Cybersecurity Funding Jumps 144% In Q2

Venture funding to cybersecurity startups had its best quarter since Q1 2022 — surging 144% year to year — and seemingly building off a strong start to the year.

The increase in venture dollars was mainly due to a significant jump in nine-figure rounds — illustrating that even as investors may be pulling back on investing in young startups, they are willing to double down on more mature companies looking for growth rounds.

In the second quarter, cyber startups saw a robust $4.4 billion invested in only 153 deals — the lowest deal count in years — according to Crunchbase data. The dollar figure represents a 63% increase from Q1, which saw $2.7 billion roll to startups in 173 deals.

The number also is a whopping 144% increase from Q2 of last year, which saw only $1.8 billion invested in cyber startups in 193 deals. In the larger picture, the first half of the year saw $7.1 billion in venture dollars go to cyber startups in 327 deals — a 51% jump from the $4.7 billion invested in H1 2023 in 101 fewer deals.

Less deals, big deals

That drop in deal flow also may be an indication of what has changed to boost funding — mainly really, really big rounds.

The biggest in Q2 was cloud security startup Wiz’s announcement in May that it had raised $1 billion at a $12 billion valuation. That round is still the biggest in cybersecurity this year. It’s the largest cyber round since Securonix raised more than $1 billion from Vista Equity Partners in February 2022.

Of course, Wiz is reportedly now in talks to be acquired by Google for $23 billion — the deal would be the largest ever for a VC-backed company, according to Crunchbase data. If the deal is consummated, it would undoubtedly bring even more heat to the sector.

Nevertheless, Wiz’s huge round was far from the only one in the second quarter, as 10 rounds hit $100 million or more. Data security startup Cyera raised a $300 million Series C led by Coatue at a $1.4 billion valuation, and Dallas-based enterprise browser developer Island locked up a $175 million Series D led by new investor Coatue and existing investor Sequoia Capital at a $3 billion valuation.

“This surge is mainly the result of a growing number of exceptionally large growth rounds such as (from) Wiz, Axonius, Island and Cyera,” said Ofer Schreiber, senior partner and head of the Israel office for cyber venture firm YL Ventures.

“After several years of a near freeze in late-stage funding, this revival is the result of impressive growth that these startups achieved since their foundation, prior to the boom of 2021,” he added.

In total, the first half of the year saw 19 rounds of $100 million or more, while the first half of last year saw only a dozen. In fact, there were only 20 such rounds all of last year.

Schreiber said he does see a bifurcation trend in the cybersecurity industry right now. On one side, more early, moderately-sized exits by younger companies — some acquired after struggling to raise follow-on financing. On the other, massive growth rounds raised by startups vying to build multi-billion-dollar cybersecurity giants.

Shifting economics

However, investors don’t believe it was just big deals that have caused a slight shift in the market.

Umesh Padval, a managing director at Thomvest Ventures who specializes in cyber, cloud and AI infrastructure, said factors such as an increase in cyber hacking, threat proliferation due to AI and enterprises starting to buy cyber products again after reeling back spending the last few years have all contributed to the uptick in investor interest.

“The last couple of years there were economic headwinds affecting all actors — and most certainly cybersecurity,” he said. “Now you are seeing these enterprises come back to the market and buying again.”

Specifically, Padval sees security including cloud, as well as governance and privacy, taking center stage with investors for the next few quarters.

In addition, AI can not be left out of the picture, Padval said, as companies are looking for ways to secure what is needed for the processing of large language models.

Everything, everywhere

Speaking of AI, it is often easiest to attribute everything to the tech of the moment. However, doing so in cyber’s case would be wrong.

While many cyber startups have AI components and tools, it was not purely the AI craze driving cyber funding.

Instead, it was a little bit of everything. Cloud security, browser management, endpoint security and more all saw huge rounds, as did those specializing in more niche areas like traffic analysis and crowdsourced security testing.

Investors expect the market to continue to warm as the second half of the year wears on.

“While the market hasn’t completely recovered yet, investors remain bullish on supporting strong security startups who can potentially challenge incumbent security giants,” Schreiber 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.