Cybersecurity venture capital (VC) firm DataTribe today released its Q3 2021 insights report, which highlights an early-stage cybersecurity investment slowdown. The capital invested in each round continues to climb, but seed rounds are increasing at a slower rate compared to later stages — painting a mixed picture for the industry.
The cost of a data breach averages $149,000 for SMBs. For those with limited resources, an attack can be devastating, causing 60% of small businesses to close their doors. But many small businesses don’t know, don’t care, or don’t know what to do about the problem. According to a recent CNBC survey, among small business owners in the U.S., 56% said they weren’t concerned about being the victim of a hack in the next 12 months and 59% were confident that they could quickly resolve any cyberattack.
The overconfidence is potentially at the expense of early-stage cybersecurity startups, for whom SMBs have historically been a reliable source of business. Depressed SMB customer counts might be warding investors away, driving seed-stage deal volumes lower than in previous quarters.
According to the DataTribe report, seed-stage VC cybersecurity investment deals dragged in 2020 and 2021, averaging around 15 deals per quarter in 2020 with just 17 so far in 2021 (16 in Q3 2021, down from 25 in Q2 2021). That’s versus the last peak in seed-stage deal volume that occurred in Q1 2019 and Q1 2017, with 32 deals and 33 deals, respectively.
DataTribe gives another possible explanation for the slow rebound: rising valuations. According to the firm’s research, seed-stage, pre-money valuation medians in Q3 climbed from around $2.5 million in 2011 to a whopping $8 million in 2021. Meanwhile, series A valuations rose from roughly $8 million in 2011 to $30 million in 2021, reflecting what DataTribe calls, “headline cyber investments.”
“Valuations are not frothy if a company is consistently generating revenue and growth numbers to justify a high multiple,” DataTribe wrote in its report. “[A] market pullback could produce formidable challenges for founders that take money at inflated valuations.”
While seed deals in cybersecurity might be slowing, institutional investors are by no stretch fleeing from the segment. According to Pitchbook, with less than three months left in 2021, cybersecurity startups have raised $17.7 billion in venture capital so far — more than a 70% increase from last year’s record of $10.2 billion. So far, 9 merger and acquisition deals in 2021 have been valued at greater than $1 billion, including Proofpoint’s $12.3 billion acquisition by Thoma Bravo, Auth0’s $6.4 billion acquisition by Okta, and McAfee’s $4 billion acquisition by TG. And of the 430 investments in cybersecurity startups in H1 2021, 36 were greater than $100 million.
It’s not difficult to see why. Despite the fact that some experts view cybersecurity as a losing game, 91% of companies increased their IT security budgets in 2021, prompted by a lack of confidence in their cybersecurity posture. With cybercrime predicted to cost the world $10.5 trillion annually by 2025 (up from $3 trillion a decade ago and $6 trillion in 2021), Gartner forecasts that spending on cybersecurity will surpass $150 billion in 2021 — an increase of 12.4% over last year.
“As we pull back and look, we are starting to see a new era emerging — one where proving your organization is secure will be required: to sell to your customers, to get insurance, to conduct business. It’s not new,” DataTribe wrote. “Venture funding was quite active in Q3. It remains a good time to raise money as a cyber founder, and venture capital has marked historic returns. However, we — along with everyone else — are wondering when headwinds will start to emerge.”
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