Srdjan Kovacevic, CEO & Co-Founder of Orqa: Building leading drone hardware in Europe

0:00Srdjan Kovacevic:Welcome to the Scaling Europe show. I'm Seb Johnson. Today on the show, we've got Srdjan. Srdjan is the founder of Orca FPV, a very cool company building out of Croatia. Thank you for joining me today. No, thank you for inviting me, Seb. It's a pleasure. It is my absolute pleasure. I absolutely love profiling companies like yours. But can you give a quick introduction? What have you built? What do people need to know about Orca? So Orca is a European aerial robotics company. We started almost 10 years ago now. You know, obviously we didn't start this business, this particular business. We started as a hardware engineering service company, providing engineering services to pretty much startups like we are today, helping other people build their dreams.

0:44and we've basically, you know, somewhere along the way, we started flying drones as a hobby. And basically we have fell in love with the hobby and we've saw an opportunity to do business in that space. And the opportunity was that we saw that there's a place for a European or non-Chinese or Western company in a space dominated by relatively generic Chinese brands. And we saw an opportunity to do a product that's going to be a category leading product in that space. So our first product were FPV goggles. We wanted to build world's best FPV goggles because we were using all these various goggles, most expensive bit of kit, but not that great.

1:45So this is how we kind of started the transition from a service business into a product business and lived to tell the story, right? I've seen a lot of companies crash and burn, a lot of service companies crash and burn trying to make the leap, make the transition. We're here, we're still around, And almost 10 years in, we are now not just a goggle company, but a fully-fledged drone company, aerial robotics company with an entire technology stack required to build an aerial robot. And all of that has been designed and made in Europe, both hardware and software.

2:35Srdjan Kovacevic:And why has that been so important to you from day one? You know what? Back when we were starting in 2016, there's no other word than stubbornness and trying to prove the point, right? Because our big pitch when we were a service company was that you don't need to go to China to do hardware. We had nothing against going to China, right? Because this is how you did hardware in 2016. But there was a claim. We were making a claim that if you're a small startup and if you're trying to do hardware, you're starting small, actually up to a certain size, even in 2016, it actually made more sense to try to do hardware locally if you could do it in an affordable and sustainable way.

3:26And we believe that we were providing companies that alternative path. and we actually thought that there was a economic sense to do it, to start in Europe and then when you scale, when you reach a certain scale you do what Apple does, you do what all these other companies were doing and actually scale in China where there is an entire ecosystem but of course that was 2016 and that was not an easy sell and I remember I was in London in one of the startup hubs specialized in hardware, I was pitching our services to a room full of hardware startups. And then nobody bought the service because, you know, everybody was going to China to do hardware.

4:11And there was I, you know, a guy from Croatia trying to persuade them that they should do hardware in Croatia of all places, right? So, you know, it was weird back then. And, you know, we wanted to prove a point that, yes, you can do it. And so when the time came to build our own hardware, we wanted to put our money where our mouth was and then show them. So, you know, I'm not going to claim some wisdom or anything, but, you know, we were just stubborn and, you know, trying to prove, yes, you know, it's possible. And then, you know, the geopolitics really kind of started going in a direction where that actually made more than economic sense.

4:55Srdjan Kovacevic:And exactly right. So now the world has changed. Now we are very much about sovereignty and secure supply chains. We've also had the war in Ukraine, which has changed things a lot. Can you talk about maybe how the stage of the journey that you're at today? So how many sort of aerial robots are you building? You know, what's your scale of production right now? Mm-hmm. So I should, you know, as an engineer, again, I should try to be pedantic and say that, you know, technology as it is today, largely what we're building are remotely operated unmanned aerial vehicles with certain automation capabilities.

5:35So I would not, as an engineer, I would not call it, you know, call them aerial robots just yet. But the direction of travel of technology and the solutions that building blocks that we're providing actually enable us and other people to use those building blocks to build systems that will have more and more layers of automation and autonomy. and we'll be able to call them aerial robots in a very short time period. I'm thinking months rather than years. But today still, we're calling ourselves aerial robotics company because this is what we do. This is what we do. But the state of the art of the systems themselves, largely they're still relying on human operations.

6:23But it's inevitable. We're going to be seeing fully autonomous aerial robots very, very soon. Now, our journey there was, as I said, we've started in a consumer space because the first product that we did was a hobby electronics product that was starting in a hobby electronics space. And then with the war in Ukraine, the interest for that particular technology was coming from a completely different place, from a defense vertical. So this is what shaped our journey. And the volumes in the hobby electronics space that we were operating were tiny. We were talking about maybe single-digit thousand runs per product, and then you do a run, you sell it, and then you see maybe you iterate the product, maybe you do another run.

7:20So it was kind of like that. And everybody, even the largest company in the space, Chinese companies that are serving Ukrainian marketing, that are serving Russian market for defense. We know all these guys because they were the same companies we were competing with back when we were competing in the hobby space. And we've seen them go from these small runs of a thousand, couple of thousand vehicles to doing hundreds of thousands. For us, the demand actually scaled when the defense started kind of looking into this space. But the difference for us was that maybe sometimes in 23, we decided that when it comes to directing our product roadmap, rather than focusing on the immediate needs of Ukraine, we would focus on the future needs of NATO.

8:24not because we didn't want to do business in Ukraine. We did want to do business in Ukraine. We want to help Ukraine as well, but we never did any significant amount of business in Ukraine. And that's because the Ukrainian companies were doing an excellent job of serving the needs of their warfighters. So rather than trying to compete in that space and compete on price and shape our product roadmap by immediate and ever-changing needs of Ukrainian battlefield, we noticed in, I think it was 23, that we noticed a divergence of requirements of Ukrainian users versus Western users. They were simply caring about different things, simply because of the nature of the situation that they were in.

9:16You had wartime needs, very, very immediate, very, very, you know, needing to cut corners, optimizing for speed, optimizing for volume, optimizing for availability. On the other hand, you had, you know, European and North American end users that were really, you know, operating and, you know, embarking on this defense transformation in peacetime, which, you know, had a completely different set of and sometimes very divergent requirements. So rather than chasing the weekly pace of Ukrainian evolution of application, we wanted to kind of skate to where the proverbial puck is going to be with the Western end users.

10:01And then we focused on creating a more complex, safer to operate, simpler to operate systems that will serve the future needs, current and future needs of the Western end users. So today, you know, this is where we are. We are actually, you know, successfully supporting a number of Western customers in their transformation journey. And, you know, to answer your question about the volume, I believe that, you know, last year, I think we did, we have a pretty broad product portfolio. And, you know, because we build everything you need to build a drone. from all the components, plus the drones themselves, plus the ground stations and everything.

10:48So across the entire portfolio, I think last year, the number is 200, like we ended last year with 250 ,000 various products that were built and shipped to customers worldwide across the free world. This year, I think we hit that number by mid-year. Amazing. So we're on a trajectory to double, to do half a million various products. Now, if I'm talking specifically about drones, our production line is capable of producing a drone every 80 seconds, 80 seconds, when we set up a full rate serial manufacturing of drones. Now, given the demand of the market that we're serving currently has not matured yet to a point where they will be buying tens of thousands of drones.

11:49When you run a fast-rate production line, and you're maybe delivering a couple of hundred vehicles, you do that in an afternoon, essentially. So our current manufacturing capacity for drones is around 280 ,000 per year. So should there be a demand, we will be able to produce 280 ,000 drones per year. And mind you, that also includes all of the components that need to go in those drones. So it's not just assembling the drones. It's also building everything you need coming in. And just to give you an idea of how our supply chain looks like, we're buying chips, we're buying tiny electronic components, and then we're building modules that are actually building blocks not just for Orca drones, but for Orca-enabled drones built by Verisoyen.

12:55So, you know, we're supporting dozens of Western drone companies in serving their customers with various types of aerial unmanned vehicles.

13:09Srdjan Kovacevic:And how do you build the supply chain to enable growth? You know, you talk about how you're sort of doubling output this year. what do you need to build in advance of that demand coming in to make sure that you have resilient supply chains that you can service that demand coming in and what are the key bottlenecks is it materials is it those parts themselves is it uh capital is it talent materials are are typically the main bottleneck and uh you know i we've I'm going to go back to 21 when we were going from we did a Kickstarter in 2019 I believe and it took a while for us to deliver the first Kickstarter we were late of course but when we delivered the first Kickstarter batch we were transitioning into first let's say regular serial production of our goggles.

14:13Now, our first batch of goggles was actually landing, after post-Kickstarter, was landing at the peak of COVID-induced chip shortage. That was the worst chip shortage in living memory of consumer electronics, companies. And this was the environment in which we were kind of moving into like from very predictable, you know, existing demand, you serve it kind of Kickstarter context to kind of building for an unknown market, right? So you don't know what your demand is. You're kind of speculatively building for demand, but you also don't know what your supply chain is going to, you know, look like because there's absolutely no visibility.

15:11There's maximum. So, you know, we were starting, you know, learning the ropes of the whole, you know, balancing act between supply chain and demand side in probably the worst supply chain crisis. And, you know, I like to say that, you know, this was kind of, you know, learning to play the game on extremely hard. So when you go into a normal market, everything is easy. So I'm going to say that today we're experiencing a similar type of supply chain crisis on the semiconductor side. It's not induced by a pandemic. It's induced by a different type of affliction, which is the AI boom, which kind of sucked up a lot of these components and constrained supply chains in a different way.

16:08And we're seeing lead times blow up. We're seeing prices being jacked up. We're seeing a lot of anomalies in the supply chain. And I would say that this is the main constraint that we're talking about last five years. We have two such events where you have extreme volatility on the supply chain side. And then on the flip side of it, if I'm looking at the demand, given that the defense transformation in our key markets, Western markets, is only in its early innings, there's no predictability of the demand. because given that most of the end users that we're serving right now are in a pre-programmatic phase where they're kind of still experimenting and buying now and then figuring it out and then maybe buying it, maybe not, maybe buying a different thing.

17:09So it's a lot of one-offs in terms of transactions. There's no multi-annual visibility to say, okay, we're going for this. This is going to be a three-year program, five-year program. This is what we want you to deliver. You know, go. We have never experienced that because we are offering a new technology that is sitting at the core of a new capability. The end user does not understand the technology fully yet. They don't know what the final shape of this capability is going to be. They're kind of figuring it out and we're helping them figure it out. So there's this unpredictability on the demand side.

17:46So again, we're in a situation where, yes, the volumes are larger, but there's extreme volatility on the demand side. Not much forward visibility on the supply side and not much forward visibility on the demand side. So again, the way to address that is really to take risk, stock up in materials, and then build for the demand that you expect to happen, but you cannot be sure of. And to your point, capital availability really, you know, helps there because if you can, if you have capital readily available, whether it's debt or equity capital, that allows you to kind of build inventory and build stockpile material to kind of be able to meet the demand when it rises.

19:01And we firmly, firmly believe that the demand will come, or rather that the demand will grow. The demand is here, but it's still at the levels that are not nearly close to what we're seeing in Ukraine. You know, just to give an example of the difference, In the month of June, Ukraine recorded 200 ,000 successful strike missions with drones.

19:30Srdjan Kovacevic:Wow. It recorded 35 ,000 successful drone interceptions. So we're talking about drones intercepting other drones. So these are successful interceptions, drone-on-drone interceptions. Now, that's a subset of detected drones that were not successfully intercepted, and that is a subset of the all total drones launched that were not even detected. Right? So 35 ,000, think about it, 35 ,000 successful interceptions. Now, if I'm putting together the entire drone procurement across all NATO countries in the past four years, it would be a challenge to add it up to 35 ,000. And that's just what Ukraine successfully intercepted in the month of June.

20:25That's crazy. And this is where we're at right now as a collective West. and you know if if we are and then warfare has profoundly changed it has been transformed and we are really talking about once in a generation transformation like we're really talking about the moment in the past the comparable moment is when you know age of Calvary you know and was kind of you know ended with the invention of machine guns and tanks So, you know, in that time, you still had, you know, in this transition time, you still had cavalry charges, you know, going against machine guns. And, you know, that was a very suicidal, you know, endeavor back then.

21:19I claim that we are living in the same thing today because in the same age today, because an armored assault in the age of drone is equally suicidal. And we're seeing this in Ukraine. Every armored maneuver is being stopped in its tracks by drones, even before it reaches a contact line. So, you know, this is the type of transformation. So there is such thing as an obsolete army. And most of the Western armies have not yet transformed. And should they meet a transformed force in the field of battle, they would be severely outmatched unless they're transformed. So this transformation is something that must happen if we are to be able to defend our democracies.

22:12And thankfully, there are plenty of companies in the West, plenty of amazing companies in the West, some of which we are helping in their mission to actually enable this transformation that is happening and must run its course. Ukraine has transformed. Russia has transformed. The rest of the world needs to transform. Europe needs to transform. North America needs to transform. And I think, you know, we are kind of in the early innings of the transformation. It's inevitable. But, you know, if you ask me, it's happening slower than it could happen. And I think we should all be working on accelerating that because I think, you know, in this time in history, and I think it's paramount that maybe more than ever that we can ensure the security of our democracies.

23:17Srdjan Kovacevic:100%. I couldn't agree more and it's the work that you're doing is so important and I think we're so early in this. I think there's so many more great companies to be built. There's so much more work done. You're right, like Ukraine is there. The rest of the Europe is still so slow to it. But look, thank you so much for joining me. This has been amazing. Let me know in the future if you've got news or updates. I'd love to play any role that I can and helping to tell your story as you go forward. For sure. For sure. Thank you. Thank you again for the opportunity and looking forward to the next conversation.