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Cybersecurity Funding Sees Slight Bounce Back From Q2, But Still Down From 2022 | #hacking | #cybersecurity | #infosec | #comptia | #pentest | #ransomware


Venture funding to cybersecurity startups in the third quarter saw a slight uptick from Q2, but was still down 30% year to year.

According to Crunchbase data, cybersecurity startups raised nearly $1.9 billion through 153 deals announced in Q3, a 12% increase from the $1.7 billion raised in 181 deals the previous quarter. The number of deals represents a 15% dropoff.

However, when compared to the same quarter last year, the numbers point to a significant decline. The past quarter represents a 30% decline from the $2.7 billion raised in Q3 2022 and a 17% drop in deal flow.

“In Q3, we saw more realistic business plans and valuations, requiring appropriate levels of capital in order to minimize dilution for common shareholders,” said Alberto Yépez, co-founder and managing director at Forgepoint Capital, which specializes in cybersecurity and infrastructure software investments. “Many of these companies had completed rightsizing their operations and workforce for the market conditions.”

With the Q3 numbers, funding to VC-backed cybersecurity startups is set to hit its lowest point for a calendar year since the sector saw only $8.8 billion in 2019.

Big rounds fade

What remains noticeable as funding dips in the sector is the lack of big, late-stage deals.

“Unfortunately, our predictions in 2022 seem to be realized this year, as late-stage funding continues to take the brunt of 2023’s turmoil,” said Ofer Schreiber, senior partner and head of the Israel office for cyber venture firm YL Ventures.

“Investors remain wary of investing at these stages in this climate, with apprehension that continues from last year and which we anticipate will not show signs of recovery into 2024,” he said.

In Q3 a year ago, there were nearly a dozen rounds of $75 million or more each, including huge rounds of more than $200 million to Acronis, Coalition and Verkada.

The same quarter this year saw just five deals of $75 million or more and only one bigger than $200 million. The biggest rounds in the most recent quarter included:

“The story of these  numbers is  the decline in the number and size of growth rounds in cyber,” said Alex Doll, founder and managing partner at Ten Eleven Ventures, a multistage global venture capital firm dedicated to cyber.

“The growth rounds in ’23, rather than being ‘down’ from COVID era … are really going back to a decade-long trend or more healthy normal levels of investment,” he added.

Cato Networks’ round is especially interesting, as funding to Israeli cybersecurity startups has plummeted in recent quarters, per Crunchbase data. The round helped Q3 numbers rise to $331 million — actually beating the $316 million raised in 14 deals a year ago.

However, if that round is removed, cyber startups in the country raised only $78 million in eight deals — below even the paltry $97 million raised in 11 deals in Q2 of this year.

Obviously, the current state of heightened tensions there could reduce that funding even further.

Road remains bumpy

However, it’s not just the tensions in Israel. Other issues in Europe and between the U.S. and China likely will keep venture funding in cyber relatively flat — or maybe even slightly in decline — for the next two or so quarters before flattening out, said Umesh Padval, a venture partner at Thomvest Ventures who specializes in cyber, cloud and AI infrastructure.

“I’m not surprised by the numbers,” Padval said. “There are a variety of factors, starting with the geopolitical issues.”

Padval said higher interest rates also have hurt the ability for investors to raise new funds this year — which in turn hurts a startup’s ability to raise money.

However, he said he does believe a leveling off is occurring and cyber is getting back into its right range now that the “euphoria” of the venture highs of 2021 have worn off.

“I think the pandemic created some bad behaviors,” Padval said of large growth investors investing in artificially inflated valuations.

What it may mean

Even though funding dollars showed a slight bounce back, the decline in deals is alarming. The total number of deals is the lowest amount in years and shows the difficulty some are seeing in getting funded.

With the decline in companies being able to raise cash — including those in the late stage — and the cyber M&A market at low ebb, security companies simply closing up shop could become a cold harsh reality.

Nevertheless, many investors see this as getting back to normal.

“The drop of venture funding in cybersecurity is leveling off and I believe is getting back to normal with fewer investors chasing deals,” Yépez said.

Methodology

Cybersecurity is defined by the industries of network security, cloud security and cybersecurity, according to Crunchbase data. Most announced rounds are represented in the database; however, there could be a small time lag for rounds reported late in the quarter.

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Illustration: Dom Guzman

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