Cybersecurity financing declined in the second quarter of 2022, but investors are optimistic and believe the economic downturn can represent an opportunity.
Separate reports describing financial activity in the cybersecurity sector were published this week by financial advisory firm Momentum Cyber and cybersecurity venture capital firm and incubator DataTribe.
According to Momentum Cyber’s Cybersecurity Market Review for H1 2022, cybersecurity stocks decreased by 25% and the economic downturn has caused losses across the board.
Roughly $12.5 billion of capital was raised by cybersecurity companies this year, but financing volume and deal count have decreased in the first half of 2022 compared to the same period of the previous year. Much of the money went to companies specializing in identity and access management, risk and compliance, and incident response and threat intelligence.
DataTribe has published a report containing data on early-stage cyber deal activity in the second quarter of 2022, in the United States. The company found that seed deal volume decreased by nearly 20% year-over-year and Series A deals declined by 43%.
“Cyber seed deals are down but still in line with historical averages of 3%. Cyber Series A deals have fallen from the peak of 8% at the beginning of the pandemic in Q2 2020,” DataTribe said.
The company reported that median seed deal valuations have dropped from $18 million in the first quarter to $12 million in the second quarter, but they’re still 50% higher than the second quarter of last year. Series A funding saw a 10% decline in median valuation in Q2 — from $45 million to $40.5 million — but it’s still 23% higher than the same period of 2021.
[ READ: SecurityWeek Analysis: 230 Cybersecurity M&A Deals Announced in H1 2022 ]
Despite the decline in cyber deals, investors do not appear concerned. Momentum Cyber’s report cites New York City-based venture firm Lytical Ventures, which says it sees “the opportunity to capitalize on the fears in the marketplace”.
“An economic downturn can create attractive entry points into companies which manifest into long-term value for investors,” Lytical said.
“Investing during a downcycle can be advantageous,” it added. “Companies that can weather the downturns are often well-positioned to grow quickly during the recovery period.”
Eight venture capital firms that have focused exclusively on cybersecurity since 2020 have raised more than $3 billion in capital.
DataTribe also doesn’t appear concerned, saying that both public and private cybersecurity companies appear to have remained more resilient compared to firms in other tech sectors. This, the company says, is not surprising considering that cybersecurity spending is expected to go up.
“Big picture, we think this is a great time for cybersecurity investing. Public and late-stage private companies will be taking advantage of the environment to make good acquisitions, and keep up the flow of capital going to cybersecurity. Great cybersecurity companies will also be born,” DataTribe said.
It added, “DataTribe continues to see a robust and quality flow of cybersecurity companies. In our talks, founders generally understood that capital was scarcer and seemed more open to lower valuations. In the long run, realistic valuations will better serve seed-stage entrepreneurs as they raise future rounds of capital.”