Funding To Cybersecurity Startups Dips Amid Market Turmoil

Funding to venture-backed cybersecurity firms in the second quarter remained high, but there are signs that it is vulnerable to the VC slowdown.

Global funding for the second quarter was less than $4 billion, the first time the number dipped that low since the fourth quarter of 2020 when it hit $2.82 billion, according to Crunchbase data.

“It’s not hard to anticipate we would see some sort of a slowdown,” said Stephen Ward, managing director at Insight Partners who invests in cybersecurity.

Deal flow also seemed to slow, with only 170 deals announced in the just-finished quarter, the lowest number since the third quarter last year, according to Crunchbase.

However, while a decline is noticeable it also is much too early to say the sky is falling. The first half of this year basically matched the first half of last year in terms of funding—$9.8 billion to $9.9 billion—and several companies were able to raise huge tranches of cash in the second quarter alone. Some of those biggest deals include:

• Switzerland-based SonarSource, which helps manage code quality, raised a $412 million round in April.
• In May, San Francisco-based AI-based email security platform Abnormal Security raised a $210 million Series C that values the company at $4 billion.
• Hoboken, New Jersey-based enterprise identity startup Semperis raised a $200 million Series C in May.

There also have been more than a dozen unicorns minted in the space in the first half of the year, including CertiK, Nord Security and Island, according to Crunchbase.

Slight slowdown

Nevertheless, it does seem to indicate a slight pullback from last year’s all-time high for funding, when more than $20 billion was poured into the space.

Ward said the slowdown, however, is not just coming from the investment side, but also the startup side as founders are taking a step back and reevaluating raising funding in the current market.

He also said he is having more “exploratory conversations” with founders, going over different options on how to best move a company forward and if that should include fundraising or not.

Dino Boukouris, founding director of San Francisco-based financial advisory firm Momentum Cyber, said it is always important to take a wider-angle view of the investment environment. Venture firms are still raising good-sized funds—such as YL Ventures’ recent $400 million security seed fund—and capital is still flowing into the security sector.

“This leaves me optimistic that there will not be as significant of a slowdown in the security sector, and also milder headwinds for earlier-stage companies,” Boukouris said.

“For seed-stage companies, I expect the impact to be even milder, as the more space there is between a company and the public markets, the less we’d expect them to be impacted by public market turmoil,” he added.

The future

Others also remain bullish on cybersecurity investing—with many calling the sector “resilient” as its importance only seems to grow. The increase in ransomware attacks, hacks and world events like the Ukraine/Russia conflict have only shone a brighter—and much hotter—spotlight on the sector, investors say.

Ward said he also expects to see strong investment around remediation technologies, especially as it applies to both DevOps and cloud security.

While funding may not be at 2021’s all-time high levels, Ward added, it is still strong when compared to other years and certainly where the sector was even just a decade ago.

“With the technology we have now, I’m just as bullish on innovation as I was three to four months ago,” he 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.

Illustration: Dom Guzman

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