Venture Investment In Cryptosecurity Jumps 10x Over Last Year As Sector Hits Sweet Spot With Venture Capitalists

What do you get when you combine never seen before investment in cybersecurity with the increasingly heated interest in cryptocurrency? You get a banner year for investment in cryptosecurity, with venture dollars invested in the sector already past $1 billion this year.

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Cryptosecurity—a sector involving technologies that help secure digital wallets and transactions involving cryptocurrency—has already seen more money invested in it in 2021 than in all earlier years combined, according Crunchbase data. While last year saw less than $100 million invested in the sector, investors have started to eye security and compliance features as the crypto market has taken off.

“Obviously, it’s getting more popular,” said Michael Shaulov, co-founder and CEO of New York-based security service provider Fireblocks. “The space has just become legitimized.”

Big rounds

Fireblocks is the biggest contributor to this year’s high fuding number. The company, which often describes itself as the “Shopify” for crypto since it helps with a variety of business issues around digital assets from security to compliance to governance, raised a $310 million Series D from Sequoia Capital, Stripes and Spark Capital in July at a $2.2 billion valuation. That was a 3x-plus increase in valuation from February, when the company raised a $133 million Series C.

However, those are far from the only large rounds this year. France-based security and infrastructure solutions provider Ledger raised a $380 million Series C in June. Oakland-based PolySign — which develops secure infrastructure for financial institutions to handle digital assets — raised its $53 million Series B in May. New York-based CertiK, San Francisco-based Aleo and Menlo, California-based CipherTrace also all have seen rounds in excess of $25 million this year.

In addition, the space also saw a significant deal this year when fintech giant PayPal bought New York-based cryptosecurity company Curv in March, although the deal was reported to be worth less than $200 million, according to CNBC.

“Things are on a tear right now,” said Dave Jevans, CEO at CipherTrace, which helps crypto exchanges, banks and even the government with security and compliance issues and raised more than $27 million in May. “We get interest all the time from investors … including growth equity.”

Regulations and big banks

There are several factors related to the rise of crypto that are making investors examine the sauce of security around it, Jevans said. The first is just the growth of regulations around the market around the world.

The intergovernmental organization the Financial Action Task Force is working with more than 190 countries to examine compliance and reporting issues in the crypto market. In the U.S., the Department of the Treasury has been evaluating requirements in the crypto market for more than a half dozen years, he added.

“The regulation market is just growing and there’s a need for technology to help companies with requirements and compliance,” he said.

Still, the larger aspect that is driving the market is just the legitimization of crypto and the fact every big bank now wants in, Jevans said.

“Large financial institutions and big banks are getting pressure from customers to buy digital assets,” said Jevans, adding banks want to know assets and transactions can be secured.

Crypto meets cyber

That growing market is not a surprise to Shaulov, who got the idea to start Fireblocks while working for Check Point Software Technologies, which had just acquired his previous startup Lacoon Mobile Security.

After seeing phishing and man-in-the-middle attacks—where a cybercriminal can secretly alter communication between two parties and can intercept the transfer of digital assets—he started to look for cryptosecurity and infrastructure startups that were addressing the problem and where he could invest.

The problem was there were none.

“So I thought we should build one,” Shaulov said with a laugh. “But in all honesty, while we started by building a cybersecurity company, we really are a fintech company. We build fintech infrastructure that is secure.”

Shaulov said as more traditional banks, financial institutions and even large fintech players have embraced crypto and people have become more comfortable with it, securing how those digital assets move and are stored has become the next logical frontier for investors to evaluate.

The need for cryptosecurity was shown last week, when more than $600 million worth of crypto was stolen in a cyberattack that targeted decentralized finance platform Poly Network — although hackers later returned nearly half the stolen assets.

“The promise is easier to digest because you can see the use cases,” he said.

Investor interest

Shaulov called his company’s recent rounds “very competitive” and added they were oversubscribed. One reason for that, he said, is that traditional venture firms are getting more comfortable entering the space—something obvious by his company’s recent Series D—which is leading to more money in the space.

Still, he is not sure there will be an explosion of companies now entering the space. Cryptosecurity and infrastructure is a space with a high bar for entrance because of the technologies involved, he said. Many companies, founders and investors bypassed the space during the crypto crash of 2018, he added, giving those that were in it or starting at that time a significant head start.

“No one wanted to do anything in the space for three years,” he said. “No one wanted to invest. Some companies went out of business.”

While he does not know how many startups will eye the space, Shaulov said some large tech giants could look at the space—especially those that do secure infrastructure—such as large cloud providers like Microsoft and Google.

“I’m not sure you’ll see the traditional security companies like the Palo Alto Networks look at this area,” he said. “It’s not really what they do.”

Large payment companies and even traditional market exchanges also could eye the space as crypto and virtual assets become the norm, added Jevans, who sees no slowing in the cryptosecurity market. He predicts crypto will follow the playbook of how other financial exchanges’ ecosystems develop — with a foundation that then is layered with security, reporting tools and analytics.

“I just don’t see why a slowdown would happen,” he said.

Methodology

Cryptosecurity, as defined in this article, includes crypto startups in the Crunchbase dataset that also are marked as cybersecurity and/or security companies. Funding numbers include pre-seed, seed and all venture rounds.

Illustration: Dom Guzman