Managing Director & Founder Allegis Cyber Capital.
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In our previous article, we discussed the unique nature of adversary-driven innovation in the cyber market and how small private startups are essential in creating next-generation over-the-horizon solutions that defend against emerging threats. explained about
These niche solutions gain momentum in the market and extend to the commercialization stage. This forces cybercriminals to innovate their offensive strategies and forces cyber startups to develop new defensive products, continuing the virtuous cycle.
I have often said that investments in cyber innovation will continue regardless of market conditions.
Based on Nasdaq’s 12-month performance, does this apply even if the tech industry alone lost more than $7.4 trillion? When did rising interest rates stop easy capital? When did inflation suck value out of future growth projections?
Sector expertise returns to cyber
Venture capital investment in Q3 2022 totaled $81 billion by Q3 2022. That’s $90 billion less than he did last year, down 53% year-over-year, according to Crunchbase News analysis. Early-stage funding accounted for $34 billion of the total, down 39% year-over-year. Series A fundraising performed better than Series B, down 23% compared to 54% year-over-year.
Cyber is uncorrelated, counter-cyclical and resilient to most macro market trends, but it is not completely immune to broad market venture capital exits. This is because a large amount of capital from general tech sector VC firms without cyber domain expertise has crept into the cyber market at an increasing rate over the past few years, all chasing the promise of “alpha”.
In recent years, cyber has gained national attention and the market interest has increased accordingly. In 2021, the cybersecurity start-up has raised a record $29.5 billion venture his capital. Everyone was keen to get in on the action.
One of the signs of VC exit was the Black Hat conference in Las Vegas in August of this year. This year, we’ve noticed a decline in participation from generalist VC firms that have started rounds over the last few years at Black Hat, RSA, and other high-profile industry events.
In the uncertain economic climate of 2022, VCs that lack the deep sector insight and depth of expertise necessary to identify truly disruptive companies from “me too” imitators will not be able to justify their portfolios. In the face of increasing pressure to become more
That was $2.6 billion in Q3 2022, marking the fourth straight quarter of declining VC funding for cyber startups and the lowest quarter since $1.6 billion in Q3 2020, according to Crunchbase data. That’s why it shouldn’t come as a surprise.
Does that mean cyber innovation is slowing down? Far from it.
Why less is more in cyber
Valuation is tied to the relationship between supply and demand of capital. When there is an oversupply, he inevitably has two consequences. Valuations will rise and funding will be provided to startups that do not meet the required criteria to allow venture capital to raise capital.
Having spent over 25 years in venture capital, I’ve seen history repeat itself.
Markets are now in correction mode, valuations and expectations have eased, and capital restrictions have provided a much-needed period to refocus, recalibrate, and reallocate.
Many sectors of cyber have become overcapitalized, with obscure companies siphoning too much human and capital resources.
Smart investment in cyber
Demand for cybersecurity solutions remains strong. According to his recent ISACA survey, his 55% of cybersecurity professionals expect their company’s cyber budget to increase in his 2023. Some of these budgets go to cyber startups that solve problems we don’t yet know about.
Those still at the cyber party are making new investments, while others are going home.
• Technical knowledge. Cybersecurity is at the cutting edge of technology. A lack of understanding of key concepts and their practical applications leads to investments in superseded technologies and substandard solutions that fail to gain and maintain market traction.
• Rapid change. From ransomware gangs to nation-state attackers, the threat landscape is constantly changing. Investors need to understand the current environment and how a company’s products and positioning respond to risks and changing circumstances.
• Domain expertise. There is no shortage of companies in every sector of the cybersecurity market. Determining which companies can establish and dominate in that space requires deep domain expertise.
• Future vision. This includes the ability to see the evolution of the cyber threat landscape over time and predict where the next big wave of innovation will be needed.
Is cybersecurity destined for the same market fate as the larger tech industry? According to Momentum Cyber, his year-to-date VC fundraising reached $16.5 billion at the end of the third quarter, bringing his total private equity and his VC fundraising in 2020 to $10.7 billion. 54% higher. According to Gartner, organizations will spend $188.3 billion on information security and risk management products and services in 2023, and by 2026 they are projected to grow to $262 billion worldwide.
The volume of early stage deals may decrease for a while, but the quality of deals will increase. The industry’s next big investment opportunity starts today in the midst of this down market and in response to next-generation threats.
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