From Zoom’s recent security challenges to Microsoft’s massive 250+ million record data breach, this year has taught us one thing: cybersecurity is still one of the most desired and in-demand components of the tech landscape. Since 2004, when cybersecurity spending was a mere $3.5 billion, industry leaders like Gartner, Forrester, IBM, and Microsoft have predicted significant surges in venture funding for cybersecurity startups. Let’s take a look at some modern cybersecurity venture capital investing trends and the importance of cybersecurity today.
Today, cybersecurity spending sits at around $124 billion. According to MarketsandMarkets, that number is set to swell to over $248 billion by 2023. There’s no end in sight. As tech continues to grow, cybersecurity will grow alongside it. The more pieces there are in the average business tech stack, the more security solutions they need to keep their critical business secrets and crucial customer information safe and sound.
Cybersecurity venture capital is a hot market. Entrepreneurs are eagerly jumping into the cybersecurity market with innovative solutions and growth-ready ideas ripe for angels and Series A. On the flip side, the market is in the perfect position for private equity deal-making, as many of the early innovators are starting to move into maturity while dealing with pressure from younger, market-aggressive players with an influx of Series A funding. Given this, cybersecurity venture capital is surely an important focus in 2021.
In this post, we’re going to talk about the current landscape of cybersecurity venture capital in 2021. What are venture investors looking for in cybersecurity startups? What does the marketplace look like during this incredibly strange and unprecedented year?
Understanding Cybersecurity Venture Capital (VC) in the Tumultuous 2021 Landscape
It’s been an unpredictable, chaotic, and friction-filled year in the tech landscape. This includes the world of cybersecurity venture capital. For the last few years, investor appetite in cybersecurity has been nearly endless. Unicorns like Kaseya, KnowBe4, Druva, and Netscope were all minted in 2019, and +$10 million Series A rounds were plentiful.
At the start of the year, news about dropped funding for cybersecurity echoed throughout the cybersecurity venture capital landscape, and we saw a little friction. But the funds weren’t drying up. They were shifting. If we look at 2018 and 2019, Series A funding was a dominant force. The startup boom was in full force, and investors were looking to cash in on unicorns and turn massive profits.
In 2021, we see cybersecurity venture capital turn towards mature markets.
- Biocatch has pulled $145 million in a Series C
- Axonius secured $58 million in a Series C
- Privitar also received over $80 million in a Series C
We’re seeing plenty of other companies’ Series C rounds rake in over $20 million. Investors are investing in fewer startups, but they’re also willing to invest more heavily in each one. It’s a natural sign of venture market maturity. Venture firms know what spells a successful cybersecurity investment, and they’ve learned not to immediately throw funds at hype in the hopes of a lucky unicorn.
We saw see plenty of Series A in 2020. Axis Security and Fast have both recently closed with over $10 million apiece. But the overall trend is towards maturity, scalability, and trustworthiness — something that’s easier to find in more mature companies.
Obviously, the recent difficult times and lag in the venture landscape have put pressure on venture deals across the board. However, cybersecurity venture capital is a little different. The same pain points that are cooling the tech sector — which has seen a wave of investor capital to the tune of $763 billion over the last decade — are heating up the cybersecurity market.
From the recent surge in remote work to global security headlines involving Zoom, cybersecurity is in the spotlight. Businesses need to improve their security posture to enable all of these remote workers, and cybersecurity startups (especially those with an emphasis on automation) are in a prime position for investment and growth.
What Are Investors Looking For In Cybersecurity Companies in 2021?
Deals are down this year. This February saw 56% less activity than 2019, and the overall trend is towards fewer opportunities across the board, yet bigger opportunities for those who do secure funding. The economic turmoil, blended with disappointing venture returns in early 2019, has drawn out hesitation from venture firms.
Venture still has money. Deals are still on the table, and plenty of firms are looking for immediate opportunities. The biggest change is where they’re looking for that opportunity. Over the last few years, tempting unicorns have raised eyebrows and drained wallets. This year, the overall mentality of venture is in “play it safe” mode — with a bigger emphasis on certain types of businesses.
We can break these types of businesses down into three parts:
- Mature companies with an immediate market presence
- Startups with scalability and long-term, lean R&D-based models
- Smart startups with a solid business plan and a unique product delivery method
1. Mature Companies With An Immediate Market Presence
“Historically, cybersecurity is a sector of the economy where spending still occurs even in economic downturns. There are risks to smaller and emerging firms, but sales revenue and the amount of capital raised provides resilience.” — Rick Holland, CISO at Digital Shadows
We’re seeing a lot of Series C activity this year. Part of that is due to the recent dificult times, but we also saw this trending up in the latter half of 2019. Market maturity is attractive. But, in today’s environment, having an immediate market presence is even more important.
Cybersecurity businesses with SaaS-based models and automation capabilities are fairing well in the current remote environment. Despite the current lockdown, tech projects aren’t slowing down. As businesses continue to leverage IT to support and enable their new remote workers, cybersecurity is the backbone that will support their continuity plans going forward.
In particular, SaaS, automation, shift-left monitoring, and outsourcing are all growing sectors. Each of these is immediately useful to remote workers, and they each have semi-rapid deployment models that make them interesting to businesses looking for help securing their solutions off-site.
The current market shakeup leaves mature businesses in a healthy position. The demand for cybersecurity solutions is growing rapidly, yet the market is causing friction for startups without reserve revenue and immediate market presence. In times of economic turmoil, startups with weak market presence are usually shaken off. Existing businesses with healthy reserves and immediate usability are incredibly attractive right now. Not only are they in a position to keep revenue flowing, but they have an incredible opportunity to swallow smaller competitors who are pinned against the wall financially.
Of course, we’ll see a swell of deal-making over the next few months. Sinking mature businesses who are unprepared to deal with the current remote influx may see deal-making restructures driven by venture capital.
2. Startups With Scalability and Lean R&D
“Venture capitalists still have lots of cash. But they’re looking to balance the needs of existing strong cybersecurity portfolio performers and new deals with ‘friendly’ valuations.” — Managing Director, Munich Re Ventures, Jacqueline LeSage Krause
Scalability has always been the single most appealing startup factor for venture firms. But now the emphasis is on both scalability and lean R&D models. The market is still ready to invest in startups that won’t have a market presence for a year or more. Those startups need to be able to operate on a bootstrapped budget.
While venture will be eagerly sitting at the sidelines ready to invest in cybersecurity firms tackling acute remote work problems, there’s still plenty of willingness to invest in small startups with lean models. Even if your product or service isn’t going to be dropping for 12 months or more, proving R&D value is huge.
In fact, it may ease investors’ minds if a startup’s product or service has a couple of years until it hits the market. That gives time for the economy to heat back up, and it lets venture capitalists pursue other, more immediate deals while they keep that startup in the future hot seat.
The biggest barrier to startup investment is going to capital. The more bootstrapped startups are, the more valuable their future products seem to venture capitalists. In economic turmoil, making big deals on unproven companies seems foolish to most. Instead, startups that are future-ready without requiring significant upfront investment are in a prime position for Series A and angels.
3. Smart Startups With a Solid Business Plan and a Unique Product Delivery Model
“Venture capital money is still available as are the quality founders seeking capital to build great companies.” — Mike Janke, Co-founder at DataTribe
There are two major ways that startups looking to make a splash in the short term can secure venture interest.
- They have a solid business plan with lucrative financial reporting figures and smart marketing strategies.
- They have a unique product delivery model that can help businesses dealing with struggles in today’s remote landscape.
Obviously, having a solid business plan is the hallmark of smart investing. But it’s becoming a necessity. Venture capitalists need peace-of-mind when it comes to investing during economic turmoil. The more airtight business plans are, the more valuable those startups are to picky venture capitalists.
However, the biggest short-term investment opportunity lies with startups that are looking to immediately impact the remote work ecosystem. Identity management, authorization, automation, monitoring, and related cybersecurity solutions are all poised to dominate the 2021 landscape.
Is Cybersecurity a Smart Venture Investment in 2021?
“With a large swath of workers going remote, the threat to companies has become even more acute.” — David Cappillo, Partner at Goodwin Procter LLP
The easy answer is yes. But there is conflicting data. PwC data shows a decline in cybersecurity venture capital over the final quarter of 2019. NVCA data shows that deal-making is up, and overall venture capital is down (a surefire sign of tough economic times). And DataTribe shows a similar decline in overall venture capital in the cybersecurity space.
However, some reports suggest that cybersecurity venture is actually up when you exclude businesses that deal only with cybersecurity instruments — not businesses with a parallel in cybersecurity. The real answer is that cybersecurity ventures will go down during the difficult times we are in. And it’s most likely that all venture capital investments in just about every industry will go lower as well. But that doesn’t specifically mean that the cybersecurity space won’t thrive.
In fact, we would suggest that cybersecurity is one of the (if not the) safest venture investment during 2021. FBI cybersecurity complaints have quadrupled since the beginning of the year when times began getting tougher for everyone. Phishing scams are ramping up in both intensity and overall activity. And businesses are dealing with new arrays of threats due to their remote work situation.
This all circles back into the cybersecurity space — which is already growing at an astounding rate. We would be foolish to claim that cybersecurity venture spending won’t decrease as venture capitalists tighten their belts and deal with market uncertainty. But the overall outlook for cybersecurity is strong.
- Mature companies looking to swallow competitors will see a swell in Series C/D funding.
- Deal-making is on the rise as venture capitalists look to benefit off of cybersecurity companies who were financially unprepared for the pandemic.
- Startups with lean R&D models and next-year launches will continue to see strong funding results.
- Startups that have the ability to immediately tackle remote issues will see a surge in funding.
- Overall, venture funding will decrease due to economic hardship.
- The long-term outlook of the cybersecurity market is stronger than ever.
Are you looking to invest in a cybersecurity fund in 2021? Are you a startup looking to find funding in these hard economic times? Meet our team of cybersecurity investor experts. Option3Ventures runs a cybersecurity venture capital firm aimed at finding underserved investment opportunities and whitespaces in the cybersecurity market.