Key insights
On capital concentrating in fewer, later‑stage ‘category winners’: The surge in invested capital in Series D rounds and beyond even as deal counts fell is clearly attributable to the growth in artificial intelligence-related companies. Investors are pouring large amounts into a small number of companies perceived to be category winners. A similar dynamic is playing out in the national security and dual-use technology marketplaces.
On the persistence of protective deal terms like pay to play: Pay‑to‑play provisions remain persistent as companies that raised at high valuations return to market without sufficient progress. In these new rounds of financing, the pay-to-play features are often used to enforce alignment among investors. This trend has not hit the national security and dual‑use markets as pervasively, and it will likely be another 6 to 12 months before it will be felt.
On the ‘barbell’ investment pattern: There is significant interest at the earlier stage and growth/later stage in the defense and national security tech market. Series B rounds tend to be the hardest rounds to raise because companies need to show real progress against a business plan. This kind of progress can be tough to demonstrate, as it can be harder to prove in slow‑moving government markets.
Tech sector spotlight
Tech financing hit a historic high in invested capital (from $3.6 billion to $20 billion), despite a slight dip in deal count.
What’s driving this massive increase in invested capital? Are you seeing a similar dynamic in national security tech and dual-use sectors?
A major contributor to the invested capital increases we are seeing is clearly the growth in artificial intelligence-related company financings. It is notable that deal count is lower, while dollars invested are significantly higher, reflecting the trend that many VC investors are concentrating their investments in a smaller number of perceived category winners, in Series D rounds and beyond. We are seeing a similar dynamic play out in the national security and dual-use technology marketplace. In Q3, there were several very large investment rounds that were completed in a relatively small number of growth and late-stage companies, mostly focused in areas like autonomous capabilities and AI. Other defense and dual-use technology areas of interest – such as space, advanced computing (including quantum), industrial base and supply chain, hypersonics/missiles/munitions, energy, sensing capabilities, and cybersecurity – also attracted significant dollars.
Pay to play
Pay-to-play provisions have been consistently trending upward in 2025 and rose to 10.1% in Q3.
How does Razor’s Edge approach these terms in growth-stage deals? Do you see these measures as a reflection of caution among company founders, or are they becoming standard practice in competitive rounds?
It is interesting to see this datapoint persisting. There isn’t a one-size-fits-all answer to this, but the trend most likely derives from companies that have tapped into market-specific exuberance tailwinds and raised rounds of capital at potentially outsized valuations relative to where they were likely to be able to execute, and then had to come back to market when they couldn’t show enough progress. In those sorts of rounds, insiders are likely to have to lead new rounds of financing, and the pay-to-play features are often used to enforce alignment among an investor syndicate. We haven’t seen this trend hit the national security and dual-use markets as pervasively, though this market’s tailwinds probably won’t evidence themselves in pay-to-play transactions for another 6 to 12 months, when some of these companies may not live up to previous billing.
Valuation dynamics
Q3 data saw some significant fluctuations in pre-money valuations across industries, with mid-to-late stage decreasing, while the early stage increased.
Has the market’s current preference for earlier-stage investments impacted the defense technology industry? In the defense technology industry, how would you justify the lofty valuations being secured by many growth-stage companies?
Right now, we view the defense and national security tech market as largely taking the shape of a barbell, with significant interest in earlier-stage (i.e., pre-seed, seed and Series A) and growth/later-stage (i.e., Series C and beyond) investments. With the renewed interest in this market from a broader cross-section of investors across the country, we are seeing many entrepreneurs bring innovative ideas and capabilities to solve tough national security problems and receive large investments in the early stages. Series B rounds tend to be the hardest rounds to raise, because companies have to be able to show that they have transitioned from a great idea to real progress against a business plan. This kind of progress can be tough to demonstrate in the defense marketplace, where contracts can sometimes be slow to award, and companies can get caught in the transition between research and development and real program implementation.
The significant appetite for investors in growth-and late-stage financings reflects the trend to concentrate dollars into a handful of perceived market-category leaders, who may go on to be winners. Valuation dynamics in these growth- and late-stage financings can often tend toward high. Our view, informed by decades of work in this market, is that the exit markets for many of these companies are not equipped to handle such lofty valuations, and as a result, we anticipate that some companies that look great today may struggle when it comes time to exit. We tend to focus on finding companies at attractive valuations that have legitimate opportunities to grow quickly and become profitable, and leverage our decades of operating experience to help connect them to high-value national security customer and program opportunities. These companies will be attractive exit candidates in any market.
Exit strategies
Q3 saw a record $18 billion invested in Series D and higher rounds – the highest seen since this report started in 2014. At the same time, deal volume remained well below 2024 levels throughout the first three quarters of the year.
How do you interpret this surge in late-stage capital deployment in mature tech companies – has there been a shift in risk appetite among investors? And how are you viewing exit strategies for your portfolio as the market continues to move cautiously?
As with our observation above about the barbell shape for the national security technology market, we think this same approach has taken root in the broader technology market. We see many investors with interest in the pre-seed, seed and Series A round deals, and multiple, largely multibillion dollar funds and special purpose vehicles focusing their attention and capital on the significant growth rounds from perceived category leaders. From the exit perspective, valuations for many of these late-stage financings probably reflect revenue or earnings before interest, taxes, depreciation and amortization (EBITDA) valuation multiples that are not likely to be achieved in the M&A markets, so many of these companies will need to rely on initial public offerings (IPOs) to create widespread liquidity (assuming the market for secondary transactions is not robust enough to provide this kind of widespread liquidity for a company’s shareholders).
There are signs of life recently in the IPO market, and there appears to be meaningful interest from institutional public investors for small- and mid-cap aerospace and defense investors, and we believe this may create an attractive option for some companies. Ultimately, the approach we typically take with our companies focuses on achieving both meaningful revenue growth rates and profitability, so that these companies can quickly control their own destinies and not have to rely on fundraising or exit activities until moments of their choosing, to tap the markets when most advantageous for them.
Focus on the Razor’s Edge mission
Given the focus of Razor’s Edge on solving critical national security challenges, how do you see government priorities and budget trends shaping venture activity in Q4 and beyond?
Since we formed our first fund in 2010, Razor’s Edge has played a critical role in shaping the modern national security technology landscape, helping scale some of the market’s most impactful companies. Our approach integrates venture and growth equity strategies and company-building discipline with proprietary national security insights gained by our investing team over three decades, allowing for accelerated portfolio company market access. We think national security and associated budgetary trends are providing tailwinds to rapidly scale companies that can deliver strategic advantages across domains, such as space, autonomy, cyber, advanced sensing, signal processing, AI-enabled systems, industrial base/manufacturing and other aerospace and defense technologies.
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