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Cyber-security VCs are holding onto their cash – but that’s OK

Doug Drinkwater | Sept. 19, 2016
Are VCs cooling their interest in cyber-security companies?

William Altman, tech industry analyst at CB Insights

William Altman, tech industry analyst at CB Insights, explains that the slowdown is because VCs are essentially becoming more picky in who they invest in.

“The overall slowdown in funding is happening because VCs are becoming more discerning with their cybersecurity investments,” he tells CSO Online.

From 2012 to 2015 the rising number of high-profile attacks prompted cybersecurity spending across both government and corporations to increase, creating massive potential for start-ups promising "next-gen solutions.” Consequently, lots of new companies with overlapping products and services emerged — especially in endpoint protection — and VCs flooded the market with cash in anticipation of the windfalls.

Consequently, Altman says that VCs are now spending more time on due diligence and scrutinizing possible investments. He adds that they are looking for technology differentiation amid an over-saturated market of similar players, and admits there is now less appetite for single-solution vendors.

“VCs are holding out for companies that are merging to offer more unified-security platforms.”

Furthermore, he continues that early-stage companies that were funded in 2015 have since slipped below expectations, with their products quickly shown to be copies, obsolete or simply with revenues that “were not up to expectations.”

Jack Gold, principal analyst and founder at J. Gold Associates, agrees that VCs may have got swept away with market hype.

“Here’s the problem…if I as a VC find a nice cool company with a new twist on security and I invest in them, there’s a chance I will find six other companies doing the same thing in the same marketplace.

“There is an over-abundance of companies trying to get a different bite of the same security meal.”

Alex Van Someren, managing partner of the early stage funds at Amadeus Capital, believes though that the market will continue to grow.

“Cybersecurity remains a very active investment area which has no trouble overcoming any slowdown, perceived or real, in the general investment environment.

“[It] will continue to be a significant investment area for the foreseeable future, since it is a horizontal technology required by many vertical sectors.”

AI and IoT security drive new VC dollars

If, as Gold suggests, there is an over-supply of vendors competing for cash in this space, it would seem that the successful ones will tweak their products for an evolving threat landscape. After all, all companies must move with the times.

Sean Cunningham, managing director of Trident Capital, illustrated this perfectly when speaking to new site Third Certainty last month, saying that the cybersecurity world has moved on from prevention to detection and response.

“Cybersecurity is moving away from the era of building walls toward more flexible and proactive approaches,” he said. “This requires constant monitoring for breaches and vulnerabilities and remedial responses. So we’re seeing a wave of consolidation among cybersecurity companies of all sizes.”

 

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