Investors Are Betting Early On Cybersecurity Startups

In an increasingly digital world, startups, small businesses, and large corporations have at least one problem in common: ensuring the security of the data they store. We also know that security is top of mind for VCs, too—but likely more for the returns than the actual protection.

According to Scale Venture Partners’s 2018 cyber report, venture dollars invested in cybersecurity startups reached $5.4 billion last year, doubling from 2016 totals. The market also saw a number of exits in the space last year including Cisco’s $2.35 billion acquisition of Duo Security, and public debuts for Carbon Black, Okta, and Zscaler.

That investment activity has continued into Q1 2019, according to Crunchbase data.

Early-Stage Startups Secure Funding In Q1

More than $1 billion has been invested into cybersecurity companies located outside of China to date in 2019. 1 That includes OneLogin’s $100 million comeback round in January 2019 (the company experienced a serious AWS breach in 2017). However, late-stage startups didn’t score all of the funding. In fact, more than 70 percent of deals in 2019 so far have been directed toward seed and early-stage startups, per Crunchbase.

To get a better handle on venture activity in the cybersecurity industry, Crunchbase News compiled a list of early-stage companies in the U.S. that picked up capital in Q1:

Industry incumbents like Check Point Software Technologies, Symantec, Palo Alto Networks, and FireEye were all early arrivals in the security space. So why the continued interest in cyber, and why do newcomers think they have a chance against industry behemoths? ScaleVP partner Ariel Tseitlin said the rise in early-stage activity is a result of the changing nature of the industry.

“Cybersecurity is undergoing a great deal of change and innovation–in small part due to underlying technology platforms changes, like public cloud infrastructure and cloud applications, and in large part due to maturation of the industry,” wrote Tseitlin in an email. The influx of new cybersecurity companies coming to market is a direct response to “the increasing gap in capabilities between best-of-breed solutions and the needs of cybersecurity teams managing enterprise risk.” Crunchbase has recorded nearly 400 cyber security startups outside of China founded after 2017. Tseitlin added that he expects this “wave of change” to continue, while new companies and categories emerge and older ones “consolidate into more mature offerings.”

Incumbents are also placing bets. Public cybersecurity company Okta recently announced a $50 million fund for strategic investments in security.

And the U.S. isn’t the only country with its eyes on cybersecurity. According to Crunchbase data, Israeli startups have made great capital strides in this category in Q1 2019: at least 13 companies, mostly seed and early stage, have raised more than $196 million in 2019 to date.

Those results include Tel Aviv-based cloud security company Aqua Security, which raised $62 million in a Series C led by Insight Venture Partners last week. ScaleVP’s Tseitlin told Crunchbase News that Israel’s military requirement has brought cybersecurity expertise to the private sector.

“There is a constant flow of talent from elite government agencies into the private sector who are highly trained in the most advanced defensive and offensive cybersecurity techniques. This has been a great recipe for new companies,” Tseitlin said.

European startups have also benefited from interest in the sector. London-based AI-powered identity authentication company Onfido raised $50 million just last week. The company’s Series C was led by Augmentum Fintech, Salesforce Ventures, and SoftBank.

Security is something that will always be top of mind for organizations, companies, and government bodies. As more cloud-native companies look for security solutions, and as automation tools and machine learning work their way even more into the security ecosystem, it’s likely that newer companies will continue to raise.

Illustration Credit: Li Anne Dias