Closing Bell - Manifest Space: Space Radio with Hawkeye 360 CEO John Serafini 8/24/23

Episode Date: August 24, 2023

While some spacecraft collect information visible to the naked eye, some are searching through radio waves to acquire and analyze valuable data for government agencies. Morgan catches up with Hawkeye 360 CEO John Serafini about his company’s efforts in the radio frequency space. They discuss the company’s successful $58M capital raise, government contract work and the narrowing competitive space.

Images aren't the only data satellites are capturing from space. Some spacecraft are collecting information invisible to the naked eye, but valuable to governments and other entities monitoring the planet. It's a new niche in the intelligence market being carved out by the likes of Hawkeye 360, a startup specializing in radio frequency, or RF, data. It's not particularly easy to forecast the size of a brand new industry. We are the first people to do commercial RF sensing and geolocation. We've built up this new industry and there are

followers behind us, but we were the first ones. So developing a TAM or something that didn't exist beforehand is not particularly easy. When we look at the market sizes of signals intelligence and electronic intelligence and tactical intelligence surveillance or constants, otherwise referred to as tactical ISR, our analysis of those traditional market sizes is around $45 billion or so. Since I last spoke with CEO John Serafini on this podcast last year, Hawkeye 360 has closed on a $58 million capital raise led by BlackRock, extended its contract with the U.S. National Reconnaissance Office, and seen the competitive landscape narrow as some rivals have run out of cash. On this episode, using space to sense what's happening on Earth.

I'm Morgan Brennan, and this is Manifest Space. You've been staying busy at Hawkeye. I think probably first, let's start with the recent news, which is that you completed another capital raise, $58 million led by BlackRock at a D1 funding round. What's that money going to go to? Well, the use of proceeds is generally three things. Thing one is to complete the build out of our constellation to 20 clusters, which is 60 satellites.

The money provides for us to fund the movement from Block 2 to Block 3, which is a much larger bus upwards of nearly 100 kilograms, will increase the amount of capacity and the collection capabilities that we can then provide within that 20 cluster constellation. So that's one. Thing two is investing further into data science. We do a lot of work today downstream in converting and processing our RF data into usable knowledge products. But this allows us to accelerate further into artificial intelligence and supervised and unsupervised machine learning. And then lastly is further investment in the orchestration of multi-int, where we're

coordinating the collection of multiple different phenomenologies of remote sensing data in space. So, electro-optical, synthetic aperture radar, RF data, even hyperspectral, all working in concert with one another to identify specific objects, receive EO, RF, SAR data, fuse it all together, and then apply data science to understand better what that object, what that asset may be doing. So there's a lot there I want to pick up on, but I'm going to start with the last piece, and that is these different types of capabilities. Just walk me through how much of that is coming from your own constellation versus your ability to work with other constellations and bring all of that material together? We're 100% focused on the RF domain. We are focused on collecting enormous amount of RF data

from our constellation, processing the RF data, performing the data analytics, and then fusing it with other people's data, whether that's from the electro-optical constellation or a synthetic aperture radar constellation. Our partners do that piece, but we really want to dominate the RF domain. Today, we collect from low-Earth orbit space, but ultimately, we will look to develop additional platforms for RF collection, whether that's UAVs or terrestrial platforms in particular, or potentially other space-based platforms. That's all of interest to us, such that we can dominate the collection and be the very best in the world at processing that data and converting

it into an actionable insight on the RF side. Interesting. So it's not about the domain per se, it's about the data. It's about the data. It's about having access to the largest database of RF data, converting that into a catalog of all the world's emitters, and then ultimately taking that database and converting it into the database of all the world's assets that are emitting RF objects, whether that's a vessel or an aircraft or a military Andy or a satellite phone. It's being able to do that work ourselves in-house and not be dependent upon any partners that allows us to control the entire value chain. Got it. So it's data as a service. It's RF data as a service in this particular case. Before I get into the data science part of it and the role of AI and

machine learning, for example, I do just want to back up a little bit and just have you explain, and I know we've had this conversation before, but just explain the value of RF data specifically and why it's a game changer, why it's meaningful, and why it is valuable. Yeah. As we've discussed in the past, when you see RF data or you see RF emitters from space, ultimately, you know that you're looking at human activity. As we discussed previously, you don't see a bear keying a mic or a lake emitting RF that comes exclusively from human behavior and human intention. So if you see that from space and you look at it long enough, you can start to extract patterns of life and better understand human behavior. That's not as intuitive or easy to do when you're combining it or looking at electro-optical or synthetic aperture radar imagery. So it's less intuitive because you can't look at a photo the same way that you can with electro-optical.

But we think that the signals data is a much more richer data set that can allow trained analysts to extract a lot more intelligence about what the human behavior is that they're witnessing. So what does that mean in terms of, especially when you start to combine it with some of these other forms of data and capabilities, what does that mean in terms of how much, to use the word you just used, how much richer the picture is of the view of Earth or specific parts of Earth than it was even just a few years ago. So let's take an example of the maritime domain. Today, it's using electro-optical and other imaging assets. You're getting spot moments in time of a picture of a vessel or vessels with rf we start to identify specific vessels and then assign them an identifier and then when our satellites next come come over that

area whether that's 20 minutes later or an hour later we're able to then pick back up again that same vessel and maintain a chain of custody of that vessel. And if you do this for long enough, you start to extract interesting and usable information about that vessel, where it's been, its patterns of life, and start to make forecasts about where that vessel may be and what kind of activities that vessel may be involved in. Now, take that concept and apply it to the battlefield or to the aerial domain or the border domain. You start to get a better understanding of how RF,

particularly when combined with electro-optical and other imaging capabilities, can provide a very rich source of intelligence for users. Got it. And I know you have a number of contracts, and that number is growing with the U.S. government, whether it's intelligence agencies or through the DOD. How big is this market and what are those applications more broadly? Battlefield and intelligence makes sense. I get it. But how does it expand beyond that as well? It's not particularly easy to forecast the size of a brand new industry. We are the first people

to do commercial RF sensing and geolocation. We built up this new industry and there are followers behind us, but we were the first ones. So developing a TAM or something that didn't exist beforehand is not particularly easy. When we look at the market sizes of signals intelligence and electronic intelligence and tactical intelligence surveillance and reconnaissance, otherwise referred to as tactical ISR, our analysis of those traditional market sizes is around $45 billion or so. So when we talk about the total TAM that we can quote unquote disrupt as a defense tech company bring a new capability to market for governments around the world, we typically identify 45 or so billion dollars

worth of total addressable market opportunity. Got it. So what does that mean in terms of, I guess, future government contracting and the opportunities there? And by the way, not just with the U.S., but also with allies, since I know you're starting to ink some of those deals too. Yeah, the vast majority of our revenue, as you know, Morgan, is government oriented. Defense, intelligence, security, value propositions. We don't do a whole lot of commercial today. Our technology has great relevance and value for commercial applications, but I'm a big believer in focus. And as we've discussed in the past, I also believe that you can't mine in government sales.

That has to be your primary focus in life if you're going to be successful. So that's where we're going to continue to grow quickly and richly within both the U.S. government and within international governments. That's our focus. We think that there's a lot of market opportunity that has never before been disrupted. That's the domain of defense industrial-based prime contractors that have been doing things under more traditional contract vehicles and cost plus contracts, which I think are pretty inefficient and lead the taxpayer into a much more inefficient outcome than buying commercial services is what Hawkeyes is trying to provide. So we think there's a significant market opportunity for us to disrupt

and we're off and doing it. Yeah. Spoken like a defense tech CEO right there. It's true. I have this type of conversation quite a bit with people that are running new defense tech companies or newer companies. So how do you do that? How do you disrupt a marketplace that has operated a certain way for so long when there is so much red tape? When there is, you could call it a very large financial moat to be able to shake up the prime structure, if you will. Yeah. Two things. First of all, separate from the two things, the first dimension is it's not easy, right? Like what we're doing is demanding and difficult and we're breaking new ground every day. But it needs to be it needs to be broken. I guess the two things are, first of all, as I mentioned earlier,

you need to be built from the ground up with the DNA to sell to governments. You need to have the contract vehicles, the clear clearances the relationships with the primes you need to be able to advocate for yourself on capitol hill and with other branches of the government you need to have the relationships within the government to be able to walk the halls and engage with these customers and that's not something that the typical silicon valley type company wakes up knowing how to do so it's a it's a different skill set and you can't you can't do it on the side. You have to really be all in to be successful. That's one. The second is you have to obviously raise a significant amount of capital. And when you're talking about,

particularly as it relates to space, it's a CapEx intensive business. You need to raise a lot of money. Today, we've raised over $360 million across seven different institutional financing rounds. I would tell you, given the larger private equity, growth equity market as it relates to tech investing, the fact that we are a defense tech company helped us out immeasurably. I would not want to be out raising capital right now in a pure tech function. But the fact that we're a defense tech company with peer companies like Palantir and Andral and Shield AI and Vannevar, et cetera, some of which have pulled off material financings in the past six to nine months, it provides us with a very solid peer group, but also there's a bevy of interesting

growth equity and private equity investors who want exposure to defense tech, who appreciate the all-weather economics, who appreciate the diversification benefit of a low beta. We have very little correlation to the global economic condition. We're more correlated to geopolitical volatility. And there's a good number of investors who appreciate that and step forward during this round to consider the company. Yeah. And you kind of just answered it already, but I was going to say, why do you think defense tech is having its moment? And it sounds like maybe because it's defensive within tech for part of the pun, and it is more correlated to geopolitics rather than economic cycles. Well, you hit on it, right?

And first of all, there's a lot of challenges on a global geopolitical basis. You have obviously the war in Ukraine. You have challenges in the South China Sea, the potential for conflict with Taiwan. There's a number of different regional conflicts around the world. For example, no one talks about Ethiopia, but that's an existing hotspot that someone needs to be focused on. But all of that means that there's plenty of work to be done for a company like Hawkeye 360 that focuses on tracking that kind of activity of interest to our customers. That's one. The second is the all-weather economics. The US Department of Defense is going to do $850 billion or so in Department of Defense budget slash the intelligence community

over the next two or three years, increasing every year at 3 three to 4% or so. That doesn't change if there's a recessionary conditions in the United States. And there's an appreciation for that from investors. And then lastly, when you're doing work with the US government, there's a lot of upside to doing so. And there are national governments. I mean, they're particularly sticky customers. Once you've been able to land and expand into a program of record and you can provide, improve and demonstrate meaningful value for the warfighter or the analyst or the decision maker, the opportunity to continue to expand that is definitively there. And they pay their bills on time. The margins are generally pretty decent. There's going to be margins there. You're not going to lose money on the contract, and you can expand that as you continue to perform

and provide value. So for all those reasons, I think servicing government customers right now is a good place to be. Okay. Of course, continuing resolutions, I think, can sometimes be the little area of volatility or difficulty in all of this. But to your point, it doesn't change the dynamics, even when you see a continuing resolution in terms of the bills and the contracts that have been laid out in the existing year. Data science. I said I was going to come back to it. looks like for Hawkeye, especially at a time where every company across every industry is trying to understand generative AI and the opportunities that that's going to unleash right now? Well, I guess I would summarize by saying TBD, right? We understand that it's a positive force. It's a transformational force, but figuring out how artificial intelligence plays into remote sensing, there's a lot of work that

has to be done. I mean, chat GPT is great. It can write a book report from my sixth grader really quickly, and that's fantastic, but that doesn't mean it can take thousands of emitter dots over a certain geographic location and be able to correlate that to human activity and understand what's occurring on the ground. Those types of algorithms are really yet to be developed. of human knowledge about signals and connect that into algorithms that can then eventually provide a digital knowledge product of what's occurring without having a quote-unquote man the loop. That's the ultimate area we're trying to accomplish, but it's not going to happen overnight. This financing, though, does provide a significant amount of capital to allow us to get

a head start on and to start to bring some of those downstream products to market. So what does the future look like for Hawkeye 360? I mean, you mentioned UAVs or even maybe looking at like ground based possibilities. I mean, looking out five years from now, 10 years from now, what does the company look like? How does it speak to the market that I know is still kind of emerging and developing, even though you've put earlier in this conversation a rough number around a rough estimate around it? I guess what where does it go from here? What we're really passionate about is the that with our downstream processing and data science work to create these knowledge products. So you have a combination of data that's our own that we can sell to our customers, raw IQ or somewhat processed data.

But then we also have a whole slate of different data analytic products that we can sell on a services basis to many different customers. That combination together is very unique. Typically what you see in the space ecosystem is companies that either have their own data, but not their own downstream processing and analytic capabilities, or they're focused on the downstream, but they're exposed because they don't own their own data. Having the full value chain as Hawkeye has today, the ability to design your own spacecraft, to manufacture them in-house efficiently, to operate our own constellation, to process that data, to do the geolocations of a wide range of different signals, correlate that into knowledge products with our own geospatial platform that we can deliver to customers, and then manage that customer base

directly without necessarily having to depend upon channel partners. That's highly unique. And to do so purely to support the world's most demanding defense and intelligence security customers, that's what this company is set up to be, as an enduring company supporting enduring customers with enduring customer requirements. And to do so, we had to raise more capital, which is why we just completed that series D1 round. Okay, I got two more questions for you. The first is, we've seen a little bit of shakeout in the market more broadly. I think about Clio Space,

for example, basically running out of cash, filing for bankruptcy. Do you expect that we're going to see more consolidation or more just correction in this broader intelligence market, space-based intelligence market from here? I think it's difficult to raise capital unless you have a lot of good things going for you. It's definitely even more challenging in the public markets. So for some of the SPAC companies

that went public in the past two or three years and need to raise additional equity, it may be challenging at their current stock prices. Will that lead to logical consolidation? I think likely. There'll be a few companies that will be consolidated and there'll be a few less companies in the electro-optical space potentially. We'll see how that plays out. The electro-optical commercial layer, which was an NRO solicitation and program that was awarded about a year ago, that was meaningful. That's a meaningful amount of revenue that went out. And I think it positions a number of those

companies really well for success long-term. But it all comes down to a company's ability to raise capital. And I think that in turn is correlated to uniqueness and the ability to do something unique with the data that you collect. And there's not many of us that can do that. Okay. Final question for you. I know you did just raise capital, but because it's come up over the years in my conversations with investors and analysts, could you envision Hawkeye 360 being a public company at some point? Well, I mentioned to you earlier that we want to be an enduring company. I have no interest in a near-term sale of the company.

We want to build this to be a phenomenal company for the long term that's needed to support our customers. Eventually, I think it makes sense for us to consider a public listing, particularly as we need access to additional resources down the road for future growth initiatives. But I would close by saying this round provides us with a fully financed business plan to get to 20 clusters with the space capabilities that we know our customers need and with the appropriate amount of cash runway to reach break-even. So we're in a very good place as it relates to our financial position. John Serafini of Hawkeye360, great to speak with you again. Thank you so much.

Thank you. That does it for this episode of Manifest Space. Make sure you never miss a launch by following us wherever you get your podcasts and by watching our coverage on Closing Bell Overtime. I'm Morgan Brennan.