Evolution Equity Partners: Cybersecurity’s growth runway | #hacking | #cybersecurity | #infosec | #comptia | #pentest | #ransomware

This article is sponsored by Evolution Equity Partners

Richard Seewald

How big is the cybersecurity market and what are its growth prospects?

In terms of aggregate demand, the cybersecurity market is valued at approximately $250 billion today. According to a McKinsey survey, the total addressable market opportunity could increase to $2 trillion with a 10x upside on the current vended base of cybersecurity software, so there is certainly significant growth ahead.

Why did you decide to focus on this category, and how has the firm built expertise in this space?

The team has been together for 25 years. We were the senior executive team at a company called AVG Technologies, which grew to become a cybersecurity software platform with more than 300 million users worldwide. We completed over a dozen acquisitions and integrations, taking AVG from a single product business to a multi-product security platform. Ultimately, we listed AVG on the New York Stock Exchange having developed an operational playbook for building cybersecurity companies along the way, which we now use to support our portfolio.

What are the key trends shaping cybersecurity?

Like many other industries, machine learning and artificial intelligence have become central to the conversation over the course of the past year, but these technologies have been part of the cybersecurity landscape for the past decade or more. We started investing in ML and AI back in 2011, building several companies focused on detection and response, a key area of cybersecurity functionality, that went on to be acquired by large vendors. More recently, it has been large language models and generative AI that have attracted so much attention.

Those themes are certainly impacting the cybersecurity landscape as well. We are seeing large organisations integrate those technologies into their corporate DNA, providing huge benefits, but also expanding the attack surface for cyber criminals, hackers and nation state adversaries, thereby creating significant challenges for the software companies we back to defend and protect against those attacks.

At the same time, adversaries are also using ML and AI to automate attacks, finding new and improved ways to penetrate their targets. Cybersecurity is a form of asymmetric warfare. The attackers only need to be right once, while the defenders need to be right all the time. ML and AI skew that asymmetry even further, so that attackers can get their job done with fewer resources than ever before, presenting a daunting task for defenders. Of course, this also creates opportunities to build cybersecurity companies that can address this next generation of attack.

What M&A trends are you seeing?

M&A has remained relatively consistent in the cybersecurity category despite where we are in the economic cycle. In fact, we recently exited a company called Talon Cyber Security to Palo Alto Networks, one of the largest publicly listed cybersecurity companies in the world.

These listed cybersecurity giants are looking to buy the next generation of technology to integrate into their platforms. Likewise, larger private equity funds have begun consolidating cybersecurity companies whether by category or geography, as well as looking at take-privates, so we have seen a lot of activity there as well. Lastly, there are a set of traditional industry companies that see cybersecurity technology as a way to provide their customers with differentiated services. Those are the three categories that have driven M&A over the past couple of years and we expect that activity to increase.

What is your approach to portfolio construction when it comes to building diversified exposure?

We recently announced a pure play cybersecurity fund with $1.1 billion of commitments. Our strategy is to invest that fund in a diversified portfolio across the different stages of maturity, with 75 percent invested at the early growth stage, 15 percent at the later growth stage and then 10 percent reserved for earlier-stage venture capital. We believe that provides private markets investors with diversified exposure to cybersecurity opportunities.

How can value be added to portfolio companies in the cybersecurity segment?

Using the operational playbook that we have developed over the past two decades, we have built a centre of excellence around cybersecurity growth. We work with management teams and founders, providing them with support and insight in areas including sales and marketing, product technology, human capital, M&A and business development, really enabling them to excel.

What does the future hold for the cybersecurity industry, and for you as a firm?

The cybersecurity industry is a category that has grown consistently for the past two decades. That growth will continue, regardless of what is going on in the broader economy, because growth is not driven by budget, it is driven by those that would seek to attack companies and governments.

Nation state adversaries, hackers and criminals have tripled down on their capability to access the soft underbelly of our society. When you think about it, virtually everything in our society is built on a software layer, whether that is social media, elections, corporations or governments. The opportunity to protect and defend that soft underbelly is not going away any time soon.

The opportunity to invest in the next generation of technology will also persist through cycles. Right now, we are seeing ML and AI being heavily integrated into these products. But hackers are using these technologies as well, so it has become almost like an arms race. Against that backdrop, the McKinsey prediction makes complete sense. I can’t think of any other software category today that presents that kind of upside – 10x on the current vended market for cybersecurity spend – along with the downside protection provided by regulation and compliance.

Governments and multinational corporations are concentrating their efforts on ensuring that organisations are spending enough money on cybersecurity to fend off attacks, meaning healthy growth for the category as a whole over the next decade, underpinned by entrepreneurs, founders and executive teams building innovative companies to defend and protect.

In terms of Evolution Equity itself, meanwhile, we will remain focused on the venture capital and growth investment stages, bringing to the table a differentiated set of capabilities and skills that can help these companies grow. Our priority is to drive attractive returns, by pulling on all those levers that we have developed in our cybersecurity playbook across technology, operations and business. We will continue to build on that platform over the next decade, raising funds to address this critically important category.


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