Acquiring Minds: "The Opportunity in Carve-Outs (and Uncle Sam)"

Host: Will Smith
Guest: Caroline Chapdelaine, Owner/CEO of Northstar Photonics
Date: April 27, 2023

Main Theme and Purpose

This episode explores the unique experience of Caroline Chapdelaine, a U.S. Army veteran and executive MBA graduate, who acquired and now operates Northstar Photonics—a high-tech defense contracting business spun out (carved out) from a parent company. Will Smith and Caroline dive deeply into the intricacies of carve-out acquisitions, the challenges of running an asset-heavy, science-driven company, the peculiarities of defense contracting, and the emotional highs and lows of her first six months as an owner. Special emphasis is placed on the operational and financial risks inherent in a carve-out transaction, the learning curve of managing a technical business without being a technical expert, and the importance of support networks.

Key Discussion Points & Insights

Caroline’s Background and Path to Acquisition

[03:35–08:12]

• Caroline grew up in New Mexico, served as an Army intelligence officer (including combat in Afghanistan), and later worked in various operational roles at major defense contractors.
• She pursued an Executive MBA at Wharton, where she discovered Entrepreneurship Through Acquisition (ETA) and realized she was more suited to acquiring and growing a business rather than building one from scratch.
• Caroline describes Wharton as a transformative experience:

  "The professors are world class. They not only teach you the concepts, but they're really ingrained in each of their industries...you can go talk to them after class and walk through the problem you’re having in business." (Caroline, [06:16])

Why Defense Contracting and the Search Process

[11:15–12:42]

• Caroline's search was industry-focused; she wanted a defense business leveraging her experience and contacts.
• Defense businesses are hard to buy because they're often snapped up by larger "primes" or private equity.
• She found Northstar Photonics after consulting for the parent company, which wanted to spin out the division as it didn’t fit their portfolio.

What’s a Carve-Out and Why Did Banks Balk?

[08:12–11:15]

• Caroline attempted to get SBA financing but was thwarted because banks considered it a "startup" due to loss of parent company infrastructure (IT, HR, etc).
• Buyers must budget for replacing such infrastructure—a hidden risk in carve-outs.

Business Profile: Northstar Photonics

[18:19–19:42]

• Manufactures a key component for fiber optic gyroscopes, crucial for military navigation when GPS is unavailable.
• “We build the premium component that goes into fiber optic gyroscopes, which are on everything that flies for the government..." (Caroline, [18:26])
• Team: 13 (now 14, soon 15)
• Revenue: $2M, EBITDA: $300K ("roughly speaking," not including all overhead due to carve-out context).

Transition, Challenges, and Hidden Costs

[20:10–22:54]

• After the acquisition, Caroline's team had to relocate to a specialized clean room within two months—an expensive and logistically challenging process.
• The true hidden cost: retrofitting or securing a compliant clean room was more expensive and disruptive than projected.

Deep Dive: The Technology and Customer Landscape

[22:54–26:34]

• Detailed explanation of fiber optic gyroscopes and why Northstar’s product is uniquely high-end ("the Ferrari" vs. competitors’ "Toyota Camry").
• Government is the only customer segment due to the high cost and unique requirements.
• The technology had lived under different parent companies for over 20 years, but this is its first opportunity as a standalone company.

Acquisition Structure & Partnership Formation

[27:53–32:42]

• Terms: $600K upfront, $1M earn-out over three years, plus $1M+ in assets; funded by partners’ equity, no upfront debt.
• Ownership split: Majority to chief scientist, second to sales/board member, and minority to Caroline.
• Caroline valued leading a company over maximizing ownership:

  “Owning a small part of a company with really smart partners...has made me more successful...However this company ends up, will probably be more successful financially, spiritually, whatever, than had I done this on my own." (Caroline, [33:30])

Emotional and Operational Challenges of a Carve-Out

[35:25–44:05]

• Difficulty running a science-heavy, opaque business—requires trust in technical staff.
• Key Man Risk: The chief scientist is critical; his buy-in reassured Caroline.
• Revenue dependence on a single product and limited customer group is a real risk—but mitigated by high barriers to entry and deep expertise on the team.

The "Darkest Days": Cash Crunch and Emotional Toll

[44:05–48:21]

• Unexpected expenses (especially moving costs 3x estimates) and a four-month production halt pending customer audit nearly exhausted cash.
• Caroline describes this period as "more stressful than my combat tour in Afghanistan":

  “I thought…I've been shot at in Afghanistan...I can run a business, that can't be more stressful. I was wrong." (Caroline, [44:16]) “For me, this felt like if you're doing this [missing payroll], you are a failure as a CEO..." (Caroline, [46:36])

• Caroline relied on personal resilience, her wife’s support, and partners’ logic to persevere.

Problem-Solving: Surviving the Cash Crunch

[50:18–54:07]

• Team considered all options: chasing other revenue, cutting expenses or pay (employees took a temporary pay cut with PTO replenishment later), raising equity, and finally seeking debt financing.
• A local Utah bank, recognizing the value of $1M+ in equipment, offered a $500K SBA 7(a) loan—collateralized by the assets, with no personal guarantee required.
• Lesson: Asset-heavy businesses can use hard assets as a crucial financial lifeline.

Lessons in Customer Relationships and Business Value

[56:03–59:30]

• The primary customer's need for Northstar’s technology was existential; they actively supported the company and had already extended prepayment.
• Key takeaway:

  “What you are really learning up close is how valuable what you have is...your customers desperately need you to keep existing. That’s a powerful, powerful attribute of a business..." (Will, [59:30])

• Caroline acknowledged that realizing the objective differentiation of her business might have alleviated her anxiety had she recognized it sooner.

Operating Remotely and Team Dynamics

[62:13–64:34]

• Caroline is a remote CEO (Utah/San Jose), typically on site every two weeks; most of the team is highly skilled technical staff, making her physical presence less critical for day-to-day operations.

Gender and Diversity in Acquisition Entrepreneurship

[65:14–69:02]

• Caroline, a woman, gay, veteran, and disabled, is conscious of being a minority in every field—but uses it as a strength and "litmus test" for fit.

  “I have worked very, very hard in each role I've been in to make sure that it's not my gender, my sexuality, my conditions that are of interest to people; it's how hard I work..." (Caroline, [65:14])

• She feels extra pressure not to fail, knowing she may represent various demographics.

Notable Quotes & Memorable Moments

• On the stress of entrepreneurship vs. combat:

  "I thought…I've been shot at in Afghanistan...I can run a business, that can't be more stressful. I was wrong."
  — Caroline Chapdelaine ([44:16])

• On the bank loan and value of assets:

  “If you've got assets, we can use that as collateral and actually do the SBA 7 loan.”
  — Local banker to Caroline ([51:23])

• On business value and customer need:

  “Customers desperately need you to keep existing. That's a powerful, powerful attribute of a business..."
  — Will Smith ([59:30])

• On choosing partners over solo ownership:

  “Owning a small part of a company with really smart partners...has made me more successful...”
  — Caroline ([33:30])

• On representation and motivation:

  "If the army was kind of the first real jolt of that reality...it felt like we had to outperform the men...so that weight is definitely there."
  — Caroline ([68:10])

Key Timestamps for Important Segments

• Caroline’s background & Wharton experience: [03:35–07:24]
• Why defense contracting; primer on "primes": [11:15–14:18]
• Business overview – Northstar Photonics: [18:19–19:42]
• Technology details & competitive positioning: [22:54–26:34]
• Terms and structure of the acquisition: [27:53–32:42]
• The cash crunch & emotional low-point: [44:05–48:21]
• Bank loan solution and lessons learned: [51:23–54:07]
• Customer relationships & business value: [56:03–59:30]
• Remote operations & team structure: [62:13–64:34]
• Caroline on diversity and pressure to succeed: [65:14–69:02]

Conclusion

Caroline’s story provides a rare and candid look into the realities of acquiring and operating a technical carve-out in the defense sector. The episode is rich in tactical insights on risk assessment, deal structuring, the value of assets, and the power of partnerships—and equally honest about the emotional challenges of entrepreneurship. Caroline’s resilience, humility, and openness about her journey make this a must-listen for anyone considering ETA—especially those eyeing carve-outs, asset-heavy businesses, or defense contracting.