‘Frothy’ Early-Stage Cybersecurity Startup Funding Cools In Q2

DataTribe report says a ‘correction’ was to be expected and even welcomed after so many past quarters of ‘frothy’ growth.

The cybersecurity funding bubble hasn’t burst, but it seems to have sprung a distinct leak.

According to DataTribe, the number of cybersecurity seed and Series A funding deals in the U.S. declined sharply in the second quarter, compared to the same quarter in 2021, as investors appeared to be pulling back amid growing economic concerns.

Cybersecurity seed deals in the second quarter fell by 19.5 percent, to 33 transactions, compared to the same quarter in 2021. By comparison, the overall number of seed deals across the entire tech sector was up 5 percent last quarter, according to DataTribe, which describes itself a “cybersecurity foundry” for early-stage firms.

Meanwhile, the number of Series A cybersecurity deals in the second quarter was down by 43 percent, to 12 transactions, compared to 2021. Overall, Series A deals in the U.S. were down 28 percent across all tech sectors.

As measured by the median dollar size of deals in the second quarter, the signals were mixed, according to DataTribe.

From the Q1 2022 to Q2 2022, the median valuation of cybersecurity seed deals fell from $18 million to $12 million. But the second quarter seed dollar number was still 50 percent higher than the same quarter in 2021.

For Series A deals, the median valuation fell from $45 million in the first quarter of this year to $40.5 million in the second quarter, according to data. But the second quarter median valuation for Series A deals was still 23 percent higher than during the same quarter in 2021.

Maurice Boissiere, chief customer officer for DataTribe, said putting all the stats together points to a cybersecurity funding market that’s cooling down after spectacular growth in recent years.

“The market isn’t tanking, but it is calming down after some frothy times leading up to late 2021,” he said. “It’s like we’re coming back to a better altitude. It’s more like a correction that we’re seeing.”

He also noted that other tech sectors had previously seen a cooling down in VC funding.

“Everything else has taken a hit,” he said. “It just took cybersecurity a little longer.”

In recent months, later-stage cybersecurity companies have been laying off employees in an attempt to preserve cash. Meanwhile, smaller companies have been told by investors to tighten their spending belts, in anticipation of tougher times ahead.

Richard Seeward, managing director of Evolution Equity Partners, said he’s not surprised that early-stage cybersecurity investing may be cooling off a bit, largely due to economic conditions.

But he said in a statement to CRN that he remains bullish on cybersecurity.

“The market for funding of best of breed cybersecurity companies remains strong and you will continue to see a fair amount of activity in the segment as the year progresses,” he said.

“Demand for cybersecurity technology remains resilient as attacks and fraud will continue to be a significant risk category for enterprises and governments around the world.”

He added: “History demonstrates that adversarial nation states, hackers and criminals raise their game in times like this and the opportunity to build cybersecurity companies that defend and protect against next generation attacks is an important area that will continue to be funded across the economic cycle. The cybersecurity market remains one of the most attractive areas in software for investment across the economic cycle.”

In a statement to CRN, Ofer Schreiber, senior partner at YL Venturesin Israel, said his firm’s research shows that “ early-stage cybersecurity deals haven’t declined in the first half of 2022” in Israel, which has emerged as a global hub for cybersecurity companies.

If anything, he said the size of cybersecurity seed and Series A funding have increased in Israel so far this year.

But he did concede that a slowdown is likely due to market conditions.

“We do anticipate a decline in investor appetite for Series A funding down the road,” he said. “Market conditions encourage investors to adopt a more conservative approach to post-seed funding this year, with more stringent due diligence processes and a general hesitation to invest large sums in companies that have not proven their current value.”