With the IPO pipeline still untucked, M&A may seem like a good option, especially in a tight funding environment.
However, this year has proven to be a difficult one for VC-backed startups looking to exit M&A.
Only 34 cyber startups were acquired in the first seven months of this year, the slowest pace of closings since 2017 (only 52 startups were acquired over the course of the year). crunch base data.
According to Crunchbase, cybersecurity M&A deals will hit record highs in 2021, with 123 VC-backed companies acquired. That number dropped by about a third last year, with just 82 such deals. This year’s pace will drop another 25%.
“It’s no surprise,” he said Umesh Padvalventure partner of tombest ventures Specializes in cyber, cloud infrastructure and generative AI. “Right now, macro trends are creating terrifying headwinds for deal closing.”
Those headwinds include rising interest rates over the past year or more, geopolitical tensions, and a fearful economy that has caused some companies to curb spending on IT and cybersecurity.
Few big deals
Because of these headwinds, there weren’t many big deals in the first half of this year.
Biggest deal in first 6 months Hewlett Packard Enterprise Announced acquisition of cloud security provider Axis security $500 million in March. the second half of the same month, Cisco Announced acquisition of cloud security platform light spin at $200 million.
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While the pace of deal closures has not accelerated so far in the third quarter (only five deals have been publicly disclosed), the size of some deals may show a pattern of change.
In July, the French-based tech company Thales Group Announced acquisition of application security giant Imperva at $3.6 billion.Perhaps more importantly, earlier this month check point software Announced acquisition of cloud-based security solutions provider Perimeter 81 At $490 million, it’s less than half the $1 billion valuation it received after last year’s Series C.
This last deal may indicate that some startups are willing to lower the valuations they made at the height of the venture market. Investors have argued since last year that sticking to those valuations would hinder the pace of trading.
So many companies have been able to raise so much money over the last few years that startups didn’t have to lower their valuations and had time to wait for the current market to lower their valuations.
But that runway may be nearing its end, too.
“It will take time for that money to dry up from the system,” Padval said. “It will take about 15 to 18 months.
Acquirers, investors and entrepreneurs were hesitant about closing deals in the first half of the year, but the hesitation is slowly coming to an end, he said. Albert Yepesco-founder and managing director of Forgepoint Capital We specialize in cybersecurity and infrastructure software investments.
“It’s been a slow start, but we’re starting to see changes around the middle of the year,” he said. “From the fourth quarter, he expects more M&A activity into 2024, with more deals at lower value. Now it’s more of a buyer’s market.”
Aside from strategy, Yepes said private equity firms were out shopping, and many were very active on the sidelines at the Black Hat Show in Las Vegas last week.
window shopping
Whether you are a PE or a strategic buyer, we think there are several areas of cybersecurity that are attractive.
Cloud security has already seen some big deals this year, and most investors expect that to continue.
Moreover, with the constant hype around AI, AI will also play a role in the cyber space.
Padval said he expects more interest in AI-related cybersecurity, meaning security to protect AI used in AI modeling and software applications.
Supply chain security, fraud detection solutions, sign-on and verification technology could also see more transactions in the coming months, he added.
Other areas targeted for consolidation are likely to include identity and DevOps, while other subsectors such as data security, software supply chain, SMB security and, of course, AI also appear poised for innovation. Yepes said.
He added a next-generation identity and access management platform. This area includes his Forgepoint portfolio companies such as: 1 cosmos and Elmetic — could also see significant growth.
But how well the market recovers will undoubtedly depend on whether 2021’s skyrocketed valuations will eventually bounce back and be more in tune with the new reality.
“Market valuations have become more reasonable as the tourist investors who drove valuations higher in 2021 and 2022 have returned home,” Yepes said.
methodology
Cybersecurity is defined by the network security, cloud security, and cybersecurity industries within the Crunchbase dataset.
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