8 Venture Capitalists Explain Good Reasons To Be Optimistic About Cybersecurity

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it wasn’t long When the tide seemed to start heading towards ransomware. But 2023 shows otherwise. Even though the year is only half over, hackers have already claimed to have caused more victims than ever before, reaffirming the importance of cybersecurity for any business.

2023 was a bountiful year for hackers, but not so much for startups trying to defend themselves against them. Investment in cybersecurity is well below the all-time high set in the previous year. Security startup funding totaled $2.7 billion in the first quarter of this year, down 58% from $6.5 billion in the first quarter of 2022. Only 149 deals were announced in the first quarter. 2023 will be the lowest total in years, down 45% from the previous year.

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But investors remain optimistic. With the explosion of large language models and generative AI, many are excited about the technology’s potential in the cybersecurity space. The need to protect the cloud and connected devices, combined with declining valuations, has led some to believe that now is the perfect time to invest.

We interviewed several leading cybersecurity investors to get their thoughts on the slowdown in fundraising, their most anticipated market trends, and the ongoing diversity issue in cybersecurity.

We spoke with:

  • Alex Doll, Founder and Managing General Partner, Ten eleven Ventures
  • Barak Schoster, Venture Partner, Battery Ventures
  • Sheila Gulati, Managing Director, Tola Capital
  • Umesh Padval, Venture Partner, Thomvest Ventures
  • Andreas Calabrese, General Partner, Tampa Bay Ventures
  • Deepak Jeevankumar, Managing Director, Dell Technologies Capital
  • Mark Krainak, Founding Partner, Acreal Capital
  • Ariel Tseitlin, Partner at Scale Venture Partners

Alex Doll, Founder and Managing General Partner, Ten eleven Ventures

Funding for cybersecurity startups has leveled off. How has your investment strategy changed to reflect the new market conditions?

The company successfully closed its cyber-only and stage-agnostic state-of-the-art global fund in June 2022 and is actively deploying funds from it. Despite the current environment, our investment strategy remains much the same as ever, but always nimbly adjusted to look for stages, subsectors and geographies within our cyber-only, stage-agnostic global mission. doing. We believe the most important opportunities come at the best value here.

These subsectors now include new approaches in software supply chains, identity, privacy and trust. We invest aggressively across stages where we see market opportunities and attractive technologies. Just last week we announced a seed investment in Silent Push and a Series B investment in Blackbird.ai. We are still very active, meeting some inspiring entrepreneurs at his InfoSec in London.

While the downturn in the public markets has reduced growth-stage opportunities in the pre-IPO stage, Series B and C exits from non-cyber-specialized funds have found some very exciting prospects. You will be able to strategically help your company move to the next chapter.

What advice would you give your portfolio to survive the current tough market?

During these uncertain and potentially frightening times, leaders need to stay close to their teams, communicate an inspirational and motivating vision, and give team members time together to jointly solve problems. there is. This kind of culture can be difficult to strengthen as we normalize from the pandemic. We are still used to remote work routines and have experienced many shocks (including the SVB crisis) in the last 12 months. But it matters more than ever.

Given that many publicly traded cybersecurity companies have posted faster revenue growth than other technology companies, cybersecurity startups are more likely than the average startup today to pursue revenue growth rather than saving money. Should we focus?

It definitely changed my perspective. Investors are now placing more emphasis on capital efficiency metrics when making investment decisions for cybersecurity companies raising new rounds. Therefore, companies should keep these metrics in mind, especially in the early stages and as they approach maturity.

On the one hand, companies need to be careful not to “starve growth” by under-investing in sales and marketing or, importantly, R&D. Experimentation is still essential when developing the optimal go-to-market strategy for new products and new users.

More intent should be placed on measuring R&D spending and looking for leading indicators of success as projects evolve. For example, marketing/sales funnels and channel quantification always get a lot of attention (and for good reason), but how little time is spent on R&D productivity metrics? It always amazes me. R&D productivity statistics may be less developed and subjective to some extent, but it’s an “art” that every cybersecurity CEO needs to learn.

All R&D resources should be accountable to the team/business in the same way sales and marketing are accountable quarterly. For example, measuring innovation release cycles and the number of actual “market tests” can be a very predictive yet overlooked statistic for early stage companies. Great companies have an inherent urgency to their innovation cycle times.

Is cybersecurity-focused venture capital underperforming? Do you expect venture investment in this category to increase in the second half of the year?

Investments in cybersecurity are trending downward, but will accelerate again within the next 12-18 months. Cybersecurity spending remains a priority for businesses, and we are seeing new and interesting investment areas such as AI and protecting organizations from the risk of disinformation, driving more investment rounds ahead. will be

In addition, new funding is currently being raised in this area, contributing to increased funding levels in the future. Overall, cybersecurity is still seen as a strong growth area and is more resilient than many other areas.

Valuations have fallen, but cybersecurity M&A activity remains flat. Are you accelerating your investment in cybersecurity to take advantage of lower prices?

Of course, we’re aggressive when we see high-value opportunities, but it’s refreshing to invest when valuation expectations aren’t so high. So yes, we believe now is a good time to invest and are actively looking for companies whose expectations are in line with today’s environment.

According to recent data, only 24% of cybersecurity employees are women. Are we seeing a shift in the demographic of cybersecurity founders, or does it reflect what we see among cyber workers more generally?

Most of the cybersecurity founders we meet are men, but more and more of these companies have female executives. Notable examples of innovative CEOs in our portfolio include Darktrace CEO Poppy Gustafsson and Corsha Founder and CEO Anusha Iyer.

It is interesting to note that much of the research and thought leadership within the portfolio has come from women such as Marta Janus, Principal Adversarial ML Researcher at HiddenLayer, and Amanda Berlin, Principal Incident Detection Engineer at Blumira. We are always actively meeting new female founders and executives, and would love to meet others who would like to talk to cybersecurity-focused investors.

Looking ahead, what cybersecurity trends are you most looking forward to from an investment perspective?

We believe AI will bring several new facets to the cybersecurity field, such as empowering security analysts and making traditional security operations tools easier to use. And as our recent investment in HiddenLayer shows, machine learning models, including LLM, must be protected from malicious attacks. We are also closely monitoring new risks arising from AI-powered automation, including bots, and symptoms such as the rapid spread of large amounts of misinformation.

How do you prefer to receive pitches? What are the most important things founders should know before calling you?

In the past, we have invited founders to submit via our website or email. The most important details to include are team background, product idea, initial thoughts on initial/milestone customers, round size ideas, and some thoughts on ‘use of revenue’. Why and how we need that amount The founder will spend her next 18-24 months trying to reach her next milestone.

Before taking the call with us, the founders should know that we are expert investors in cybersecurity and already have a lot of knowledge about the general dynamics of this space. So beyond generic stats about breaches and industry growth, we want to know the founders’ unique experience in cybersecurity and how it contributes to the products they’re building and growing. I think.

We want to see early evidence of getting early and prompt feedback from potential buyers and design partners. The ability of the founding team to receive and iterate on this feedback quickly is critical. Great companies have an inherent urgency in their innovation cycle times, and we believe this trend can be seen very early in the DNA of winning founding teams.

Barak Schoster, Venture Partner, Battery Ventures

Funding for cybersecurity startups has leveled off. How has your investment strategy changed to reflect the new market conditions?

Our investment strategy is consistent. I founded a cybersecurity company before becoming a venture capital investor, but my passion for this field has not changed. Cybersecurity remains a key focus area for Battery, which has expanded its scope to include other related areas such as privacy protection, developer tools, cloud computing, data analytics, and artificial intelligence. We aim to seize opportunities in adjacent markets with synergies with the cybersecurity market.

We maintain a long-term view, prioritizing investments in startups with promising technology and strong market potential, even if immediate funding conditions are challenging.

What advice would you give your portfolio to survive the current tough market?

Focus on the customer: Continue to build the software people want, meet their needs, listen to their feedback, and proactively address their pain points. Additionally, many cybersecurity companies may need to rethink their go-to-market strategies by considering different distribution methods (direct, managed security service providers, value-added resellers, open source, self-service, etc.). not. By adapting to customer needs and compliance regulations in emerging market segments. We invest in research and development to discover new opportunities, improve efficiency and differentiate ourselves in the market.

It is also important for companies to maintain cash flow and ensure efficient resource allocation. We advise companies to carefully monitor cash flow and maintain a sound financial position to ensure sustainability.

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