple other things, just the and these are these are risks that that everybody in the seat you're sitting in now has to deal with, but key man risk. So you talked about how one of your partners, the chief scientist, um he he was the one who wanted to do it then didn't then came back and did, right? So you know that he has he's capable of not wanting to do this. He ultimately changes his mind happily, but he you know that there is some lingering or that he had doubt at some point. Um so that how did you think about that? And and also again, because this is so so specialized, so technical this technology, it really really relies on him and the rest of the team. So I imagine kind of to a person each each, you know, each member is is pretty valuable and and and kind of a a point of failure from a risk perspective. Definitely. So, an answer that for me and then yeah, answer that for me and then I got one more question on the risk. Yeah, it did not um go past me that he came back and said, "Hey, now I'm willing to do this." Um there was a little bit but like, you know, you kind of said no last time. Uh but something had changed and and these are the the intangibles of of deal making, right? Like, I don't know if there's a gleam in his eye or more pep in his step, but I could tell that he actually was genuine and that he said, "Hey, I've I'm committed now. I really do believe in this business." And so, the first part was conviction. The second part that I I've learned more and more since is how much he loves and trusts the employees. They worked together some of them for as at least 5 years, some as many 20, 30. And so, if he was going to do this, um he wasn't one once he's in to to suddenly back out and and leave these employees hanging. So, that was the the faith I went on and and ended up paying out. Mhm. Great. And then lastly, just um it's a it's basically a single product business, right? Essentially. Well, you said you said there's kind of four four units, but essentially it's kind of like this single technology package in different ways or Yeah, that's a good way to put it. What of that risk that like, I don't know, if if one of the other primes comes out, you know, develops this technology or something. Like, there's not there's not a lot of diversification in what you're offering the market. There there's a concise way to put it. Yeah, um pretty wide moat with those four, five PhDs with 30 years experience each. Um because it's not only the IP, it's the trade secrets as well. Um they just know how to do some of these things that you can't reverse engineer. So, um even if the primes got their hands on this, even if they somehow got our IP, they still don't have enough to to go with to go figure it out. And it's really expensive to develop this stuff. There we're not that um pricey of part of the components that they need. And so it's cheaper just to buy the part from us than it is to try and develop it. Um it's a very important component, but it's not one that's breaking there. Um breaking the the books for them. So uh not a lot of risk of them developing it on their own. Hopefully a lot of chance that they'll want to acquire us at some point, but um that we'll see. Great. Okay. So you buy the business, Caroline. Now start taking us through what happens last fall. Yes. So then the drama starts. Um we know we have to move. Uh we are quickly figuring out the real estate so that we can start moving in December. Uh we finally land a place um in San Jose. Looks pretty good. It's got a clean room space. It's actually massive. Um we were our photonics business was existing probably in less than 5,000 square feet at the parent company. And this place was 30,000 square feet. Um a third of which is clean room space. So it's far more than we need, but uh we know we're ambitious, we're going to grow, and so it's it's probably okay. And we got it at a pretty good deal because the um real estate market there is is on kind of a lower point. So we get the place. Um we get the movers um because moving this much lab equipment it's not like two guys in a truck and some pizza and beer to get it done. It's um ends up being, you know, three trucks of movers with about 16 guys over 3 days and some heavy equipment to move some of this stuff. So uh the quote they gave us up front was expensive. And we knew it was going to have to be expensive. Um but then after the move, which goes very well, um they hit us with the actual bill. Uh and it ends up being three times the cost that we thought we originally quoted. And that hurts a lot. Um but that's recoverable. So in January we're we're figuring out, okay, I like I work out a payment plan with them. This is horrific, but then the next challenge comes is we don't just get to move into this cleanroom space and start building. One of our primary customers that we're counting on for cash flow needs to come in and audit the space and approve it for production before we're allowed to make anything or sell anything to them. Because this goes into such an elite piece of equipment for the military, there are really really high quality standards that have to be met and it's not a check the block exercise. It's a really uh in-depth experience to to make sure that you're not only maintaining the level of quality in the production, but that the paperwork is there and all this sort of stuff. So we knew that that could be a thing and and our customer also hadn't really foreseen just how challenging this was going to be for both sides to get us stood back up and then approve us for building. And so we move in December. We are our team works really well, really fast. We are set up and ready to build in January. Uh but turns out we're not going to be able to start producing until April and there's very little cash coming in. We are running out of the bit of equity that we had put in and uh times are getting desperate. I hit some I hit a couple of my lowest lows in life in this process because uh this is the first time I'm dealing with the potential of complete and utter failure at least in my mind. Uh and so it's a pretty trying moment for the company and myself. Caroline, why why couldn't why weren't you going to be able to get revenue until April? So until these until this primary customer who's the majority of the revenue, until they approve our production system and quality system, they can't allow us to build parts for them or ship parts to them and therefore they can't pay us. Right. And so it was just going to take for all that to happen as you like calendar it. It was just going to take out till it till April. Yeah, to get everything stood up the way it needed to be, as clean as it needs to be, the quality system where it needs to be, we knew it was going to take till April. And so, what are you So, if you can, talk to me a little bit about these these low points. Is this one of these aforementioned days that were more stressful than your combat tour? Yeah, that's that's worth unpacking. So, I um boy, I've been humbled a lot by this journey. I thought when I went into ETA that, you know, I'm a veteran, I've uh been shot at in Afghanistan. Like, I've seen hard times and did okay, brought everyone home safely. I can run a business. That's that can't be more stressful. Um I was wrong. It turns out it is more stressful, but in a different way. I don't want to make little of of the stresses of war, but the military, and particularly going to combat, you're trained to and very good at dealing with this flight or flight response, right? You get shot at, you know, what you need to do to address that issue. Whatever the immediate threat is, that's what you're trained to do and handle. And so, I was good at that. A business or many of the business challenges that I faced so far, you can't use that that tool of of how do you manage a a flight or flight response? It's not, oh, if I just work really hard for the next hour, I can conquer this. It's actually like, I need to step back, evaluate what my options are, ask the team for help, for what their thoughts are, and then do the best solution and and correct from there. And so, that's why I made this this comparison that um because I thought the military had already challenged me more than anything else could, therefore the business wouldn't be as hard, um was just a misunderstanding of the different anxieties and stresses that life can present to you. And so, um these low points that I start finding um are the you know, challenging my assumptions and beliefs of I thought I could run a business that, you know, I've got this great experience, I've got this great education, I should be well suited to step in and and make miracles happen. And turns out not. Um, I'm no miracle maker any any more than the next person. So, that was the first thing is that I can't just fix these problems. The second was running out of cash to me felt like the ultimate failure. Um, because now we were putting in personal money, we were asking employees to to take a hit to their pay, and and for me this felt like if you're doing this, you are a failure as the CEO. And and that was tough to swallow. Um, I don't know that I'm I've yet overcome that feeling or or quite reckoned with success and failure in those terms, but that's what really brought me down. That's strong, Caroline. Okay, so in this dark moment, um, what and just what what do you do? Not I mean, I do want to know what you did actually tactically, but what did you do to kind of get over your panic or get over your your feeling of of the abyss? Like, yeah. How how did you how did you finally finally like wrap your arms around your own emotions? Woo. I did all the things that everybody says you're supposed to do. Focused on my physical health, I focused on my mental health, I leaned on people. And so, I I was even more frustrated because I was doing all the things that that you're supposed to do for stress management. Um, I was in therapy, I was meditating, I was um, trying to have a regular workout schedule. Um, I So, despite doing all those things, none of them actually solved the problem. Um, I end up actually getting anxiety higher anxiety, have insomnia now, inexplicable leg pain. All these problems develop. I don't have any solution. Um, and the things that got me through were have myself a good cry, uh, drink a heavy dose of wine or whiskey, and then, um, have my my loving, uh, caring wife come in and and remind me that um, this too shall pass. Um, though it in my small little bubble right now of of sadness and self-pity, um, it it feels really bad, but it's it's probably going to be okay. Um, you're surrounded by good people who love and support you, even your employees know that you are giving it your all and will probably not suddenly abandon you because of this this small blip. So, having a support network, um, that can can kind of help buoy your emotions when everything else has failed. You had mentioned that um, this rocky patch was also when you really appreciated having partners. So, did you also did did did the your two partners also help you in this moment? Yeah, um, and they fulfilled their role rather than being this kind of emotional support cuz I think all of us try to to put on a pretty strong face for each other, um, because I think if one of us breaks, we're all going to shut down. Um, but being actually the the logical conversationalist board that we needed to be for one another is where it came in handy. So, um, that was where it was so helpful to pull apart the issue, talk through different solutions that we could try, um, for me, I thought we had so few options that I was already kind of planning the wind down and how painful it was going to be and kind of already catastrophizing this whole thing. And then having them kind of start jumping in with, "Hey, we could do this." or, "Hey, have you tried this bank idea?" or that suddenly got the gears back in motion of like, "Okay, we're probably not the end of the world. Um, there are many things we can try before we have to, you know, burn the boats and call it quits." And and that was a huge help to have the three of us just sit in a room and talk through the the solutions. Mhm. Um, Carolyn, you may have already said this, but remind us, um, the your two partners, one is the chief scientist who we've talked about now who is the boss of the team and works in the business. And then the other your other partner is not in the business, right? He's actually has a his own job. Correct. Right. So, he's just sitting back as a board member right now. Occasionally he steps in for sales. He's he's had you know, over 20 years in related industries and is just a a king of salesmanship. And so, he'll come in when we kind of need to close a big deal. Mhm. Great. Okay. And so, what were what were from these from these pow-wows with the two of them, what were some of the solutions that emerged to try? Um yeah, some were grimmer than others. Internally it's you know, you could address the the immediate issues. Are there any revenues that we can collect even though we couldn't collect from this particular customer. We did have grants through the government that we could move faster. We could look at expenses. Are there any things we anything we can cut? There were a couple things. Are there any employees we can cut which I that was another one of those things like just the thought of it was awful. Or is there a way we could change their pay and we we ended up actually doing one of those employee options which was to ask them to take a pay cut for a week and then um replenish them with PTO later to pay back that. And then looking at the external capital options of can we raise equity from a VC or from ourselves personal loans. And then finally what we ended up settling on, can we secure some kind of debt from a bank? Mhm. Great. And so, what did that So, that's what you ended up settling on and did did. So, tell us a little bit about what that looks like. Yeah, so I went you know, when I first was buying the business, I called some banks, right? Was told no, this is not something appealing. But now desperate times call for desperate measures. We ran out of cash. I get a little more aggressive about calling banks. Um, reached out to a couple close friends and said, like, "Hey, here's, you know, cash crunch. Is there some type of debt structure that banks have that can help?" And the first suggestion I got was the SBA Express line of credit. And I hadn't heard that before. And the other advice that I leveraged was, "Try a local bank." Um, this is from one of my classes at Wharton of sometimes you don't go to the big fish to the likely candidates um that we maybe an ETA that you'd normally go to, but like go to your local bank where you can actually meet somebody who who maybe lives down the street. So, I end up calling a local Utah bank, said, "Hey, I heard about this SBA Express line of credit. Um, here's the situation. Is this a good fit?" And um the lender who's got, you know, 15 years doing SBA lending said, "Uh, tell me more about the business." And, you know, I explained it. He said, "Do you you have assets?" And I said, "Oh, we have a ton of assets. We have all this equipment." And in my mind I'm thinking this is all like all of our super nerd equipment. Nobody cares about this stuff. It's not of value to anyone but us. Um, but to a bank it actually is hugely valuable. He said, "If you've got assets, we can use that as collateral and actually do the SBA 7A loan." Um, said, "So, send me your balance sheet. Um, let's talk numbers and then we'll come back with options." And sure enough, uh, you know, we've got a million dollars in assets. I send them the list of, you know, blah blah blah microscope that nobody's obscure things that nobody's ever heard of. He takes a look. He said, "Hey, we'll send out an appraiser, but if it's worth at least this, we can get you $500,000 probably within a month." I'm like, mind-blowing experience for me cuz I thought no bank would lend to us, but um yeah, as as we unpack this, we'll actually be funded in about a a week. We were able to do the SBA loan in a way I hadn't known about before or hadn't considered, which was rather than doing this terrifying personal guarantee that everyone talks about. Because we had such an asset-heavy business and we had enough assets that appraised, I think yeah, well over a million dollars, the bank said we don't we don't even need you to pledge um any kind of personal assets. Um the the bank's or excuse me, the business's collateral um assets alone will be enough. And yeah, so we should have that soon. Amazing. Amazing, Carolyn. Pretty cool. So, for a million dollars in assets, they give you they give you half a million dollars in loan. I wonder if that ratio that two-to-one ratio is typical. Um when you go to a bank and or anybody looking for money because you are in crisis, you know, that obviously gives the person on the other side of the table a lot of negotiating leverage. Yeah. And banks, who we know are are risk of the most risk averse of all money money men money people, um see like seem like they'd be the least likely candidates to um you know, help a business in distress. Uh again, though, he's he's he's very well collateralized with all of your with all of your um your assets, but I mean I don't know. Am I are my instincts wrong there or were I mean, were people like, "Wait, you're telling me Like also also I get in light of Lisa Forest's conversation with you, which is like, "Don't do a carve out. No banks will do a carve out. No bank no bank will lend against a carve out." Here you come in, you know, four or five months later having done a carve out and things aren't going well and it just seems like, "Okay, now they'll be even more likely." No, I don't think so. A lot lot less likely to work with you and and and help you out. So, did that dynamic come up at all? That the fact that you're basically in distress seeking money from conservative banks? Well, uh I tried not to get I tried not to let my opinions get in the way of the facts. And so, I didn't bring all of that anxiety and and terror um into the conversation with the bank because truthfully, um we do have customer contracts. There is a bright light at the far end of the tunnel, but it is there. And so, even though I felt like the world was crashing in, in truth, the business was okay. It was going to be okay if we could get this debt. And the bank was protected. And so from their perspective, we have an okay runway for the next year. And if it all goes south, they have these assets on hand. And so they're going to be okay. So um I was what very well aware that I needed to not bring in my own thoughts um in the conversations with the bank. And I'm glad I didn't because, you know, now looking back, I'm like, "Oh, this is actually a pretty good deal for the bank. Um there's there's not much risk for them. Even though at the time I thought like, "It's all going to burn and we're just everyone run for the hills. Don't touch this business." You know, that was just the the mental state at the time. So. Yeah. Yeah. Great. Um And it just about the light at the end of the tunnel. So so this this big customer of yours who was had all these requirements, the quality assurance, and so on, and um and needed to check the production facility, etc. Mhm. They were they all but a yes? They were like, "Yes, we're going to do this contract in April once we just, you know, tick all these boxes and make sure everything's fine." So it really it really did feel like pretty guaranteed that is if you could just just make it to April, you'd be okay, sort of thing? It was it's very much that and it's proving to be true. So they the customer was on site last week. Um as expected, they uh looked through the whole system. It's like, "Yeah, you got a couple of minor things you can fix, but in truth, it's even though we had moved locations, it's not like we had wildly changed what we were and who we were. Uh we were still the same people making the same parts and still wanted to adhere to the quality standards cuz we know how important it is. Um so we hadn't changed. The customer needs our parts pretty bad. And so even if we had failed completely for some some reason, they would have just stepped up the game and sent more people in to make us healthy again. Um so having now crossed that threshold and and making the small corrections for this customer, getting the bank loan in next week, and then more customers coming on this summer. The light at the tunnel tunnel is growing a a smidge brighter. Mhm. You know, I wonder just for people um who might be listening to this and never have experienced or might experience distress. Um can you I'm just thinking out loud here. Did the idea of actually asking this customer to prepay or even to extend credit to you um come up or was that just like they were going to and you would of course you wouldn't do that if they could just go get your technology elsewhere. But if they really need your technology and as you you just said they're invested in your success. Um maybe you could you know expose yourself a little bit to them in in the way that you wouldn't in maybe a normal vendor client relationship. Um so did that did that possibility come up or are there strategic reasons not to do that I'm not seeing? No, no definitely did. Um so we've been in bed with this customer for a very long time. Both of us both of our successes wrapped up in one another. Um they had already um put forward some prepayments. They'd already done a lot to see that we'd be successful um cuz it would have been more painful for them if we were not. They would be in a in big trouble. But also they're just like good people. Um and had some genuine care for us, our employees and our technology. But still um not to look a gift horse in the mouth, we thought about going back and saying, "Can we have some more?" Um and I I started hinting at it even on some you know we have weekly weekly calls with these these folks and I even started hinting at it like, "Hey, so we're getting a a loan soon to keep us you know afloat until we can ship you parts." scratch the back of the neck tell. Yeah, a little bit and so I dropped some hints so that if things really really went south and we had to call in another favor, it wasn't going to be you know a big surprise to them and it wasn't. They knew how hard it was for us to get this business going. They probably could and would still step up. Um but thankfully we haven't had to ask that of them um yet and and hopefully won't need to. Yeah. Yeah. Well, all of this despite the fact that you're you're learning it the hard way what you are really learning up close is how valuable what you have is. That that one of your clients is like their own success relies on your success and so that they would I mean, you know, you I I I remember hearing this phrase from private equity people like when when they're evaluating businesses to buy small businesses like ask yourself why does this business what what what is the phrasing like does this why does this business even exist or does this business have a right to exist? And and I think I I think really the point of that question is like is this business basically just interchangeable, you know, like one plumbing company versus another plumbing company. And frankly, there's not much difference there other than of course quality and so on. But really a lot of the businesses that my guests buy and that these small businesses that that that that acquisition entrepreneurs buy, there's not a lot of competitive differentiation from one type of business to another. And so and so this is you know, your your case is is is the exact opposite of this. This is it's this incredibly strategic, unique decades of of development into it technology. So it I'm sure has a right to exist and your your customers just really maybe a better way to put it is your customers desperately need you to keep existing. That's and that's a powerful powerful attribute of a business that I that I'm not used to seeing from my guests. Yeah, and I I kind of feel like well, I should have called you 4 months ago because when you phrase it so nicely like that, it does sound like yeah, this business is fine. There should be no anxiety ever. Um but you're right. When you put a lot of this this is you know comes back to the don't let my own opinions of the truth get in the way. It's it's true a lot of this stuff really does de-risk and makes this opportunity have so much potential. Um, all the more reason that if I fail, I'm going to feel like such a dope, um, but we'll we'll deal with that in the next episode. Well, Carolina, I want to start wrapping up, but I have um, well, just to make sure so so we leave the story um, people it's clear where where where we're at. You got the loan from the bank, the SBA loan backed by this um, this collateral, this million dollars in assets, and you are really close to getting the contract and the revenue from this big client, and then you have other clients uh, customers later this year that are also um, on deck to to start paying you. Great. Mhm. Okay. Awesome. So so just a couple kind of theme questions. Just how are you finding being a remote CEO operator? You're in Salt Lake, they're in San Jose. Um, what what what are the what are the dynamics of that look like and just kind of like what's it whatever you want to share about that. Yeah, uh, it's it is worth talking about. Um, I wouldn't choose it. Um, I would I would prefer to be able to like you know drive over to the business right now, say hi to everyone, check in on things. Um, but this this deal is what it is and had to be the way it was going to be, and I can't uh, couldn't uproot my family and and leave Utah to go be there, and so had to make the best of the situation. Um, I fly out basically every two weeks, spend a few days there catching up with everyone, um, but the reality is I am the dumbest person in the room when I go over there, right? Like there is I can run the business, but technically it's not like I add a lot of value to this team. They don't need me to know how to do their job. Um, they need my partner, um, who's you know the head scientist, and he really does run the day-to-day because he understands the day-to-day. Um, so my presence there is is I'm sure helpful in some ways, but um, more important is what I'm doing behind the scenes, which is customer calls and vendor calls and making sure the cash flow is there, making sure we can secure this debt. Um, all the stuff that goes with CEO-ship that's not, you know, beating your chest in front of the employees kind of thing. So, it's fine. Um, I don't mind the travel. I've I've done travel for a long time, so for me it's a quick hop, skip, and a jump to get over there. And uh, while I wish things could be different, it's manageable. Mhm. And is every other employee than you uh, an engineer or scientist in some way? Or are there any operations or sales or business or admin people on the team? Um, so, half the team is some variant of scientist, engineer, spends lots of times time thinking about hard problems and solutions. The other half of the team are assembly people who are very, very skilled at putting this um, these tiny things together in microscopes. Um, who've worked on this stuff for, I mean, either our product or some product for 30, 40 years. Um, so, yeah, half assembly, half scientist. And then now now that we are kind of getting our feet under us, I'm starting to put in more support staff to to keep the day-to-day running. But as but kind of historically or as of now-ish Mhm. you were the only you were the only operations, admin, like non-technical person. Yeah. Okay. Yeah. Uh, and just want to ask cuz I don't I don't have um, many women as guests. I've had and and that's a theme that's come up including a panel that um, that I did with Chelsea Wood hosted um, with three women um, acquisition entrepreneurs. I imagine obviously with your military experience you've you've probably you're probably used to being one of the only if not the only woman in the room and acquisition entrepreneurship is also a very male-dominated space. So, um, anything to to say about that or you don't have to, but but now now would be the time if if you want to if you want to speak to the other other women out there considering this path. Yeah, yes, I absolutely want to highlight the fact that I come with a few labels that you don't usually see, right? Woman, gay, veteran, disabled. Um I hope they are never part of the dialogue, but they still are. And you're right, every career I've been in, I am a minority in some way. And that has forced me to make sure that it is never part of the dialogue. So, I have worked very very hard in each role I've been in to make sure that it's not my gender, or my sexuality, my conditions that are of interest to people, it's how hard I work, how much I can bring to the team that is of interest. And so, as I've made my way through these different parts of my career, um I I try to avoid uh places that are discriminatory like that. Um Both in the ETA as as well as many of my careers in the past, um maybe it could serve as a great litmus test of the team or the business I'm looking at is if there is an immediate reaction of you're a woman, like you know, in in some kind of derogatory way or oh, you have a wife, see that. That kind of thing can be like, okay, well, if that's going to be your your reaction as perhaps a current business owner, chances are your team might look something like you and this is not the business for me. So, it can be um you know, use your strengths to your advantage, but I hope that this will not be part of the dialogue for forever. Mhm. And have you found um that there have been interactions like that where there was some kind of reaction like that and and you decided, okay, well, this is probably not somebody I want to work with. To be honest, it's never it's rarely that strong reaction where you can, you know, sense that somebody thinks less of you because of whatever label you want to throw in there. It's I It's hard to kind of put your finger on. You can There's usually some subtle hints of of doubt or of, you know, the side eye or something that um isn't quite explicit where you can be like, "Hey, Look." Um I I bring something else besides just whatever labels you might see on on the surface. And so, being keenly aware that that is something that might be in the back of somebody's head and in addressing it head-on if it need be. Um absolutely. Or of of just being very very aware that if that needs to be part of the dialogue or if that may be um a challenge you face that uh either you address it early or get out of there and find a place that that suits you better and that you, you know, have more aligned interests in. And just last question on this, Carolyn. Do you feel like your terror when things weren't going well? Um do you think that that weighed heavier? I mean, do you feel like you carry like more responsibility or at least just like an internal sense that you you have that much more pressure for this to be successful because, like it or not, you you might be representing certain demographics? Oh, yeah. Um in every case in my career, right? Like if The Army was kind of the first real jolt of that reality of there was there were metrics that separated men from women in in combat arms and how we performed physically. And so, it was always something that we had that it felt like we had to outperform the men or at least be equal to show that like, "Look, we bring stuff to the table and and gender is not um a limitation here, but maybe even advantage or or at least a neutral thing." And so, I've always felt that in every part of my career that um someone somewhere might actually be looking, you know, to see like, "Hey, if if she can do it, he probably probably do it." And I don't want to fail especially because of that. So, that weight is is definitely there, but I'll bury it deep inside and try not to let it come out too much. Let's wrap it there, Caroline. This is a wonderful conversation. How can people reach you? Well, how do you how do you prefer people reach out? Uh email, which is unfortunately very long. Caroline.chaplain@northstarphotonics.com. Um mouthful, but I think we'll we'll probably hyperlink it and then LinkedIn, same same name. All right. I will put all that in the show notes and we will definitely need to check back in with you to see how all of this has played out in the next year. Thank you very much for this for this time, Caroline, and for reaching out. Um initially, you you were right when you said your your story was an unusual and very interesting and valuable one. So, thank you very much. Thank you, Will, and thanks for all you do for the community. I hope you enjoyed that interview. Make sure you subscribe to the Acquiring Minds channel below. We are now publishing twice a week. So, tons of new interviews and stories to come. Stories that will help you along your own path to acquiring a business.