In a sign that national security technology is a safe bet even in troubled economic times, defense and security-focused VC firm Razor’s Edge Ventures announced the closing of its third startup investment fund at just under $340 million. The firm said it exceeded its initial goal of $250 million and will target companies developing autonomous systems, space technologies, cybersecurity, AI and machine learning, digital signal processing and other aerospace and defense technologies.
Founded in 2010, Razor’s Edge funds multistage startups with commercial and government customers, but specializes in ventures “[help] National Security Council [members] Solve critical technical problems and advance critical missions,” in its own words. The outfit’s areas of interest will be informed by “strategic national security priorities,” with the express goal of helping the US maintain “technological superiority,” managing partner Mark Spoto told Technology Flow.
“Despite challenging economic conditions in the broader financial markets at this time, and significant increases in defense spending in the US and abroad; we face a complex and growing threat environment,” Spoto said via email. The path has been hailed as offering an investment opportunity that is uncorrelated with, and in many ways countercyclical to, the broader financial, stock or commercial technology markets. Hedge those asset classes. We started our fundraising for the new fund last fall and ended up surpassing our fundraising goal in June.
Traditional venture firms are often reluctant to invest in defense-oriented startups, given both the ethical implications and the long road to profitability. In the US, it takes at least 18 months of planning for a government contractor to win its first contract – and most contracts are awarded to incumbents. Any startup needs to bridge the gap between R&D phase and contract award.
Razor’s Edge says it has an advantage in its connections with the national security community and its investment policy. The firm operates with a two-pronged strategy, supporting early-stage startups – eg, Series A and B – as well as more established companies.
For example, Razor’s Edge recently invested in Corsha, a Washington, DC-based cybersecurity startup looking to bring multifactor authentication security to machine-to-machine API traffic. Another portfolio company of the firm is X-Bow Systems, which is developing a solid rocket motor.
When it comes to early-stage investments, Razor’s Edge said it narrows in on companies it believes can grow into significant businesses in the defense and intelligence markets and later expand into commercial verticals. For more established and later-stage opportunities that are companies already working with the US government, Razor’s Edge advises on strategic business investments and “tuck-in” acquisitions.
“We believe we are one of the first venture capital funds to have a national security focus as its sole investment thesis. The idea for Razor’s Edge stems from the successes of Blackbird Technologies and RavenWing, two national security technology firms founded and run by the firm’s managing partners,” Spoto said. “We have a strong bias toward management teams that seek quick returns, operate lean and leverage government contracts and revenues to reduce long-term capital requirements and build products that markets want and will pay for… [and we offer] A massive network of talent in areas such as management, operations, engineering and sales drawn from our portfolio companies.”
Razor’s Edge has some wins under its belt — two initial public offerings and two “material” M&A exits — and $600 million in assets under management. However, a perfect track record is elusive regardless of due diligence. And when asked about hype cycles in the defense space, Spoto admitted that it’s a difficult trap for VCs to avoid falling into.
“There is overhype from a valuation and funding perspective in cybersecurity and also in some other areas like drone and border security technologies,” he said.[And] We are trying to take a smarter and longer view in other areas, such as quantum computing, alternative energy and energy technologies, and the impact of climate change on government and defense operations.
However, Razor’s Edge will have to compete with new and established rivals such as Booz Allen Hamilton’s recently launched $100 million corporate venture arm, Booz Allen Ventures, and Shield Capital — a firm with Defense Department connections. Other contenders include Lockheed Martin’s Lockheed Martin Ventures and HorizonX, which spun off from Boeing in August 2021.