After a strong comeback in the second quarter of this yr, funding for cybersecurity startups dropped 51% in the third quarter as investors pulled out.
Venture dollars for cyber startups fell to simply $2.1 billion in the third quarter – a sharp decline from the $4.3 billion raised by such startups in the previous quarter – in line with Crunchbase data.
Perhaps surprisingly, this quarter also saw the lowest variety of deals since the fourth quarter of 2013, with only 116 rounds announced. This figure represents a decline of 41% in comparison with last yr and 35% in comparison with the second quarter.
What happened?
In the second quarter, cyber enterprise financing gave the impression to be on track to rebound.
However, the global enterprise capital market continues to slow, and cyber was unable to buck the trend last quarter.
The biggest difference between the second quarter and last quarter was the number – or lack thereof – of huge rounds. Cyber reported 10 rounds of at least $100 million in Q2, including a cloud security startup Wizard in May, closing the yr’s largest cybersecurity round, which raised $1 billion at a $12 billion valuation.
However, only 4 were recorded in the last quarter – all much smaller in comparison with Wiz:
- In August, the San Mateo, California-based secure communications company Kiteworks raised a $456 million round Insight partners AND Sixth Street. While the company didn’t provide a valuation, it did say it is a minority investment, meaning its valuation is over $1 billion.
- In the same month, based in San Francisco Abnormal security — which goals to stop attacks and find compromised accounts in email and connected apps by using machine learning and artificial intelligence to grasp human behavior — closed a $250 million Series D company led by Wellington Board which valued the startup at $5.1 billion.
- Compliance launch in July This is praiseworthy raised $150 million in a round led by Capital of Sequoia which valued the company at $2.45 billion.
- Also in July, Kirkland, Washington, launched a software supply chain security startup Chain guard closed a $140 million Series C, giving it a unicorn with a valuation of $1.12 billion. He led the round IVP, Partners of the Lightspeed enterprise AND Red point.
While it may be argued that the Wiz round skewed the second quarter numbers, it’s value noting that even without this deal, the dollar amount for the third quarter was still 36% lower than the previous quarter.
Bullish investors
Even as dollars and transactions decline, investors remain optimistic about what they see in the sector.
“I think valuations are at a good level right now and there are some exciting new cyber architectures emerging,” he said Umesh Padwal — managing director of Thomvest Ventures which specializes in cyber, cloud infrastructure and artificial intelligence – specifically mentioning autonomous agents trained on massive amounts of knowledge to more effectively diffuse security problems.
Padval said several aspects are likely contributing to the declining numbers. This includes problems with seasonality – with the third quarter falling largely in the slower summer months – how cyber deals are classified because of their intersection with the burgeoning AI sector, and even perhaps the AI craze taking over time from some investors looking at latest cyber deals.
“I think it’s probably a confluence of several factors,” Padval said, adding that the third-quarter dollar total is very comparable to last yr’s total.
Israeli cybersecurity funding declines
One region particularly known for cybersecurity – Israel – had much more significant problems last yr. It’s hardly surprising that with declining funding for Israel-based startups, the tent startup industry is also suffering.
Cybersecurity startup funding in the country last quarter was just $135 million across eight announced deals, in line with Crunchbase data. While this dollar amount is double the second quarter, it is still down 49% in comparison with the first quarter and 62% in comparison with the third quarter of 2023.
The largest round for a cyberstart in Israel last quarter was an $80 million deal CTERA networksthat permits enterprises to share, protect and manage files from any device.
“In the third quarter, Israeli cybersecurity financing saw a slight decline in both the number and total of rounds, in line with the global trend,” he said Schreiber’s offersenior partner and head of the Israeli office of a cyber investment company YL ventures.
“I don’t think one quarter will represent an annual decline unless this trend continues in Q4,” he said. “Israeli early-stage cybersecurity startups (seed, A) raised the majority of funding rounds this quarter… This may help explain the overall decline in funding this quarter.”
Schreiber said he sees U.S. VC firms remaining extremely energetic in Israel’s cybersecurity ecosystem, with some firms opening or reopening offices in Tel Aviv or hiring an investment specialist in Israel.
“We anticipate several large financing rounds in the fourth quarter, such as the first and second quarters, which have been on the back burner for the past few months and may offset the slight decline in the third quarter,” he added.
Methodology
According to Crunchbase, cybersecurity is defined by the industries of network security, cloud security, and cybersecurity. Most announced rounds are represented in the database; nevertheless, there could also be a slight delay for rounds reported late in the quarter.