A $75 million investment fund earmarked exclusively for cybersecurity startups is always great to see. But SYN Ventures’ huge investment in an early-stage security startup has raised both expectations and eyebrows against a backdrop of tech industry headlines featuring cybersecurity layoffs and bankruptcies.
In October, venture capital firm SYN Ventures closed a $75 million seed fund focused solely on cybersecurity startups. This is considered one of the largest to date and follows the closure of security startup IronNet and the announcements of layoffs at Fortinet, Rapid7 and SecureWorks.
For many, the shutdown of the once-highly priced IronNet, which was valued at $1.2 billion in 2021, served as a harbinger of darker things to come. But SYN Ventures, a venture capital firm focused on the security sector, argues that just as the sector is shrinking, innovative security companies are flourishing.
Jay Leek, co-founder and managing partner of SYN Ventures, told SC Media that now is the perfect time to launch a cybersecurity seed fund.
“We’re seeing so many seeding opportunities right now. There’s no better time than now,” Leake said.
The reality of a turbulent market
Mr Leek’s bullish outlook contrasts not just with the headlines, but also with September data from IANS Research that reveals road security companies have weathered a difficult situation.
An IANS survey of 550 CISOs found that global instability and inflationary pressures contributed to a 65% decline in IT budget growth from 2022 to 2023. The average budget increase in 2023 is expected to be 6%, down from the 17% increase in the previous budget cycle.
These market forces are causing investors to reconsider their previous valuations of cybersecurity startups and question how they will fare in the year ahead as customers cut IT budgets.Separately Vanta researchonly 9% of shrinking IT budgets are going toward security.
Deepak Jeevankumar, managing director at Dell Technologies Capital, said other market factors pushing companies to become more frugal include inflationary pressures that drive up the cost of doing business, as well as increased compliance and regulatory requirements. He said there are cost pressures.
Venture traveler returns home
This enhancement follows years of significant increases in cybersecurity budgets and generous funding for security startups. Easy access to capital has helped support much of the startup world. From 2018 to 2022, seed and venture capital seed funds earmarked to help launch cybersecurity startups will be easy to come by and eager investors will want to get in on the action. I was drooling.
“What we saw was a massive influx of capital into cybersecurity,” said Bob Ackerman, managing director at Allegis Cyber Capital. This is because I wanted to enter a field where there is a
By 2022, rising interest rates and macroeconomic uncertainty will set the stage for a global economic slowdown and IT market downturn. This turned off the investment faucet that was tied to ordinary venture capital investors, Ackerman said.
“When you have too much money flowing into a sector, it tends to distort the economics of that sector, and you end up putting money into things that probably shouldn’t be funded,” he said. He said the economic downturn is partly an economic reality and partly a corrective to over-funding startups.
There were 423 financing deals totaling $5.2 billion in the first half of 2023, up from 531 financing deals totaling $12.5 billion in the first half of 2022, according to figures compiled by Momentum Cyber, which tracks cybersecurity financings and corporate acquisitions. Diminished.
“For too long, it has seemed as if a company’s ability to raise capital was the measure of success. ,” said Wayne Schepens, Managing Director, LaunchTech Communications.
perfect storm
While VC funding for cybersecurity startups has cooled, SYN Ventures sees an opportunity.
Leek claims that SYN’s $75 million in seed funding will go to startups that are less likely to repeat the mistakes of their predecessors. These miscalculations include aggressive capital burn rates aimed at quickly dominating fast-growing markets that have either not materialized or are taking longer than expected to mature.
Our current focus is on delivering value, reducing costs for our customers and aligning our solutions to high-growth product categories. Schepens said there is plenty of funding available for startups that can check the right boxes.
Leake said he expects the investment environment to improve over the next year or two. This period is perfect for today’s cybersecurity startups to take advantage of market upturns as they occur.
“Right now, there’s no chance these startups will grow their revenues anytime soon,” he said. “This is a unique time for entrepreneurs to prove the market value of their solutions without having to rush to market or rein in spending.”
VC deals are still happening
Significant VC deals are still happening for startups seeking post-seed funding. Data from Momentum Cyber revealed that investors pumped his $5 billion into startups in the first half of 2023. But that’s less than half of what was promised the previous year.
“While investors are becoming more selective, there are still funding opportunities for hungry and resourceful entrepreneurs,” Schepens said.
Leake said this new level of investor caution means that expectations about how much money startups can expect to raise need to change. They needed to prepare to present a stronger case for growth to potential funders.
Focus shifts from funding to fundamentals
As startups recalibrate and focus on differentiating their products, further innovation due to profitability and thinning of the startup pool is inevitable for startups that cannot keep up, VCs told SC Media. .
“It’s all about delivering value to customers, and there are some amazing young companies out there that are doing just that. VCs are looking for great opportunities and will continue to do so,” Schepens said.
Michael Cortes, a partner at YL Ventures, said his organization continues to see a strong appetite for seed and Series A investments in cybersecurity startups. Series A funding comes after a cybersecurity startup has raised pre-seed (proof of concept) funding and will be used for product development, operations, and marketing. Pre-seed funding ranges between $10,000 and $1 million, with Series A up to $10 million.
The need for smart startups remains
Startups also have to contend with industry consolidation and moves by large vendors to offer more of their clients’ technology stacks, leading to the rise of a single security vendor offering a mega-platform.
But that doesn’t mean there’s no room for startups. There are always opportunities for startups with unique ways to solve new cybersecurity challenges.
AllegisCyber Capital’s Ackerman and others are bullish on technologies such as artificial intelligence (AI) that enable innovative solutions that can be applied to security operations and threat analysis.
“AI will improve productivity and eliminate skills shortages. Industry will also use AI to process threat intelligence, thereby increasing productivity,” he said.
Quantum cryptography, blockchain technology used to authenticate and verify user identities, and neural network intrusion detection systems are just a few examples of beyond AI driving innovation in the cybersecurity space.
At YL Ventures, which focuses on early-stage cybersecurity startups, Cortes funds startups in the identity space, vulnerability and risk management, as well as VC for companies that provide tools to monitor generative AI solutions. He said interest is growing.
“I don’t think funding for cybersecurity startups is going to be the Wild West that it used to be,” Schepens said. “But cybersecurity remains one of the most powerful industries. Smart investors are always looking for new entrants to surge to the top of the security stack.”
It may take time, but new and innovative security solutions will continue to interest investors as long as malicious actors continue to find new and more sophisticated ways to challenge security experts, Ackerman said. said.
(Steve Zuria of SC Media) (contributed to this report)