Proving that national security technology is a safe bet even in times of crisis, defense and security-focused VC firm Razor Edge Ventures today announced the closing of its third seed investment fund at just under $340 million. The firm has more than $250 million in funding and will target companies developing autonomous systems, space technologies, cybersecurity, AI and machine learning, digital signal processing, and other aerospace and defense technologies.
In the year Founded in 2010, Razor Edge funds multi-stage startups with commercial and government clients but is focused on individual ventures.[help] National security community [members] Solving difficult technological problems and advancing critical missions, in his own words. The outfit’s focus is on “strategic national security priorities,” managing partner Mark Spoto told TechCrunch, with the ostensibly goal of helping the United States maintain “technological dominance.”
“Despite the current challenging economic environment in the broader financial markets, defense spending has grown significantly both in the U.S. and abroad. We face an increasingly complex and evolving risk environment,” Spoto said in an email. “Limited partners (LPs) in our latest fund We appreciate that Razor’s Edge offers an investment opportunity that uniquely participates in emerging markets and is uncorrelated with the broader financial, equity or trading technology markets, and in many ways serves as a counter-cyclical hedge to those asset classes. We completed it in June, surpassing the fundraising target.
Traditional venture firms are reluctant to invest in defense-oriented startups because of the ethical implications and long-term profitability. In the US, it typically takes at least 18 months of planning before a government contractor wins its first contract — and most contracts are awarded to officials. Any startup that gets its foot in the door must bridge the gap between the R&D stage and the contract award.
Razor Edge says it benefits from its relationship with the national security community and its investment approach. The firm operates a two-pronged strategy, supporting early-stage startups – for example, Series A and B – as well as established companies.
For example, Razor’s Edge recently invested in Korsha, a Washington, D.C.-based cybersecurity startup that brings multi-factor authentication security to machine-to-machine API traffic. Another of the company’s portfolio companies is X-Bow Systems, which develops solid rocket engines.
When it comes to early-stage investments, Razor’s Edge says it will narrow in on companies it believes can grow into larger businesses in the defense and intelligence markets, and later expand into commercial enterprise verticals. For more established and later-stage prospects, who tend to be companies that already do business with the US government, Razor Edge advises on strategic business investments and “inside” acquisitions.
“As a sole investment theory, we believe we are one of the first venture capital funds to have a national security focus. The idea for Razor’s Edge was born out of the successes of Blackbird Technologies and Ravenwing, both national security technology companies founded and managed by the facility’s managing partners,” said Spoto. We have a strong bias toward management teams that seek quick revenue, operate small, and can leverage government contracts and revenues to ease long-term capital requirements and build products that markets demand and pay for. [and we offer] A large network of talent from our portfolio companies in areas such as management, operations, engineering and sales.
Razor’s Edge has a few successes under its belt — two initial public offerings and two “material” M&A exits — and $600 million in assets under management. Even with due diligence, a perfect track record is difficult. And when asked about the incentive cycles in the defense space, Spoto admits it’s a difficult trap for VCs to fall into.
“There are excessive pressures in terms of assessment and funding … in cyber security and also in some other areas such as drones and border security technologies,” he said. “[And] There are other areas where we are trying to learn more and see more, such as quantum computing, alternative energy and energy technologies, and the impact of climate change on government and defense operations.
Either way, Razor Edge will have to compete with new and established rivals like Booz Allen Hamilton’s recently launched $100 million corporate venture arm, Booz Allen Ventures and Shield Capital — with Defense Department connections. Other competitors include Lockheed Martin’s Lockheed Martin Ventures and HorizonX, which will be spun off from Boeing in August 2021.
