Disrupting Fiefdoms, Rapid Growth, and Fenix Group with Dave Peterson

In this engaging conversation, Callye Keen is joined by Dave Peterson, a defense entrepreneur with a wealth of knowledge in defense startups. Their lively discussion revolves around the importance of startups in the defense space, market sizing, and potential challenges in the transition of commercial technologies to defense.

Topic Highlights:
00:00 - Defense Entrepreneurship
Dave Peterson outlines the significance of entrepreneurship in the defense sector, highlighting the difference in culture, language, and processes from conventional startups, providing an overview of the role that startups play in contributing to defense innovation.

18:32 - Challenges of Introducing Commercial Technologies to Defense
Callye Keen sheds light on the difficulties faced when introducing commercial technologies into defense. Discussing his experiences, he emphasizes the challenges of convincing defense stakeholders about the reliability and applicability of technologies proven in the commercial sector, often leading to resistance due to unfamiliarity.

19:02 - Market Sizing and Value Proposition in Defense
Callye Keen discusses the complexities and uncertainties of sizing the defense market, especially when considering product applicability. He shares key strategies to estimate the total addressable market, the value of solving specific problems, and how the opaque nature of defense can sometimes be a barrier.

20:14 - Understanding Your Market in Defense
Dave Peterson explains why understanding the defense market is crucial, especially when trying to secure investment. From projecting future revenue to identifying potential competition, he highlights the importance of business intelligence for defense startups.

22:09 - The Value of Dual Use for Defense Startups
Both Callye and Dave discuss the advantages of dual-use strategies for defense startups, underscoring the protective benefits of diversifying into related markets. The conversation emphasizes on finding commercial applications for defense innovations to overcome potential hurdles.

24:04 - Importance of Process and Mentorship in Defense Startups
Dave Peterson's final thoughts revolve around the need for well-defined processes in defense startups and the value of seeking guidance from experienced individuals. He advocates for productization and quality control as key factors for success.

Parting Thought:
"Nobody wants to buy one-offs. They want to buy productized things with quality control enabled, in your whole process soup to nuts." - Dave Peterson [00:24:42]

Callye Keen - Kform
https://kform.com/
https://www.linkedin.com/in/callyekeen/
https://youtube.com/@kforminc 
https://twitter.com/CallyeKeen

Dave Peterson - Fenix Group
https://www.fenixgroup.io
https://www.linkedin.com/in/dave-peterson-042b30125/ 

Transcript

Speaker 1: 0:00

There are senators and congressmen out there interested in protecting jobs for the way it's always been done, and that tends to be how the palm works. That's how funding works. So if you come along with something cheaper, better, faster and it is a threat to some senators, pet corporation and this or that state, you may have built an enemy without even realizing it.

Speaker 2: 0:21

Welcome to the startup defense. My name is Callie Keene. Today I have Dave Peterson. Dave, can you give us a background on what is Phoenix? Who are you? What are you passionate about right now? It's going to be with you, Callie.

Speaker 1: 0:33

Thanks for having me on the podcast. Phoenix Group is an OEM, so we manufacture what we call battlefield edge networks and radios for the defense space. We got our start because of problems we experienced when we were serving in government. It's kind of a passion project. In the beginning I never thought in a million years I'd be manufacturing radios for a global marketplace. But that's who we are and what we do and where we came from. That's phenomenal.

Speaker 2: 1:00

Now, this is because I'm in defense manufacturing and we've met before the show, but I do encounter a lot of people coming out of the service all different branches or the IC and then they become entrepreneurs Because they see, like you just said, that you see the problems firsthand, and maybe it's because people coming out of the service are action biased, go for those opportunities and build something, and you've done that quite successfully. But can you speak a little bit to what that process looks like and maybe we can get into some of the obstacles that you encountered and have overcome?

Speaker 1: 1:35

Sure, I could probably write a book about what not to do with your startup, especially if you're going into manufacturing. The critical mass comes when you have to be repeatable and scalable and do it with quality controls in place. When we first started like I said, it was a passion project we learned that our communications were not getting it done. Overseas. I was in every war zone that the US participated in for most of the life. The last place I went to war was in Syria. I learned some things there and that kind of informed what I wanted to do with Phoenix Group, but we really didn't understand how, or we didn't have a plan for how, to get it done.

Speaker 1: 2:13

So we started in the government research houses. So that's an excellent place to get some funding if you don't want to be dilutive in terms of your shares and your ownership. But at the same time, if you take government money to build something on RDT and E dollars, there's a high likelihood that they're going to build you up. You're going to get a prototype out of it and then they're not really going to have a transition plan, which is super dangerous. So in our case, we worked with the government. We went from. I think we had two people when I started the company in 2016. And we went from that to, I think, 26 almost overnight, because we won a contract to create something that didn't exist before and we built it. We went through a couple of phases of that and 30 million in revenue, and we got leases on buildings and started looking at manufacturing at scale.

Speaker 1: 3:02

And then the government says, well, great job, good luck. That's a life changing moment. When that happens, you need to have a plan to find out your market, what it will absorb, what it's looking for, discover your market and then go meet it. And you have to listen to the customer. You have to be able to adapt and that's expensive. So at some point, you're probably going to need funding outside of government and maybe, if there is an enterprise market for you outside of defense, that's healthy. We've learned lots of lessons over the years and we're just now at the point where we're delivering systems and radios to partners all over the world. We've got some excellent partners in the UK and Australia and the Netherlands, and we have systems in Eastern Europe right now. That's all I'll say about that. So the growth trajectory is not fast. There's no such thing as a quick buck or an overnight success in defense. It is a long slog and you have to put in the work.

Speaker 2: 3:56

We kind of balance the long tail of defense with the short cycle that you'd have in commercial, where we scale up really fast in a commercial product but the life cycle of that product might be realistically, on the really cradle to cradle of it, six months or 12 months at this point, yeah Right, whereas our dev cycle might be six or 12 months on a defense product and our life cycle cradle to cradle, hopefully, is shorter now than ever, but still In the commercial world would be considered insane three, five years with some support for obsolescence. There's a lot of advantages there In my opinion. Again, it's my market, so everybody who's listening can take this with a grain of salt. I prefer it because we can spend a little bit more time to make great things and since it's going to stick around, we can afford to do that.

Speaker 2: 4:47

But every customer is a new customer and they're not going to respond to a Facebook ad or cold calling. There's nobody to call or DM or email like there is in e-commerce. You have to build relationships and you've been able to do this pretty effectively. I will note you're very active on LinkedIn and you make me kind of feel like a stalker most days, but also it's like my own little news feed because I get to see what Dave's doing, what Phoenix is doing and other interesting players that are in the market. That's clearly working for you in defenses, historically hard to connect, has that been a helpful channel just to stay active in the market?

Speaker 1: 5:27

LinkedIn has been great for us and social media in general has been good for us, as long as you can kind of mold it to your needs. Most of the people at Phoenix Group here they come out of the special operations community or the intelligence community, so we have a lot of friends who are on social media Just to let everybody know what you're doing. If you're a small firm, social media is excellent because you're never going to compete as a small defense startup with the big crimes in the defense industry. You're not going to do it. Being on social media allows you to break through some of that not invented here syndrome that infects the DOD and some of the cultural bias toward risk aversion. I'm sure you know in defense there's kind of a bias towards just doing it the way it's always been done. Innovation is almost an oxymoron in defense. Even though everybody wants it on their resume, they're not geared for that.

Speaker 1: 6:13

The defense space if you think about what the army is, I can't expect Hundreds of thousands of people are just going to start buying this thing and automatically know how to use it. It's got to fit somewhere in their budget cycle and it's got to fit somewhere in what they're able to bring to war, and the training curriculum that goes along with that is important too. You have soldiers who their whole MOS is geared around a particular technology. If you're going to introduce something, there's a lot of education that has to be done ahead of time. So we use social media in a sense to educate and show what the art of the possible is, and that's been good for us.

Speaker 1: 6:48

It's led to interest and outreach, and typically the way it goes is we'll do a LinkedIn post and then someone will say, hey, can I get a demonstration of what you're doing? And then that leads to invitations and relationships, which are critical. I mean, business is relationships. Once those are set, you've shown the government that, yes, we can produce quality products at scale and we're here with you and we're part of your mission. Then you start to build trust. That in turn results in revenue.

Speaker 2: 7:16

Organizations are inherently de-risking by their nature right, building SOPs, building accountability and organizational charts and it's not antithetical to innovation itself, but it is a de-risking or risk averse strategy. That's why corporations can sustain and grow in that incremental sense and why, especially in our industry, you see so much acquisition activity around growth because the corporate body itself is pushing a lot of paperwork and a lot of stability versus you're presenting disruptive products to the market. That is the opposite of what organization wants. The army is no different in that regard than a large organization.

Speaker 2: 7:59

Yeah, you hear disruption and innovation be thrown around, but in reality, we got to put a little fence around that because that's not what we want. Absolutely not what we want. What we want is capacity and capability to be dramatically increased while, potentially, costs is being reduced. Even that's disruptive. I'm very interested in what's happening with the new hedge fund for innovation and then what's been going on with Afworx and Softworx and all the organizations DIU, and so we talk about that a lot on the show. Have you seen the value of those organizations and have you been able to leverage that in your go-to-market strategy?

Speaker 1: 8:39

Absolutely yeah, we're huge fans of the Defense Innovation Unit, not only their mandate, but the people at DIU get it. A lot of them are out of the industry in Silicon Valley and they understand agile business process and they understand what innovation really is. I think they live up to their moniker that way and we've been fortunate enough to win quite a few sippers over the last few years to get some disruptive tech into the hands of the warfighter quickly. I will say that word disruptive. You got to be really careful in defense with that word, because there are huge fiefdoms and institutions set up to fight against disruptive technology. If you think about how the government funds defense, there are senators and congressmen out there interested in protecting jobs for the way it's always been done and that tends to be how the POM works. That's how funding works. If you come along with something cheaper, better, faster and it is a threat to some senators, pet corporation and this or that state, you may have built an enemy without even realizing it. What we like to do is say, hey, we're not disruptive to what you're doing in government, we are complementary to what you're doing. We're meeting an unmet need, for instance, the little talent radios that we build. I think the last thing in the world the government ever wanted to see was yet another man-a-radio there. You could call it a saturated market and when we first released those, we did it on LinkedIn and my phone exploded with all of the other man-a-radio manufacturers going. What are you doing? Are you competing against us now? But that was never the intent.

Speaker 1: 10:13

Talent is a result of the Sibir that we did with the US Army. Basically, the way we got that done was we built a small prototype and we took it to an integration test event with the US Navy and at this test event, lots of government folks come in and see what 100-plus companies are doing and if they like your MVP, then they'll say, hey, we're going to create a Sibir for this or for something like this and it's going to be competitive and if we like it, we'll fund it. So the way we couched talent, which is the little man-a-radio we make we said look, we are not disruptive, we are complementary to your existing systems, but we offer a lower price point. So the military has just tons and tons of sensors. Maybe they cost $5,000 and below, and they were buying $10,000 radios to connect those sensors. So they said look, what we want you to do is build a super cost-effective, high battery life, high network capacity radio that is in a completely different category from what exists.

Speaker 1: 11:12

So we looked at that from a market research standpoint and we said, ok, this is an unserved market, not an underserved market, but there was nothing in the space technically. So we thought it was a good idea. We put in some of our money, the Army put in some of their money, and we built it not as a one-off where we delivered 20 of them from a garage somewhere. We went to a manufacturing house, we got molds made, we built our bomb in a way that's repeatable and ISO 9001 standards apply when you're manufacturing, and we built it so that we could scale globally. Yeah, I would say the CBER process and the government research houses that are out there for startups are an invaluable part of the defense ecosystem and I think without them you would have almost no startups doing anything in defense. You might have some software firms, but nobody would be making anything.

Speaker 2: 12:02

I would agree. And then with the new OTA contracts, where we'll be able to pitch in and then that qualifying as competitive public release and then be able to issue contracts out. Let's say we'll see what record of that is over the next, say, three to five years, but so far it looks pretty good. It looks like things are moving along fairly well. But I would agree, it's very hard to start a company that's going to physically make a new product and not get some type of funding like that or have strong, strong market signals and a lot of support. Historically, there's been very little VC funding as well for any defense-related startup. The tides are changing. As part of what this show is about, because I work with investors through accelerators and it used to be like don't tell anybody that we invested in a dual-use startup, because if XYZ hears from that, they're not going to want to put in any more money. And then the returns started happening and they realized like, hey, this is a pretty solid business, let's get involved in here a little bit more.

Speaker 1: 13:08

Yeah, I would agree. I think the thing that the PE and the VC firms that are out there need to understand is it's not a fast flash to bank you might have in an enterprise startup. If you're in Silicon Valley, you can expect pretty huge ROIs if you've got a real market under you. It's more of a very slow burn in defense and then an explosion once adoption happens. And I think that's what these hedge funds are starting to realize, especially as softworks and affworks and the various research processes that are out there for startups. They are gaining traction and you've got some real success stories out there. It usually leads to acquisition.

Speaker 2: 13:46

If you're an investor, that's what you're looking for, though, right. If you're an investor, you realize, like you start looking at this and think, hey, the premise and promise of SaaS it never has been fulfilled. You can look at records from 2010 to now. Saas businesses, which were the darlings of the investment world. They never make any profit, right. They're never free flowing cash, and so acquisition is maybe. Their exit strategy is okay, we're done with this, I got to move on. But in defense, kaki or Rockwell is just right over the horizon, and if you're an investor and you're coming in at seed or series A and you know well, worst case scenario, in three to five years or five to 10 years, northrop is going to be an acquirer because they're a partner right now. That's kind of what you want as an investor and that's played out very well in the top defense unicorns in the markets.

Speaker 1: 14:42

I agree. I think that's the advantage that defense startups have over the bigs is they're never going to take the risk to innovate Like a Kaki is never, ever going to do that. They will buy risk.

Speaker 2: 14:53

They're really smart acquirers. I'll say that they're smart acquirers.

Speaker 1: 14:58

You're absolutely correct, and there's been a million instances and examples of that happening over the past decade or so. I think you can make it in defense. At some point you're going to need an investor to throw some gas on the fire, but they're going to want to see some wins first, and I think leveraging those the Sibbers and those OTAs are critically important for showing a viable path to success.

Speaker 2: 15:23

Dave, I want to circle back to the conversation of understanding the market and really knowing what to go after, Because this is a really common question. People coming from your background or just commercially, the world is filled with opportunities, but not all of the opportunities are for us Right. They're market opportunities that are free floating. They're not things that are within your or my ability to execute on. How do you look at all of those possibilities? And you have an awesome team, so it's like you could really do whatever you want. How do you go after that thing and say this makes sense as our next suite of products or our next problem that we're going to tackle?

Speaker 1: 16:01

Oh gosh, I won't say that I've got the nut fully cracked on that. Some of it, I'll be honest with you, is just luck and having the right experience. I love entrepreneurs. One of the reasons I mentor entrepreneurs coming out of the military is to try to lead them away from the landmines that are sure to get them. But I guess, when I look at the market, we tend to make risk decisions that we know a big defense contractor is not going to make.

Speaker 1: 16:28

And one of the things that I see a lot of startups do and we've been guilty of this too is being too early to market, and this is a problem that I see in any innovation space. If you look around at the market that you're in and you've got a brand new mousetrap that works better than anything anybody's ever seen before and you decide to build that mousetrap, well, now you have to unseat the incumbents. That's a scary prospect. I mean. You can look at IP patent portfolios out there. You better be real careful when you're going on into a market with a development process and you're going to be spending money. But if you do make those decisions, you have to know Okay, not only is there an appetite for this, but there's budget for it and there's a requirement for it. You have to qualify opportunities before you decide to build, because if you don't, you could be really early to the party I mean by years and then you're stuck with an education tail to whatever you already built and you're not moving revenue. The government doesn't know what the heck you built, no matter how great you say it is. They may decide. Well, I just blew my budget on something that isn't as good, but it was a hundred million dollar program and I can't very well go back to Congress and say I don't need that anymore. Lots of different challenges are there to overcome and you have to be wide eyed.

Speaker 1: 17:46

When you make a decision to build something, you have to know that it's the right decision and you have to know where your market is and how to approach them and how to get them to adopt. Whatever it is you're doing, you have to meet some need that they've never been able to meet before, and that's kind of how we approach decision making. In every single product that we built, it was born of either an experience we had in the field when we were in government service overseas, or it was an idea. Sometimes it's just a flash in the pan, like a light bulb that goes off. You hear someone mention something and you go holy cow, I can't believe. You just said that, why doesn't that exist? And then you begin your market research and you go okay, this is a hundred million dollar market globally and here are the potential buyers, here's the TAM. And you set out to go build it. You're going to be on social media like I am Be careful you don't do that too early.

Speaker 2: 18:34

I agree, yeah, and the higher the level of education, the longer the time that you need to. We have a couple of things that we're working on which we've been able to do commercially, and now I'm trying to bring them back to defense and I have to explain to everyone hey, this is a capability that's very common and we've deployed this literally thousands of times commercially. So we should have this capability over on this side and they're like I've never heard of that before. I know I get that a lot. You have to understand what to go after. I think with defense as well.

Speaker 2: 19:07

For new entrepreneurs, it's very difficult to size the market so commercially. We can look at the TAM of a market by getting different data that's available whether that's from the government or that's from McKinsey or we can do some kind of rough tests there's different ways of testing or we can size the market or the market problem, like what's the value of solving this problem? In the market, we can do some things, but in defense it's like we have a product that's secure comms for travel teams and it's like, okay, well, how many people are there that actually need this product? Well, there's only a few hundred, realistically. So it kind of gives you a hard cap on what you're going to do and that might be really really good opportunity or it really sizes the level of development that you're going to want to do. But you could also be completely wrong, because the market's fairly opaque and you're just unaware that a whole nother group they have thousands of people that need that solution. Encounter that as well.

Speaker 1: 20:08

Business intelligence is super important in defense. When defense startups go to get their first investment round, this is critical too. When you're doing your shopping for your investor, you're going to run into PE and VC firms that are going to say, well, give me six years of projected revenue. It's defense. The government doesn't know what its budget is next year. They just made a $6 billion accounting error. They have no idea. Some of that must be data driven for sure, but some of it is also just knowing the market and understanding that here's what the government is spending on an adjacent piece of technology, for instance. Here's how we're better or cheaper or faster, whatever it is. You have to have a plan to go and capture some of that, if not all of it. From a risk perspective, when you do your SWOT analysis, you better know what the competition is doing, because you're not paying attention and just make you completely obsolete overnight. That's something in defense that happens from time to time. We focused on communications because there used to be an old joke in the military and it was I can use my cell phone before I get to work and after I got to work, but from nine to five I'm not allowed to use a cell phone For every 19-year-old that grows up with those things. Now that became our focus. Initially it was making private cellular networks safe and applicable to battlefield intelligence and data dissemination or sensor democratization. Those are all things that the government wants and they're spending billions of dollars to try to figure out how we use those. R&e research houses and the cyber process and DARPA and others. We showed them a prototype and went to production. Now we're in, I think, nine countries as a result.

Speaker 1: 21:41

You mentioned something a minute ago that caught my attention. I think it's super, super valuable for a defense startup to also have an enterprise business, because the government's somewhat unpredictable. You have continuing resolutions. You have no real dotted line from research budgets to the POM for scaling in DoD. That's a long process, but if you have an enterprise application for dual use, that's good. They can get you through the hard times times like COVID when nobody was doing anything in government and that can sustain you. You can use that time for iterative design or improving process Lots of things that can help you scale even when things are slow.

Speaker 2: 22:21

I think even exploring dual use in the sense that there might be a Leo market or a first responder market, fema market or overseas markets, are ways of diversifying into a quasi-dual use. It's very difficult to run a true dual use company. This is another thing I think we could collectively talk about. For a long time, our approach has been to work with the commercial companies that they effectively are that commercial channel partner, because we're, at the end of the day, we're a government company and we're used to that way. We get paid and the security requirements that we need and the life cycle of everything. Commercials are a little befuddling for that, but partnerships make anything possible.

Speaker 2: 23:03

I 100% agree with you though, because, certainly for, say, your radio product, there's domestic DHS applications that are not fieldable DoD applications, but there's FEMA and response and municipality and probably fire fighting applications. There's multiple other applications that are just perfectly suitable, especially at your price point. It makes sense to put that someplace on the roadmap of scale and it's kind of protected if we don't get a budget pass. Dave, I really appreciate you taking the time to be on the show today. It's nice to catch up with you.

Speaker 1: 23:40

Likewise. Yeah, I enjoyed it too. Let me know if you ever want some help doing the mentorship thing.

Speaker 2: 23:46

I always want help. I always want help. But before we go, can you give us some final thoughts? Just a word of advice.

Speaker 1: 23:54

Yeah, I think the biggest lessons I've learned are process is key. As creative as you may be as a tech entrepreneur, if you don't have process, you're always going to be a tinkerer. So have a plan. Nobody wants to buy one-offs. They want to buy productized things with quality control enabled and your whole process soup to nuts. That's one piece of advice. And then, before you spend a dime, go and talk to people like Callie here, who can give you a little bit of warning on where those landmines are. You can make it. You can be very, very successful in the defense space as a startup. You have to have a plan, you have to know your market and you have to know what the market's going to do to you.

Speaker 2: 24:32

Thank you, Dave. Yeah, nobody wants to buy your science fair project.

Speaker 1: 24:34

Oh, there you go.

Speaker 2: 24:36

All right, this has been the startup defense.