Razor’s Edge Ventures closes $340M fund as it looks to invest in defense startups

In a sign that national security technology is a safe bet even during tough economic times, defense and security-focused VC firm Razor’s Edge Ventures today announced the closing of its third nearly $340 million startup investment fund. It surpassed the 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 commercial and government clients, but specializes in ventures that “[help] national security community [members] solving tough technology problems and advancing critical missions,” in his own words. The team’s areas of interest are influenced by “strategic national security priorities,” managing partner Mark Spoto tells TechCrunch, with a purported goal of helping the US maintain its “technology superiority.”

“While economic conditions in broad financial markets are currently challenging, defense spending has increased significantly both in the US and abroad; we face an increasingly complex and growing threat landscape,” Spoto said via email. “Limited Partners (LPs) in our newest fund appreciated that Razor’s Edge offers an investment opportunity that uniquely participates in a growing market and is uncorrelated to the broader financial, equity or commercial technology markets and in many ways serves as a counter-cyclical agent Hedging these asset classes We started our fundraising for the new fund last fall and completed it in June, exceeding our fundraising target.”

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Traditional venture firms are often reluctant to invest in defense-focused startups because of the ethical implications as well as the long road to profitability. In the US, it typically takes at least 18 months of planning before a government contractor gets their first contract – and most contracts go to established companies. Any startup that gets a foot in the door needs to bridge the gap between the R&D phase and procurement.

Razor’s Edge claims to have an advantage in its connections with the national security community and its investment approach. The company works according to a two-pronged strategy and supports start-ups in the early stages – e.g. B. 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 that aims to bring multi-factor authentication security to machine-to-machine API traffic. Another portfolio company of the company is X-Bow Systems, which is developing a solid rocket motor.

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As for early-stage investments, Razor’s Edge says it’s limiting itself to companies it believes can grow into sizable businesses in the defense and intelligence markets and later expand into commercial businesses. For more established and up-and-coming prospects, which are typically 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 was born from the successes of Blackbird Technologies and Ravenwing, both of which were national security technology companies founded and operated by the company’s managing partners,” said Spoto. “We have a strong bias towards management teams looking to generate revenue fast, lean work and use government contracts and revenue to mitigate longer-term capital requirements and create products that markets will want and pay for… [and we offer] a vast network of talent in areas such as management, operations, engineering and sales that our portfolio companies draw from.”

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Razor’s Edge has a couple of accomplishments under its belt — two IPOs and two “substantial” M&A exits — 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 defense hype cycles, Spoto admitted that it’s a difficult trap for VCs not to fall into.

“There’s an overhype from a valuation and funding perspective … 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’re trying to get smarter and take a longer look, like quantum computing, alternative power and energy technologies, and the impact of climate change on government and defense operations.

Either way, Razor’s Edge will have to compete against new and established competitors like Booz Allen Hamilton’s recently formed $100 million corporate venture arm, Booz Allen Ventures, and Shield Capital — a firm with ties to the Department of Defense. Other competitors include Lockheed Martin’s Lockheed Martin Ventures and HorizonX, which was spun off from Boeing in August 2021.

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