As a sign that national security technology is a safe bet, even in tough economic times, the defense and security-focused VC firm has Razor’s Edge Ventures today announced the closing of its third startup investment fund at just under $340 million. It surpassed its original goal of $250 million, the company notes, 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 multi-stage startups with both commercial and government clients, but specializes in ventures that “[help] national security community [members] solve difficult technological problems and perform critical missions,” in his own words. The outfit’s areas of interest are informed by “strategic national security priorities,” managing partner Mark Spoto tells australiabusinessblog.com, with the ostensible goal of helping the US maintain “technological superiority.”
“While economic conditions in broad financial markets are challenging right now, defense spending has increased significantly, both in the US and abroad; we are facing an increasingly complex and growing threat environment,” Spoto said via email. “Limited partners (LPs) in our latest fund appreciated that Razor’s Edge provides an investment opportunity that uniquely participates in a growing market and is uncorrelated to the broad financial, equity or commercial technology markets and in many ways serves as a countercyclical hedge to those asset classes. We launched our fundraising for the new fund last fall and completed it in June, exceeding our fundraising target.”
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 typical takes at least 18 months of planning for a government contractor to win their first contract – and most contracts are awarded to incumbents. Any startup that gets a foot in the door has to bridge the gap between the R&D phase and the award of the contract.
Razor’s Edge claims to have an advantage in its connections to the national security community and its investment approach. The company operates on a two-pronged strategy, supporting early stage start-ups – for example Series A and B – and more established companies.
For example, Razor’s Edge recently invested in Corsha, a Washington, DC-based cybersecurity startup looking to provide multi-factor authentication security for machine-to-machine API traffic. Another of the company’s portfolio companies is X-Bow Systems, which develops a solid rocket engine.
When it comes to early-stage investments, Razor’s Edge says it’s limited to companies that it believes could grow into large companies in the defense and intelligence markets and later expand into the vertical market of commercial enterprises. For the more established and later prospects, usually 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 established with a single investment thesis focused on national security. The idea for Razor’s Edge grew out of the successes of Blackbird Technologies and Ravenwing, both national security technology companies founded and managed by the company’s managing partners,” said Spoto. “We have a strong preference for management teams that seek revenue quickly, work lean, and can leverage government contracts and revenue to reduce longer-term capital requirements and build products that the markets want and will pay for… [and we offer] a vast network of talent, in areas such as management, operations, engineering and sales, from which our portfolio companies draw.”
Razor’s Edge has a few successes to its name — two IPOs and two “material” mergers and acquisitions — and $600 million in assets under management. However, a perfect track record is elusive, regardless of the thoroughness of the due diligence. And when asked about hype cycles in the defense space, Spoto admitted it’s a tough trap for VCs not to fall for it.
“There is an overhyped from a valuation and funding standpoint… in cybersecurity and also in parts of some other areas like drone and border security technologies,” he said. “[And] there are other areas where we are looking smarter and longer, such as quantum computing, alternative energy and energy technologies, and the effects of climate change on government and defense operations.”
In any event, 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 company with ties to the Ministry of Defence. Other competitors include Lockheed Martin’s Lockheed Martin Ventures and HorizonX, which spun off from Boeing in August 2021.