Cybersecurity Startup Funding Hits 5-Year Low, Drops 50% From 2022

Just two years ago venture funding to cybersecurity was on fire, with more than $23 billion flooding the sector.

In 2023, cyber startups saw only about a third of that, as venture funding dipped to its lowest total since 2018. Security companies raised $8.2 billion in 692 venture capital deals last year — per Crunchbase numbers — compared to $16.3 billion in 941 deals in 2022.

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The drop was exacerbated by Q4 numbers, as startups locked up $1.6 billion — marking the lowest quarter since Q3 2018 when cyber firms raised just $1.3 billion. Only three cyber startups raised rounds above $100 million:

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• Managed detection and response startup BlueVoyant closed a $140 million-plus Series E led by Liberty Strategic Capital.
• Dallas-based cybersecurity startup Island announced a $100 million Series C led by Prysm Capital and valuing it at $1.5 billion.
• San Mateo, California-based Verkada closed a large $100 million round led by Alkeon Capital.

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“What we saw in terms of cybersecurity funding in 2023 were the ramifications of the exceptional surge of 2021, with bloated valuations and off-the-charts funding rounds, as well as the wariness of investors in light of market conditions,” said Ofer Schreiber, senior partner and head of the Israel office for cyber venture firm YL Ventures.

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New reality

Indeed, most investors agree poor decisions and bad judgment from a couple of years ago still haunt the sector charged with keeping people safe from bad actors on networks, the cloud and their devices.

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Security firms are still struggling to grow into big valuations garnered just a few years ago when money was cheap and fundraising for both startups and VCs across most sectors was easy.

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Startups that raised funding rounds in 2021 will have no choice but to raise follow-on funding this year — or try to sell themselves — as they are approaching the end of their runway, Schreiber added.

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“That being said, startups have sobered up and understand that they need to lay their foundations more responsibly today, in light of investor appetite and market conditions,” he said.

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“Investors remain interested in funding groundbreaking cybersecurity startups, especially in the early stages, and data supports this trend.”

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Interest remains

Few in the industry doubt investors will abandon the sector. Cybersecurity continues to be a top concern for nearly every company and government, and attack vectors and tensions are only growing.

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“The widespread adoption of generative AI technologies, coupled with recent geopolitical conflicts like the Russia-Ukraine and Israel-Gaza wars, has escalated the frequency and sophistication of cyber attacks,” said Gili Raanan, founder and partner at Cyberstarts.

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“The economic crisis further contributes to this situation, as hackers often take advantage of market downturns to carry out malicious attacks,” he added.

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Those challenges could strengthen spending in cyber.

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“Despite macroeconomic challenges, the demand for digital transformation in the cyber realm remains,” said Nadav Zafrir, co-founder and managing partner at Israel-based incubator and investment firm Team8 which has a security focus.

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“As global conflicts persist and intensify, the threat of cyber attacks remains high, and therefore, the need to strengthen cybersecurity measures through technology investments will remain paramount,” he added.

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There constantly are new attack vectors that will need to be stopped, agreed Umesh Padval, a venture partner at Thomvest Ventures who specializes in cyber, cloud and AI infrastructure.

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“AI will make it worse, war will make it worse,” said Padval, adding areas such as DevOpsSec (the integration of security in software development) and cloud security will grow.

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“The last few years have created some bad behaviors. This investment level is the right level for this area,” he said.

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Reference: https://news.crunchbase.com/cybersecurity/funding-drops-eoy-2023/