In a sign that national security tech is a safe bet even in difficult economic times, defense and security-focused venture capital firms Razor Edge Ventures Today announced the closing of its third venture capital fund for just under $340 million. The company noted that it exceeded its initial goal of $250 million and will target companies developing autonomous systems, space technology, cybersecurity, artificial intelligence and machine learning, digital signal processing, and other aerospace and defense technologies.
Founded in 2010, Razor’s Edge funds multi-stage startups with commercial and government clients, but focuses on “[help] national security community [members] Solve difficult technical problems and advance critical missions,” in its own words. Managing partner Mark Spoto told TechCrunch that the agency’s areas of interest are determined by “strategic national security priorities,” with the ostensible goal of helping the U.S. Maintain a “technical edge”.
“While economic conditions in broad financial markets are challenging at this time, defense spending in the U.S. and abroad has grown significantly; we face an increasingly complex and growing threat environment,” Spoto said by email. “The limited partners (LPs) of our newest fund appreciate that Razor’s Edge offers an investment opportunity that uniquely participates in a growing market, not tied to the broad financial, equity or business technology markets, and that in many ways A countercyclical role to hedge against these asset classes. We launched our fundraising campaign for the new fund last fall and closed in June, exceeding our fundraising goals.”
Traditional VCs are often reluctant to invest in defense-oriented startups, given the ethical implications and long path to profitability.In the US, it usually At least 18 months of planning are required before government contractors win their first contracts — and most Contract awarded to incumbents. Any start-up company involved must bridge the gap between the R&D stage and contract award.
Razor’s Edge claims to have an edge in its ties to the national security community and how it invests. The company operates with a two-pronged strategy, supporting early-stage startups — such as Series A and B — as well as more established companies.
For example, Razor’s Edge recently invested in Corsha, a Washington, D.C.-based cybersecurity startup that wants to bring multi-factor authentication security to machine-to-machine API traffic. Another of the company’s portfolio companies is X-Bow Systems, which is developing a solid rocket motor.
Speaking of early-stage investments, Razor’s Edge said it narrowed down companies it believed could grow into sizable businesses in the defense and intelligence markets before expanding into commercial enterprise verticals. For more mature and late-stage potential clients, often companies already working with the U.S. government, Razor’s Edge advises on strategic business investments and “temporary acquisitions.”
“We believe we were one of the first national security-focused venture capital funds to be created. The idea for Razor’s Edge grew out of the success of Blackbird Technologies and Ravenwing, both founded and run by the firm’s managing partners National security technology company,” Spoto said. “We have a strong bias against management teams that seek revenue quickly, operate lean, and can leverage government contracts and revenue to mitigate long-term capital needs and make products the market wants and is willing to pay for… [and we offer] Our portfolio companies can draw inspiration from a vast network of talent in areas such as management, operations, engineering and sales. “
Razor’s Edge has had some success — two IPOs and two “major” M&A exits — and has $600 million in assets under management. However, whether due diligence is thorough or not, a perfect track record is elusive. When asked about the hype cycle in the defense space, Spoto acknowledged that it’s an unavoidable trap for VCs.
“From a valuation and funding standpoint, there is over-hype … in cybersecurity and some other areas like drones and border security technology,” he said. “[And] We are trying to get smarter and take a long-term view in other areas, such as quantum computing, alternative energy and energy technologies, and the impact of climate change on government and defense actions. “
Regardless, Razor’s Edge will have to compete with new and old rivals, such as Booz Allen Hamilton’s recently launched $100 million corporate venture arm Booz Allen Ventures, and Shield Capital — A company linked to the Department of Defense. Other competitors include Lockheed Martin Ventures and HorizonX, which spun off from Boeing in August 2021.