By Heather Somerville and Brett Forrest
The U.S. Army is bypassing some of venture capital's best-funded drone makers to buy technology from a little-known Utah manufacturer.
Salt Lake City-based Teal Drones has been selected as the winner of a military program to provide thousands of small surveillance drones, according to a regulatory filing and an Army document viewed by The Wall Street Journal.
The program will arm U.S. soldiers with backpack-size drones similar to what the Ukrainians have deployed in vast numbers in the war with Russia. The Army has said it needs around 11,700 drones for its Short Range Reconnaissance program, its largest effort yet to acquire small surveillance aircraft. That size of purchase could give Teal roughly $260 million in revenue in the coming years.
In a Tuesday filing with the Securities and Exchange Commission, Teal said its portable drones would be provided to Army infantry platoons to expand their reconnaissance abilities.
It is a victory for an underdog in the crowded U.S. small drone market, which comprises billion-dollar California enterprises, low-profile founder-funded operations and penny-stock companies.
Teal, which was founded a decade ago by a teenage drone racer, didn't have the venture-capital clout and slick marketing of some of its bigger peers, and has almost no record as a defense supplier. It is owned by a Puerto Rico-based publicly traded holding company whose shares were trading below $1 this spring.
Now, it is poised to become the recipient of potentially the largest-ever U.S. military contract for small uncrewed aircraft.
The company's 3-pound, folding, backpack-size drone can fly autonomously and is equipped with antijamming technology developed after testing drones in Ukraine, said Teal executives. The Army declined to comment.
The Defense Department says it wants to ramp up the use of drones, but hasn't bought many of them, making Teal's deal with the Army an exception. The Pentagon accounts for less than 2% of all the commercial and government drone system sales each year in the U.S., according to the Defense Innovation Unit, a branch of the Defense Department that works with startups trying to sell to the Pentagon.
"The Department of Defense does not have a holistic strategy for small drone systems," said David Michelson, autonomy portfolio director at the Defense Innovation Unit.
The Army's idea to equip soldiers with hand-held reconnaissance drones was conceived back in 2009 after small, cheap drones were used as weapons by terrorist groups in the Middle East. It has taken 15 years for the Army to finalize the program.
American companies have also struggled to gain inroads selling to consumers and public safety groups as their drones are much more expensive and often technically inferior compared with Chinese-made competitors.
This hasn't deterred venture capitalists, who have poured billions of dollars into startups building drones they hope the Pentagon will buy. Silicon Valley's Skydio, which lost out to Teal on the Army program, has raised more than $700 million in venture capital, including a $170 million haul announced Friday.
Teal belongs to Red Cat Holdings, a holding corporation for a collection of drone manufacturers. It bought Teal in 2021 in a $14 million stock deal. Red Cat has never been profitable and recently warned shareholders that it may lack the funds to stay afloat.
Red Cat shares fell more than 3% to $4.74 Tuesday, giving the company a market capitalization of $367 million. The stock, which has mostly traded around $1 since Red Cat's public offering, has quintupled this year.
Teal's drone, called the Black Widow, can fly autonomously without GPS, using an internal map to navigate where it is going and locate its target, said Teal founder George Matus. It can fly about 40 minutes at a stretch without emitting a radio frequency, making it harder for the enemy to detect and jam, Matus said.
The company tested a previous model of its drones in Ukraine early in the war that couldn't fly more than a mile and a half before being downed by jammers, said Red Cat Chief Executive Jeff Thompson.
"If you can't do EW, your drone in the battlefield -- it's a paperweight, " said Thompson, referring to electronic warfare.
Teal went on to develop the Black Widow. It hasn't sold any drones to the Ukrainian government.
Teal sales should nudge Red Cat into cash-flow positive territory next year, said Thompson. The company has forecast $50 million in revenue for next year. It had $18 million in sales for its last fiscal year ended in April.
It is a remarkable evolution for Teal, a hobbyist and drone-racing startup Matus began as a high-school sophomore. The company was seeded with a couple hundred thousand dollars from a former San Francisco 49ers football player and a Peter Thiel-backed fellowship.
Like most American drone startups, Teal suffered as China's SZ DJI Technology devoured market share, making the business of selling drones to hobbyists and racers unsustainable. Matus winnowed his staff down to about 10 people and pivoted to defense.
In 2021, the Army passed over Teal in its first round of drone testing, eventually choosing Skydio, awarding it an order of around $29 million. After soldiers ran into technical challenges with Skydio's drones, Teal re-emerged as a contender for the Army's program in 2022, ultimately beating out Skydio.
In a statement, Skydio said it was surprised it had lost the competition and congratulated Teal. Skydio said the Army program was only a "small fraction" of its business.
Write to Heather Somerville at heather.somerville@wsj.com and Brett Forrest at brett.forrest@wsj.com
(END) Dow Jones Newswires
November 20, 2024 08:00 ET (13:00 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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