The Future of Cybersecurity Investment Appears Bleak as Funding Drops Significantly.

The Future of Cybersecurity Investment Appears Bleak as Funding Drops Significantly.

The financial dealings within the cybersecurity field saw a significant decrease during the first three months of 2023 when compared to the same time frame in 2022. Experts who monitor this industry predict limited progress until at least the latter part of this year.

There is some doubt about how the market will react to Silicon Valley Bank's sudden failure in mid-March, and how this will affect venture capital funding in the sector, despite the expectation that it will have an effect on both the short and long term.

At the moment, it's possible that cybersecurity startups will experience their least productive funding quarter in years. This prediction comes from a researcher.

Cyber Still Struggling with Ongoing Financial Challenges

Eric McAlpine, founder and managing partner at Momentum Cyber, reported that during the first quarter of the year, public cybersecurity companies repeatedly emphasized conservatism and their preparedness for persistent challenges in 2023. He noted that strategic leaders are being extremely cautious as they anticipate the upcoming months, and this mindset will have a ripple effect throughout the industry.

The warning tone is being sounded due to concerns over a potential widespread economic downturn, plummeting stock value, and mass layoffs at major technology companies like Amazon, Meta, Microsoft, and Tesla. Although experts at IDC predict that cybersecurity spending will surge by 12.1% in 2023 to reach $219 billion, some people are worried that inflated costs of technology and other factors could offset the benefits that corporations anticipate receiving from this increased investment.

According to McAlpine, Momentum Cyber has monitored 32 deals related to cybersecurity mergers and acquisitions, with a combined value of $2.6 billion, and 102 financing deals worth $2.5 billion, until the end of February. This represents a significant decrease compared to the same quarter last year, during which Momentum Cyber had tracked $13.8 billion across 79 deals. In Q2 of 2020, there was a remarkable surge up to $89.8 billion, which then decreased significantly during the second half of the year.

According to his statement, there has been a significant decrease in both the number of mergers and acquisitions as well as financing deals, along with their total value. This decline is attributed to the ongoing instability of the market we are currently facing.

The research company Omdia found that the pace of M&A deals has decelerated during the first quarter of 2023. Analyst Ketaki Borade commented that the total number of transactions completed this year is only slightly more than 50% compared to the same time last year, with 44 deals completed instead of 97 in 2022.

Some big M&A deals happened in the first quarter of 2023. Thoma Bravo bought Magnet Forensics for $1.1 billion, Francisco Partners purchased Sumo Logic for $1.7 billion, and SailPoint acquired SecZetta in January for a sum of money that hasn't been disclosed.

Investment in Venture Capital Slows Down Along with Broader Market

According to Richard Stiennon, who is the chief research analyst at IT-Harvest, there was a decrease in the investment activity of cybersecurity companies in the first quarter of 2023. It wasn't just the mergers and acquisitions that slowed down during this period. The venture capital and other forms of investment in this field also experienced a decline.

According to Stiennon, IT-Harvest followed 41 investments in cybersecurity firms, worth roughly $1.35 billion, until March. This amounts to an annual rate of just $8 billion, a significant decrease from 2022 where Cybersecurity investments reached $17 billion, and 2021 established an unprecedented high of $24 billion.

Out of all the investments made, Stiennon reports that a chunk of $893 million came from seven rounds that each totaled over $50 million. Overall, the total investment amounted to $1.35 billion. As of now, no companies have gone public through an IPO this year.

While there was a decrease in cybersecurity mergers and acquisitions and funding during the beginning of 2023, there were still some noteworthy transactions occurring. One of the most impressive deals was by Israeli cloud security provider Wiz, who raised $300 million in Series D financing in February 2023. This elevated the company's value to an extraordinary $10 billion, which sets a new record for the highest valued private firm in the cybersecurity industry.

Stiennon highlights two big deals that happened in the first quarter of 2023, which were a $205 million growth funding round that was given to identity management vendor Saviynt by AB Private Credit Investors, and a $180 million equity investment and strategic financing that MDR vendor Deepwatch raised in February. Another major deal was the $500 million capital raise received by Sandbox AQ, an Alphabet spinoff, also in February.

Just like in the past, certain parts of the cybersecurity world are getting more attention from investors than others. Rik Turner works as an analyst at Omdia and he found that network security, security management, and SecOps have gotten the most funding this year. These areas have always been popular with investors according to Turner.

According to Turner, there are other aspects such as security of cloud, applications, and data that are now integral parts of the overall stats. This trend points towards the increasing use of cloud-based app infrastructures, which was already happening before the pandemic but has been accelerated further due to it.

Many of the technologies that investors are putting their money on happen to be the same ones that businesses are dedicating a significant portion of their security budget towards. At a recent online event hosted by Dark Reading, Chenxi Wang - founder and general partner of Rain Capital - pointed out that cloud security, network security, identity and access management, SecOps, and application security are among the top areas organizations are currently focusing their spending on.

According to Wang's remarks in Dark Reading, she has noticed a drop in both the number and speed of strategic deals during the first quarter of 2023. On the venture front, Wang has also observed a reduction in the number of companies receiving funding compared to the previous year.

An Attentive Approach to Cyber-Investment in the Remaining of 2023

Wang and other experts in the field have a slightly apprehensive perspective on merger and acquisition as well as investment involvement in the cybersecurity industry for the remainder of this year.

A significant concern is how the downfall of SVB will unfold during the remaining months of the year. According to Wang, similar to several other individuals, the failure of SVB will create difficulties for startups and small organizations that are in their early stages - primarily those who are willing to take high risks - to receive financial support.

Ultimately, this will result in fewer businesses successfully expanding and achieving long-term viability," she explains.

McAlpine doesn't worry as much about the immediate effects that the collapse of SVB triggered. Any decrease in financial activity that happened right after has already started to recover. However, the consequences that may come in the distant future may take years to be noticeable.

In the future, we recommend that companies do not rely solely on one option. For instance, it would be wise to work with different banks like a worldwide bank and a local bank. This will help to avoid any disruptions in the business due to the unstable banking system during this time.

He predicts that the situation will improve in the near future. He believes that the state of uncertainty surrounding finance and mergers and acquisitions cannot continue indefinitely. Even if companies can temporarily adapt and extend their resources, they will still require funding to advance to the next level. Furthermore, he predicts that more companies will pursue both financing and mergers and acquisitions concurrently. This will give them more choices in case one avenue doesn't work out at a desirable valuation for the founders and investors.

Steinnon thought that the funding he was hoping to receive last year would be available in 2023 instead. However, he is disappointed by what he has observed this year. Nonetheless, he anticipates that investment and merger and acquisition (M&A) operations will ramp up from the third quarter and will match, if not exceed, last year's total of $10 billion.

According to his forecast, the cybersecurity industry is expected to experience a sluggish investment quarter in 2023's second quarter, marking one of the slowest in years.

The consequences of the failure of SVB are expected to negatively affect funding, including for cybersecurity. The speaker anticipates that private equity will take advantage of the lowered valuations and acquire deals from both the public and private sectors.

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