Just two years ago, venture capital was pouring into the cybersecurity sector like a gushing spring, topping $23 billion in 2021. However, Crunchbase data reveals a stark contrast in Q2 2023, showing a 63% drop from the same quarter last year, bringing venture funding for cybersecurity to a mere $1.6 billion. This represents the lowest venture capital funding in the sector since Q4 2019.
In the first half of this year, cyber startups have managed to raise only $4.3 billion, a fall of 60% from the $10.8 billion raised in the first half of 2022. This figure is also more than $2 billion less than the $6.4 billion raised in the latter half of 2022.
This decline in cybersecurity venture funding underlines the significant changes in the venture capital landscape over the past 24 months. Companies, irrespective of their stage of development, found it easy to secure substantial growth rounds in 2021. Now, the climate has drastically shifted. Private investors are prioritizing companies capable of achieving cash-flow break-even quickly and efficiently, leading to a significant slowdown in deal volumes and dollar amounts across all sectors, most prominently in the cybersecurity sector.
Decreasing Cybersecurity Deal Flow
The overall drop in cybersecurity funding is not confined to the money raised, as the volume of deals is also experiencing a significant decline. The second quarter witnessed only 148 cybersecurity funding deals, a decrease of 35% from the 228 deals in Q2 2022. In the first half of this year, a total of 312 deals were announced, marking a 38% drop from the 507 deals during the same period last year.
The decline in both the volume and amount of funding becomes even more pronounced when focusing on larger funding rounds of $100 million or more. In the first half of 2022, 33 such rounds were completed, while the same period this year saw only 11, marking a staggering 67% decline.
Future Implications for the Cybersecurity Sector
Though these changes mirror the broader venture capital landscape, it is particularly remarkable given the belief that the cybersecurity sector is immune to recessions or economic downturns. It appears that cybersecurity funding is facing pressure from both ends – startups following the “grow fast, go big” strategy now find themselves in a market that values profitability, and their customers are cutting back on expenditures amidst economic uncertainty.
However, this does not signal the end of the sector. The constant threat of ransomware attacks and hacks means that businesses still require robust security measures, even as IT budgets are squeezed. Furthermore, developments in artificial intelligence may improve the sector’s offerings by enabling security operations to run more efficiently and ensuring the data utilized by AI is uncorrupted.
Moreover, despite the downturn in funding, large public cyber companies such as Palo Alto Networks, Fortinet, and CrowdStrike have seen a surge in their share prices since the beginning of the year. This trend may encourage more mergers and acquisitions in the sector, as larger companies might be more inclined to engage in stock deals if their share prices continue to rise.
Successful exits through M&A could, in turn, prompt venture capitalists to reconsider their funding strategies. Therefore, as we navigate through the rest of the year, the cybersecurity sector may yet offer an exciting roller coaster ride for investors and startups alike.