In a sign that national security technology is a safe bet even in difficult economic times, a defense and security VC firm Razor’s Edge Ventures today announced the closing of its third startup investment fund worth nearly $340 million. As the company notes, it exceeded the initial goal of $250 million and will be aimed at companies developing autonomous systems, space technologies, 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 both commercial and government clients, but specializes in ventures that, in its own words, “(help) the national security community solve difficult technology problems and implementing key missions. The team’s areas of focus are based on “strategic national security priorities,” managing partner Mark Spoto tells TechCrunch, with the purported goal of helping the United States maintain its “technology advantage.”
“While economic conditions in broad financial markets are currently challenging, defense spending has increased significantly both in the U.S. and abroad; we face an increasingly complex and growing threat environment,” Spoto said in an email. “Limit partners (LPs) in our latest fund appreciated that Razor’s Edge offers an investment opportunity that uniquely participates in an emerging market and is not correlated with the broad financial, stock or commercial technology markets and in many ways serves as a countercyclical hedging mechanism these asset classes. We started fundraising for the new fund last fall and completed it in June, exceeding our fundraising goal.”
Traditional venture firms are often reluctant to invest in defense-focused startups, given both the ethical implications and the long road to profitability. In the US it is usually it takes at least 18 months of planning before a government contractor wins its first contract – and most orders are awarded to parent entities. Every start-up that enters the market must bridge the gap between the research and development phase and the award of the contract.
Razor’s Edge claims to have an advantage in its ties to the national security community and its approach to investment. The company operates a two-track strategy, supporting start-ups at an early stage of development – e.g. series A and B – as well as 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-fuel rocket engine.
When it comes to early-stage investments, Razor’s Edge says it is limiting itself to companies it believes can grow into large enterprises in the defense and intelligence markets and then expand into commercial enterprises. For more established and later-stage clients, which are typically companies already working with the U.S. government, Razor’s Edge advises on strategic business investments and “add-on” acquisitions.
“We believe we are one of the first venture capital funds established whose sole investment thesis was to focus on national security. The idea for Razor’s Edge arose from the successes of Blackbird Technologies and Ravenwing, both national security technology companies founded and led by the company’s managing partners, Spoto said. “We rely on management teams that are quick to seek revenue, operate lean and can leverage government contracts and revenues to ease long-term capital requirements and create products that markets want and will pay for… (and we offer) a vast network of talent in areas such as management, operations, engineering and sales that our portfolio companies benefit from.”
Razor’s Edge has a track record of success – two initial public offerings and two “significant” M&A exits – and $600 million in assets under management. However, excellent performance is elusive regardless of the thoroughness of due diligence. When asked about hype cycles in the defense space, Spoto admitted that it’s a difficult trap for VCs to fall into.
“From a valuation and financing standpoint, there is excessive hype… in cybersecurity, as well as in some other areas such as drone technologies and border security,” he said. “(And) there are other areas where we are trying to be smarter and take the longer view, such as quantum computing, alternative energy and energy technologies, and the impact of climate change on government and defense operations.”
In any case, Razor’s Edge will have to compete with new and established rivals such as Booz Allen Ventures, the recently formed $100 million corporate arm of Booz Allen Hamilton, and The Shield Capital — a company with ties to the Department of Defense. Other competitors include Lockheed Martin Ventures and Lockheed Martin’s HorizonX, which spun off from Boeing in August 2021.