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Cybersecurity Startups: Will Venture Capital Funding Boom Go Bust in 2018?

More than 200 cyber security startups landed venture capital or private equity funding in 2017, according to Cybersecurity Venture’s count. That’s a lot of horses brand new or relatively new to the race, all jockeying for a piece of the estimated $1 trillion pot. Yet it was a below average entry field, according to the advisory firm Momentum Cyber’s data, which figures upwards of 300 cyber security startups get in the game annually, a Reuters report said.

When the crowd is large and most, if not all are chasing the same prizes, two things happen: There are a few winners, a lot of also-rans and a ton that drop out altogether. Apply this to the cyber security market and it seems unavoidable that a shakeout and consolidation are brewing.

Which startups will survive to take the next steps? As defined by the money people, not many newbies progress to a successful initial public offering or a profitable sale. “I have never seen such a fast-growing market with so many companies on the losing side,” David Cowan, a partner at VC Bessemer, told Reuters.

With the number of cyber attacks ballooning and the nature of digital warfare becoming more lethal by the day, you’d think that there’s plenty of business to go around for the growing cadre of security providers. But there are a number of dynamics in play that may be working against the market. For one, enterprises see obvious benefits in working with fewer suppliers. For another, many outsource their security requirements to MSSPs, which usually partner with only a few proven and trusted providers. And, when smaller companies vie with the big guys in the same market, the number of startups that offer groundbreaking technology often dwindles to a scant few.

So what looks like a sure thing market maybe isn’t that at all. Dave DeWalt, Momentum’s new chairman and former FireEye and McAfee boss, told Reuters: “Suddenly, we are in this situation where there are just too many vendors and too few can be sustained. You’re starting to see companies go, ‘oh my gosh, what do I do? Can I get more capital, do I have to merge?'” he reportedly said.

Even with a possible market pullback, it’s unlikely that VCs will abandon the security industry in anything but pedestrian numbers. The market holds inestimable profits for the successful players and there's plenty of money in play. Case in point: Through last November, Momentum Cyber counted 255 financing transactions in the cyber security market valued at $4.4 billion along with 141 M&A transactions totaling $11.5 billion.

Perhaps VCs are already anticipating a cyber security consolidation and looking more closely at the smaller deals. “Startups that are likely to reach between $100 million and $300 million in value are still offering excellent opportunities for an exit,” Yoav Leitersdorf, a YL Ventures managing partner, told Reuters.

D. Howard Kass

D. Howard Kass is a contributing editor to MSSP Alert. He brings a career in journalism and market research to the role. He has served as CRN News Editor, Dataquest Channel Analyst, and West Coast Senior Contributing Editor at Channelnomics. As the CEO of The Viewpoint Group, he led groundbreaking market research.