Cybersecurity Funding Rounds Increase in Q3, But Dollar Amounts Lag
Cybersecurity funding remains lower than 2021 and 2022.
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Early signs of improvement emerged in the third quarter as investment grew by 46% from the previous quarter, according to Canalys. This is despite U.S. interest rates rising again, economic uncertainty persisting and geopolitical tensions remaining high. Six cybersecurity vendors secured $100 million or more in funding in Q3, compared to just three last quarter and seven a year ago, which points toward a potential change in venture capital funding strategies. However, one quarter does not make a long term trend and Canalys expects new funding to remain constrained.
The number of investment rounds in 2023 has already overtaken the entire volume of 2022, yet the dollar amount still lags, standing at 38% behind last year's total, according to Pinpoint. Seed, Series-A and Series-B investments are at the forefront, showcasing a more diversified approach by investors looking to balance their portfolios and reduce potential risks.
"It seems the industry may be in a reset of sorts," said Pinpoint's Mark Sasson. "Many of the later-stage companies and organizations that have raised hundreds of millions of dollars over the past few years have simply not delivered. We have seen companies valued as unicorns go completely bust. Investors seem to be cutting their losses on those companies and turning to early-stage startups that are solving evolving security problems. So instead of investing $100 million into a C-round, investors are spreading that money over several Seed, A-and B-stage companies."
While the Splunk acquisition, in terms of the size and impact to the industry, was the most significant move of the quarter, there were other notable M&A deals, Sasson said.
"Imperva was acquired by Thales for almost $4 billion, and private equity firm TPG acquired a Forcepoint business unit focusing on industrial security for $2.5 billion," he said. "We also saw industry leaders like Check Point Software Technologies, CrowdStrike and Tenable active this quarter."
Funding in Q3 shifted more toward vendors specializing in DevSecOps, application and API security, according to Canalys. Endor Labs, Upwind Security and Grip Layer were ranked in the top 10 of the largest rounds. This highlights the continued growth opportunities around cloud-native application protection platform (CNAPP), and securing open-source software and SaaS.
Investment in startups focused on artificial intelligence (AI) increased, according to Canalys. HiddenLayer secured $100 million, which has built a product to protect AI algorithms from malicious code injections. Smaller funding rounds were secured by other vendors that specialize in delivering pre-trained AI security agents to augment security operations center (SOC) teams and protecting against external attacks by generative AI.
Cybersecurity funding in the fourth quarter remains dependent on macroeconomics, Sasson said.
"The cybersecurity market was red hot, and arguably unsustainably growing in 2021 and 2022," he said. "The increase in rates that led to the overall economic slowdown put the brakes on tech and cybersecurity growth. Investors and companies in the sector have shifted from growth at all costs to sustainable growth."
If Gartner’s predictions for a 14% increase in cybersecurity spending are accurate, there should be sustained growth in security investment over the next few quarters, Sasson said.
"But if spending on security is stagnant, or declines for whatever reason, it’s plausible that investors will limit their exposure," he said.
Cybersecurity funding in the fourth quarter remains dependent on macroeconomics, Sasson said.
"The cybersecurity market was red hot, and arguably unsustainably growing in 2021 and 2022," he said. "The increase in rates that led to the overall economic slowdown put the brakes on tech and cybersecurity growth. Investors and companies in the sector have shifted from growth at all costs to sustainable growth."
If Gartner’s predictions for a 14% increase in cybersecurity spending are accurate, there should be sustained growth in security investment over the next few quarters, Sasson said.
"But if spending on security is stagnant, or declines for whatever reason, it’s plausible that investors will limit their exposure," he said.
The third quarter of 2023 brought a 21% increase in cybersecurity funding compared to same quarter in 2022, painting an optimistic picture of the industry's growth trajectory.
That's according to Pinpoint Search Group, a cybersecurity recruitment firm. In Q3, Pinpoint's research team recorded 113 combined funding and M&A transactions within the cybersecurity space.
The total funding reached $2.3 billion, signaling a stark rise from the previous year's Q3 figure, according to Pinpoint. Interestingly, the 89 funding rounds documented in the third quarter marked a significant surge from the 56 rounds observed during the same time frame in 2022. Moreover, the quarter witnessed 24 crucial M&A activities, including Cisco’s massive $28 billion acquisition of Splunk in September.
Cybersecurity Funding to Continue for Advanced Technology
Mark Sasson, Pinpoint's managing partner, said "when we talk about an increase, it’s important to put that into perspective."
"While investment increased over the last quarter, the funding raised in Q3 2023 remains lower than most of the quarterly investment we tracked in the fiscal years of 2021 and 2022," he said. "It could be that 2021 and 2022 will, in hindsight, be considered the boom times for cybersecurity investment, and today’s trends are going to be more baseline. Alternatively, if 2021 and 2022 were baseline, then the increase could represent a return to the norm. One thing is certain, cybersecurity is a growing industry and demand will persist. Because of the constantly changing technology landscape, innovation in the sector is a must and investors will continue funding advanced technology in the space."
However, a new Canalys report on cybersecurity vendor funding shows new investment secured by pre-IPO cybersecurity vendors declined on an annual basis for a sixth consecutive quarter in Q3 as the funding crunch continued. (Canalys is owned by Channel Futures' parent company, Informa.) Overall, funding was down by 33%, to $1.89 billion, in the quarter, and down by 53% in the year to date. This pullback of venture capital has resulted in startup and growth-stage cybersecurity vendors scaling back expansion plans, cutting operating costs and lowering growth targets.
Scroll through our slideshow above for more from Pinpoint and Canalys on cybersecurity funding.
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