Industries like defense, space, and aviation represent a combined market of nearly $1 trillion and collectively account for over 3.5 million jobs. The space industry alone is estimated to exceed $1 trillion in annual revenues by 2040, up from $427.6 billion in 2022. However, each of these industries is dependent on high-precision manufacturing, a market expected to reach $71 billion by 2026. As critical as this segment of manufacturing is to aerospace and defense, the market is currently served by a fragmented market of thousands of machine shops, with no single player owning more than 1% market share. In addition, most of these manufacturing operations are operating on fairly manual processes developed in the 1960s.

While the manufacturing base is fragmented and antiquated, the demand for precision manufacturing has never been higher. Funding for space startups in 2022 was $21.9 billion, with the total value of space companies exceeding $4 trillion for the first time. There are roughly 5.6K space companies in the United States, almost four times more than the next country, the UK, where there are 1.6K of them. With companies like SpaceX spending billions on manufacturing, there is a need for a modernized supply chain. That’s where Hadrian comes in.

Hadrian is a manufacturing company that has built vertically integrated technology for high-precision manufacturing, with modules including quoting, programming, machining, and inspection. Hadrian’s goal is to build factories to accelerate the pace of American manufacturing by delivering parts in ”less time, on time”. Hadrian manufactures precision components for aerospace and defense technology companies using autonomous, software-powered precision component factories that, according to the company, can help its customers make their products 10x faster and 50% cheaper.

Hadrian was founded in 2020 by Chris Power, who serves as Hadrian’s CEO. Power was motivated to build Hadrian because he wanted to help enable the US to rebuild its industrial manufacturing base. He realized that the structural issues with the incumbent supply chain would be challenging, if not impossible, to fix through scale or vertical software alone. This informed his decision to build new manufactories from the ground up. As Power said:

This decision was informed by Power’s prior roles. Before Hadrian, Power launched a private equity firm called ADSC with an investment mandate of rolling up precision manufacturing facilities in the aerospace and defense supply chain. Even earlier, Power had worked at Ento, a workforce management software company focused on blue-collar industries.

It was in these roles that Chris realized that financial engineering alone could not solve the core problem of making precision parts faster and cheaper. While scale and software would improve production efficiency to a degree, they would not be able to address the fact that the majority of industry know-how and experience is set to leave the industry over the next decade as the majority of the workforce in the supply chain enters retirement.

Since its founding, Hadrian has added a number of employees from companies such as Tesla, Anduril, Raytheon, Palantir, Stripe, and Meta, as well as nearly a dozen former SpaceX employees as of October 2023 such as Chris Baker who led the production of SpaceX’s passenger-capable spacecraft, Dragon. In March 2023, Ben Braverman, the former CRO of Flexport, announced he was joining the company as Chief Business Officer. In June 2023, Braverman shared he had closed a partnership with Anduril. Sometime in late 2023, Braverman left the company without public explanation.

Factories

Source: Twitter

For Hadrian, the factory is the product. Hadrian is building vertically integrated factories for the advanced and precision manufacturing industries. The company has built a manufacturing facility where it leverages software to extract efficiencies throughout the production value chain. This allows its machinists to produce high-quality precision parts with low lead times and high tolerance levels.

Source: Boring Business Nerd

Hadrian’s first factory was a 20K square foot R&D facility that could also service customers and was located in Hawthorne, CA. According to Hadrian, it could produce space and defense parts 10x faster and more efficiently than alternatives. Its second is 5x the size of its first and is located in Torrance, CA.

Hadrian's vision is to modernize America's industrial supply base by creating a manufacturing platform that removes any prototyping or production bottlenecks from slowing or deterring innovation across the aerospace and defense industries.

Source: CNBC

Katherine Boyle, a general partner at Andreessen Horowitz and investor in Hadrian, described the company’s founding story this way:

Hadrian is building manufacturing facilities integrated with software to modernize the ways their customers manufacture components that go into products like rockets, satellites, jets, and hypersonics. The company has built software workflows that complement the workflows of machinists operating precision manufacturing equipment, which allows the company to extract efficiencies both externally and internally.

Hadrian wants to cut lead times from 20 weeks to 3 weeks by using software to streamline communications with customers and by automating manual tasks in the manufacturing process without compromising product quality. In addition, the company’s software has simplified the process of operating manufacturing machinery to the point where former baristas and copywriters can operate them with 30 days of onboarding, whereas they would otherwise need years of training.

Flow

Hadrian’s software tool, Flow, serves multiple functions. Internally, Flow serves as Hadrian's enterprise resource planning (ERP) software that streamlines the operational aspects of Hadrian’s production process from order entry through to fulfillment. This saves the company time by automating manual tasks, accelerating production times, and optimizing resource allocation. In addition, Flow serves as the operating system (OS) on the factory floor that synthesizes complex workflows into step-by-step instructions for on-floor machinists.

Externally, Flow also serves as an end-to-end management tool that streamlines processes and communication between customers and Hadrian from bid to ship. This provides real-time visibility into the production process so that customers can understand what stage of production a product is in. Flow therefore drives greater human resource efficiency, limits downtime, and reduces errors during the process, all of which produce shorter lead times for Hadrian and its customers. This is in contrast to the incumbent supplier base which still relies on workflow processes from the 1960s with many orders being placed over the phone, fax, or email.

Hadrian takes customer specifications and turns them into code that tells its machines how to cut a particular part. The way this is typically done in production requires skilled machine operators to program a machine for each customer order, often multiple times throughout the production process. With Hadrian, programming the machine takes a couple of hours, and the machine is then run autonomously nearly around the clock (including overnight).

According to the company, Hadrian's software cuts manual work by 80% for customers. The company streamlines the entire post-production process: everything from engraving serial numbers, purchase order paperwork, print revisions, keeping records of depth and load balancing details, and more. The way this is currently done in small machine shops is through PDFs, which causes major delays, increases cycle times, and makes it more difficult to prototype new parts.

In order to manufacture high-precision components for its customers, Hadrian uses a combination of software workflows (through Flow), advanced computer numerical control (CNC) machines, and machinists. As of October 2023, the company is focused on aluminum-based products and has yet to move to harder alloys such as steel, titanium, and Inconel which come with even greater production complexities and stricter tolerance levels.

Customer

Hadrian's initial customer focus has primarily been aerospace and defense companies like SpaceX, Anduril, Amazon’s Project Kuiper, and others. As of March 2022, Hadrian was serving three of the largest space companies and was expected to add a number of companies in commercial aerospace and new defense as well.

Customers use the Hadrian platform because, according to the company, it is more capital-efficient than building products in-house and more reliable than using third-party machine shops. The company's approach is rooted in automation built on top of existing machinery, cutting 80% of the manual work required while being 40% more efficient than existing suppliers for equivalent parts. For context, in a typical machine shop lead times to turnaround a part for a customer can take 4-16 weeks, whereas Hadrian claims to deliver in 1-3 weeks.

Market Size

The US officially entered the space race in 1958 with the formation of NASA. In July 1969, Neil Armstrong and Buzz Aldrin became the first humans to set foot on the moon, which established the US as an early victor in the pursuit of space supremacy. This movement saw a rapidly increasing NASA budget which grew to a peak of ~$50 billion in 1966 (adjusted for inflation), representing 4.4% of the Federal budget.

Source: CSIS

The US space industry supply chain traces its origins to the emergence of the aviation industry during World War II, where “prime contractors” like Boeing, Lockheed, and others were established to build aircraft for military use. The US space supply chain emerged immediately after World War II built on this same network of primes where NASA had established intentional processes for contracting from the private sector.

There were two significant waves of consolidation among prime contractors initially in the 1940s and '50s as military contracts declined following World War II, and then again in the 1960s as companies looked to achieve operating efficiencies through scale.

Source: The Generalist

Beginning around 1980, large aerospace companies started to outsource the manufacturing of less critical products which led to a growing network of companies providing a broader range of products including subsystems, assemblies, parts, hardware, and materials. This demand-side pull from NASA and the US government, coupled with the supply-side outsourcing of manufacturing by the primes, is what led to the creation of the US space industrial base as it stands in 2023.

The Department of Commerce conducted a significant review of the space industry in 2012. That report found that the industrial base of US suppliers servicing the global space industry generated more than $60 billion in 2012, of which $56 billion (93%) was generated by US customers. The US Government collectively is the dominant customer in the industry accounting for ~75% of total spend in 2012, split between defense ($25 billion, ~42% of total spend) and non-defense ($20 billion, ~33% of total spend) with commercial space rounding out the remainder.

Source: U.S. Department of Commerce, Bureau of Industry and Security

US aerospace and defense suppliers and manufacturers are often categorized by tiers describing the relative complexity of products, rather than describing manufacturers. While suppliers are often identified by a particular tier, it is common for suppliers to operate across multiple tiers of the supply chain.

Source: NASA

NASA's projects were outsourced to the primes, who in turn outsourced manufacturing responsibilities to this fragmented network of suppliers around the country. This resulted in thousands of suppliers working on any particular project, introducing uncertainties around costs, schedules, and quality throughout the manufacturing process. The number of suppliers involved is also difficult to manage, where projects can only move as fast as their slowest supplier resulting in frequent production delays and project overruns.

Source: U.S. Department of Commerce; a visual representation of the supplier base that contributed to the construction of the MSL Curiosity Rover

The complexity of this model was already causing issues by the 1980s and has continued to cause problems. Some of the key obstacles include:

1. Low competition, leading to inflated costs

2. Fragmentation adding to the already complex processes and increased lead times

3. Outdated workflows built in the 1960's

4. An aging workforce in individual machine shops

These issues were exacerbated with the Space Shuttle program, with the program’s costs totaling ~$209 billion in 2011, adjusting for inflation. In addition, the program missed half of its planned annual flights. NASA's budget declined as a percent of the federal budget from the 1990s onwards, and ultimately led to a policy in 2004 that concluded: "NASA's role must be limited to only those areas where there is irrefutable demonstration that only government can perform the proposed activity." This ultimately led to the termination of the Shuttle program in 2011.

Source: Conor McLaughlin

With this continued limitation on direct government operations, the already fragmented supplier base in defense and aerospace was further privatized. As a result, the global space market has become one of the largest industries globally, with over $427.6 billionin annual revenue as of 2022. The satellite industry represents the significant majority of these revenues, at 74% as of 2019.

Source: Hughes

Between 1970 and 2000, the cost to launch a kilogram into space remained fairly steady, with an average cost being $18.5K per kilogram. With the Falcon 9 and Falcon Heavy, SpaceX has been able to lower the cost of sending payloads into orbit by ~90%. With the anticipated launch of Starship, launch costs are expected to decline by a further ~90% to $200 per kg.

Source: Visual Capitalist

These declining launch costs are unlocking a wave of innovation from the private sector. Lower costs of shipping products into orbit (and returning them back to Earth) have changed the financial return profile of a range of new space initiatives beyond rockets and satellites including in-space manufacturing, mining, and defense. Funding for space startups in 2022 was $21.9 billion, a massive increase from $300 million in 2012.

This growth is only expected to accelerate, as industry forecasts predict the space industry to exceed $1 trillion in annual revenues by 2040, up from $427.6 billion as of 2022. That continued investment has opened the floodgates in demand for space-capable products. Companies like Hadrian are positioned to take advantage of that trend by providing a more seamlessly integrated manufacturing process.

The competitive landscape for Hadrian is fragmented and complex. One individual Boeing 747 consists of 6 million individual parts provided by 20K different suppliers and partners. Each part represents a complex web of regulatory and performance requirements, geographic specifications, and raw material requirements.

Within precision manufacturing, there are also subsets of relevant products in aluminum, steel, titanium, and Inconel that require different machining capabilities and further segment the addressable market for each player. As a result, it’s difficult to identify specific relevant competitors to Hadrian. Instead, below is a landscape of relevant vendors that can address various aspects of the precision manufacturing market.

Traditional Machine Shops

In the US, there are an estimated 21K machine shops that generate ~$52 billion in annual revenue. Machine shops can broadly address a wide variety of product types, including airplane fuel pumps, oil & gas components, energy storage, hydraulics, launch platforms, and much more. These machine shops can have hundreds of employees and generate hundreds of millions in revenue. According to the North American Industry Classification System (NAICS), there are ~1K operations that constitute a precision-turned product manufacturing operation.

While estimates vary in terms of how many machine shops offer “precision manufacturing,” Hadrian estimates the number is ~3K precision machine shops. Here are just a few of the largest precision machine shops that Hadrian would ultimately compete with for aerospace and defense contracts:

Kaman Aerospace: Founded in 1945, and based in Bloomfield, CT, Kaman is a manufacturing operation with subsidiaries like EXTEX Engineered Products and Kaman Aerospace. The company has a market cap of ~$513 million as of October 2023 and generated $688 million in 2022 revenue with major customers including the US military, Lockheed Martin, Raytheon, and Boeing, who accounted for 10% of the company’s revenue.

Melling Tool Company: Founded in 1956, and based in Jackson, MI, Melling is a manufacturing operation with subsidiaries like Melling Products North and MellingMedical. The company generated $189 million in 2022 revenue and, while most of Melling’s customers are in the automotive industry, the business does have contracts with the Department of Defense, and can address assemblies for Tier 1 and Tier 2 suppliers.

Sorenson Engineering: Founded in 1956, and based in Yucaipa, CA, Sorenson Engineering is a manufacturing operation with ~170 employees and $45 million in 2022 revenue. The company provides a variety of machining services and operates in industries such as aerospace, military defense, space, and satellites.

Manufacturing Conglomerates

Larger multi-faceted manufacturing operations can operate across two different segments of the market: (1) original equipment manufacturing (OEM), and (2) aftermarket parts. OEM parts are originally produced for an end product (e.g. the fasteners that go into a plane as it’s being built) whereas aftermarket parts are produced for an end product after the fact (e.g. a plane that needs a replacement valve.)

TransDigm: Based in Cleveland, OH, TransDigm was created as the result of a leveraged buyout in 1993 that combined four companies; Adel Fasteners, Aero Products Component Services, Controlex Corporation, and Wiggins Connectors. Initially, the company focused on manufacturing aircraft components like batteries and fuel pumps. As of 2017, TransDigm had acquired 88 additional companies to expand its manufacturing coverage.

TransDigm went public in 2006, and as of October 2023 has a market cap of $45 billion with $5.4 billion in 2022 revenue. About 25% of TransDigm’s revenue comes from defense contracts, with the rest coming from commercial aerospace customers. In addition, as of 2016, about 50% of the company’s revenue came from OEM parts, while the rest came from aftermarket parts. In 2019, the company was criticized for generating a 9,400% profit margin on products like metal pins by price gouging the Defense Department.

Teledyne Technologies: Founded in 1960, and based in Thousand Oaks, CA, Teledyne is an industrial conglomerate that operates ~100 companies, with at least 32 that were acquired. Teledyne’s operations spread across industries like aerospace and defense, factory automation, electronics engineering, and more. As of October 2023, the company had a market cap of $17.5 billion and generated $5.4 billion in 2022 revenue.

HEICO: Founded in 1975, and based in Hollywood, FL, HEICO is a manufacturing conglomerate with two primary divisions: (1) the Flight Support group, and (2) the Electronic Technologies group. In aviation, according to the company, HEICO is “the world’s largest independent provider of FAA-approved aircraft replacement parts.” As of October 2023, HEICO had a market cap of $19.3 billion and generated $2.2 billion in 2022 revenue.

AMETEK: Founded in 1930, and based in Berwyn, PA, AMETEK is a manufacturing conglomerate with two primary segments: (1) Electronic Instruments (EIG) and (2) Electromechanical (EMG). Across these two segments, the company represents over 100 brands of products. As of October 2023, AMETEK had a market cap of $32 billion and generated $6 billion in 2022 revenue.

Alternative Manufacturing Operations

A common alternative approach to satisfying demand for precision manufacturing is to build a network of suppliers. The fragmented landscape of 21K machine shops creates what many companies see as an opportunity to aggregate that manufacturing capacity and offer it as a collective production capability to end customers. One difficulty with this type of network is a lack of control over on-time delivery and product quality, given that the manufacturing operations are standalone companies with limited oversight by the network provider.

Xometry: Founded in 2013, and based in North Bethesda, MD, Xometry is an on-demand marketplace for industrial parts. The company claims to have a network of 10K manufacturers that can address a variety of precision manufacturing needs across aerospace, defense, automotive, medical equipment, and more. In December 2021, Xometry announced the acquisition of Thomas, a product sourcing platform that expanded Xometry’s reach to a total of 500K suppliers. At the end of Q3 2021, Xometry claimed to have 26.1K active buyers (including 30% of the Fortune 500), while Thomas’ platform has 1.3 million registered users (including 93% of Fortune 1000 companies). As of October 2023, Xometry had a market cap of $707 million and generated $381 million in 2022 revenue.

Fictiv: Founded in 2013, and based in San Francisco, CA, Fictiv is an operating software for a network of manufacturing operations. That network consists of 250+ vetted partners that together make up 150K monthly machining hours. Customers that Fictiv has worked with include Honeywell, Facebook EdMod, and Gecko Robotics. The company has raised a total of $192 million in funding from investors like Accel and Bill Gates. Unverified sources indicate the company generated $63 million in 2022 revenue.

Proto Labs: Founded in 1999, and based in Maple Plain, MN, Proto Labs is a manufacturing operation focused on prototyping and low-volume production runs which are meant to be either test batches or non-recurring rush jobs. The company manages a network of 200+ suppliers that produce 4.6 million manufactured parts per month. As of October 2023, Proto Labs had a market cap of $613 million and generated $488 million in 2022 revenue.

Aerospace & Defense Companies

Instead of being competitors, large aerospace companies and defense primes are the primary customers for Hadrian and competitive machining operations. However, in some cases, these large companies will attempt to manage some of their manufacturing operations in-house. For example, Northrop Grumman’s Advanced Manufacturing Technology & Innovation group is attempting to build additional research and development capabilities similar to Hadrian.

Hadrian's first factory was 20K square feet and functioned as an R&D facility, while also serving initial customers. According to Hadrian, it could produce space and defense parts 10x faster and more efficiently than alternatives. Its second factory was 5x the size of its first and both are located in Torrance, CA.

According to the company, Hadrian’s process has led to 10x faster lead times from bid to ship and 40% efficiency gains, with a clear path to 70% efficiency gains over the next 1-2 years of R&D. While the biggest gains will come from cutting production times, Hadrian is removing time and cost from each step of the process.

In its first 24 months since its founding, Hadrian was able to serve three of the largest space customers. In June 2023, Hadrian announced a strategic partnership with defense startup Anduril. The goal of the partnership is to reduce manufacturing lead time on national security solutions by up to 50%. This partnership shows Hadrian’s advance within new defense in addition to commercial aerospace companies.

Hadrian has raised a total of $99.5 million in funding as of October 2023. In March 2021, Hadrian raised $90 million in two rounds: a Series A led by Lux Capital and a Series A-Prime by Andreessen Horowitz. Other investors include Founders Fund, Caffeinated Capital, JAM Fund, Construct Capital, and 137 Ventures. While Hadrian’s valuation hasn’t been disclosed, there are a number of public companies operating in the precision manufacturing space that can shed light on how a company like Hadrian may trade in the future.

Source: Koyfin

Companies like TransDigm, Kaman, and Xometry can trade at a wide range of multiples, anywhere between 1-10x LTM revenue. Growth is one aspect of this discrepancy. Companies with high revenue multiples, like TransDigm or HEICO, are growing ~20-23% year-over-year. Alternatively, companies with low revenue multiples, like Proto Labs and Kaman, are growing revenue at a high of 12% or a low of a 2% decline in revenue year-over-year. Some companies, like Xometry, are growing revenue relatively quickly at 37% year-over-year, which means its valuation is more a function of profitability.

Source: Koyfin

Looking at these companies on a profit basis provides an additional perspective. The range of multiples extends from 8.6x LTM EBITDA to 28.5x LTM EBITDA. One big driver in how these types of companies are valued is based on the level of profitability they can achieve. Companies with high multiples of EBITDA, like HEICO, TransDigm, and AMETEK generate EBITDA margins of 26-46%. Meanwhile, companies with low multiples of EBITDA like Kaman and Proto Labs generate 4-12% EBITDA margins. Returning to the example of Xometry, while its revenue growth is 37%, its EBITDA margin is -17%.

In conclusion, as Hadrian continues to grow, the company will likely be valued on a combination of revenue growth and overall profitability. The average machine shop reports profit margins of ~8-12%, which would generate an EBITDA margin on the lower end of the public set of comparable companies above. Hadrian will not only have to deliver a higher quality experience for customers but also do it at a much higher margin than a typical machine shop.

Product Expansion

Hadrian is currently focused on aluminum-based products with plans to then move to harder alloys, such as steel and titanium, that comes with even greater production complexities and stricter tolerance levels. The company’s ability to execute on that expansion will open it up to a broader addressable universe of products to sell.

Industry Expansion

While aerospace and defense appear to be Hadrian’s focus markets as of October 2023, there is a significant amount of overlap within other industries for other precision manufacturing machine shops. For example, Melling is a manufacturing operation with $189 million in 2022 revenue. While the company does have defense contracts, a large portion of its revenue is in the automotive industry with customers like GM and partnerships with Advance Auto Parts. As Hadrian matures its manufacturing operations, there is opportunity to address these adjacent markets that also have meaningful demand for precision manufacturing.

Self-Funded Expansion

Hadrian claims it can provide a higher quality service and, through enhanced automation and software, produce a higher margin on its products. As Factory 2 comes up to full capacity, there is a possibility that each machine will product sufficient cash flow to effectively fund the next machine. As one factory becomes profitable the excess cash flow from that factory could also fund the expansion into additional factories. In order for this outcome, Hadrian would have to successfully and consistently operate at a fairly high profit margin, similar to highly profitable competitors like TransDigm operating at 30-40% margins.

Vertically Integrated Primes

SpaceX was so frustrated by the poor experience offered by the space supply chain that it felt compelled to take up to 80% of its production in-house. Similarly, Northrop Grumman’s Advanced Manufacturing Technology & Innovation group is attempting to build additional research and development capabilities in order to reduce its dependence on a lower-quality supply chain. Over time, other large primes could see value in vertically integrating certain aspects of their supply chains.

While this could limit Hadrian’s addressable market, it’s unlikely to ever take up a majority of the precision manufacturing market given the high cost of capital for each of these initiatives. There’s a reason these large companies have leveraged a fragmented supply chain for 70+ years, and building a complex and multi-faceted internal manufacturing operation is not something most companies do overnight.

High Cost of Capital

A typical machine shop will produce profit margins of ~8-12%. In addition to operating a complex and expensive machining operation, Hadrian is also spending significant amounts to build several technology products to augment that operation. Even though Hadrian only has one operational factory, the company employs ~100 people as of October 2023. If the cost of that technology fails to enable Hadrian to achieve a higher profit margin on its machining operation, then scaling that operation could grow increasingly complex.

High Switching Costs

In an October 2023 interview with Contrary Research, one Lockheed Martin executive shared that the supply chain of an F-35 was established 15 years ago and, for the most part, hasn’t changed since. While it’s true some suppliers are aging out of the market and being replaced, there are still significant costs each time a prime has to switch to a new supplier for any particular component. In addition, there are very few new products launched each year. Even though Raytheon, for example, generated $67 billion in 2022 revenue, the company only secured an additional 12 defense contracts. And several of those were for orders of products Raytheon had already established the supply chain for.

Precision manufacturing is one of the most important ingredients to long-term economic growth. Lowering costs and improving efficiencies in manufacturing can open up a wide range of new applications. Better tools and processes mean parts that couldn’t be built at all or couldn’t be built as cheaply or quickly before suddenly becoming abundantly available. Nowhere is this more obvious than in space manufacturing, where launch costs continue to decline but parts purchasing remains complex.

Given the space market’s highly fragmented supply chain with thousands of machine shops, Hadrian has a unique opportunity to accelerate the pace of manufacturing by delivering parts in less time, on time, every time. Hadrian’s early traction with some customers in the first few years since launch demonstrates its potential to excel as a supplier within the aerospace and defense technology industries. Going forward, Hadrian’s success will be a question of how much it can revolutionize the traditional manufacturing process.