How Did Cybersecurity Investments Fare in 2020?
Nearly every industry in the world has drastically changed in the last year, with finance being no exception. Although investment spending decreased in many industries, there are some industries that were fortunate enough to see growth during this unprecedented year. Cybersecurity is one of those industries. According to Forbes, cybersecurity spending reached $123 billion last year. This number is expected to swell to a whopping $248 billion by 2023, according to MarketsandMarkets. Why is this so when COVID-19 has had such a negative impact on investments in other industries? The answer has to do with the number of pieces in the average business tech stack, which is defined as all of the technologies a business uses to build its digital infrastructure. As the number of pieces in the business tech stack grows, cybersecurity solutions will need to grow as well to keep company and customer information safe.
What Do Funding Stages Look Like?
Let’s say you have started a small cybersecurity business that focuses on firewall security management. How would you actually go about getting funding? You could always gradually prove the value of your products while simultaneously relying on the generosity of your family and friends to fund new innovations. This type of funding is referred to as “pre-seed” funding and it can help a company get off the ground in the early stages of their company. Subsequently, your customer base will grow, your operations will expand, and everyone will live happily ever after. Does this sound too good to be true? Unfortunately, it’s unrealistic for most companies to grow with limited outside help.
This is where investors come in. Before funding starts, investors conduct a valuation of the company. This means they do an in-depth analysis of various factors affecting the company like risk, track record, leadership, market size, etc. If there are no red flags during the valuation process, the company moves on to the first official equity funding stage: seed funding. Much like planting a tree, this early financial support “seed” is planted with the hope of helping the company grow. This early round of funding often helps a company with product development or preliminary market research. Each company raises a different amount in a seed funding round which can be anywhere between $10,000 and $2 million.
If a business establishes a strong enough track record after seed funding, the founders may decide to pursue Series A funding. Typically, the capital from a Series A round of funding is used to further develop the company’s product offerings. Companies participating in this round of funding will have a stronger business model and plan for generating profit in the long-term. Companies usually raise about $2 million-$15 million in this round. It’s common for larger, well-established venture capital firms like Sequoia Capital to start investing in this round. When a company obtains one strong investor, it is easier for them to attract additional investors. Only around half of companies obtain Series A funding after seed funding.
Next, we have Series B funding which is all about expanding the market for your business. Often, Series B funding is necessary for businesses that need to grow enough to meet the expectations of their previous investors. Businesses looking for this type of funding already have a winning product and a track record of success, but they often need to finance their growing team. Sometimes this round of funding has the same investors as the first round, but usually additional late stage investors are involved as well. Businesses raise an average of $33 million in Series B funding.
The last stage is Series C funding. Companies who reach this stage are already quite established and successful. They may look for this late stage funding to reach new markets or undergo major product developments. Additionally, this stage can be used to merge the company with a competitor when appropriate. The main purpose of this investment round is to scale the business. This round often attracts the most investors because the business becomes a less risky investment as it has a proven track record of success. Although it is possible for companies to go on and raise Series D or E funding after Series C, it is uncommon unless they would like to achieve a specific goal like raising their valuation prior to an IPO.
Three Key Qualities to Look for in Cybersecurity Investments
Now that we’ve reviewed the funding basics, what are some of the trends that explain how some cybersecurity companies have raised funds despite facing difficult times during the pandemic? According to Option3 Ventures, there are three key qualities that investors are looking for in cybersecurity companies in 2021:
- Scalability and lean R&D
- Solid business plans and a unique product delivery model
Let’s dive deeper into each of these trends…
Technology projects are not slowing down, despite most of the workforce working remotely for the past year. This means that companies’ cybersecurity needs are growing to support their remote workers and their technology projects. Specifically, mature SaaS companies are faring well as their services are needed to secure the increasingly remote workforce. In economically volatile times, younger companies with less experienced teams are typically swallowed up by these larger, more financially secure companies.
2. Scalability and lean R&D
On the opposite end of the size spectrum, investors are looking for startups, specifically with scalability and lean R&D. While scalability or the ability for a company to grow quickly might seem logical, why would lean R&D be important? The key is that they will have a hot product when the economy speeds up again, but they won’t require a large upfront investment during these economically uncertain times. These types of startups can bootstrap their budgets for a couple of years before their products or services take off.
3. Solid business plans and a unique product delivery model
It’s no surprise that investors would want to invest in companies with solid business plans. However, this becomes even more crucial in tough economic circumstances. Like all of us, venture capitalists would like the highest level of certainty during these uncertain times. This is why they are even more likely to choose businesses with solid business plans. Additionally, investors are looking for companies with unique product delivery models that will have an immediate impact on the remote work environment that we are all facing. This is why companies focused on identity management, monitoring, and authorization are expected to be popular cybersecurity investments this year.
ForgePoint Capital’s Take on Cybersecurity Investment in 2021…
ForgePoint Capital is the premier venture investor for early stage cybersecurity companies. We sat down with their Managing Director, Alberto Yepez, and their Principal, Ernie Bio, to see what they look for in cybersecurity investments in 2021. When considering potential cybersecurity investments, Ernie and Alberto focus on the market, the technology, the leadership team, and the customers. For example, they chose to invest in 1Kosmos for four main reasons. First, they saw an opportunity in the market to marry up identity proofing and passwordless authentication. Second, the BlockID technology is cloud native, portable, in compliance with high security standards like NIST-800, and blockchain-based. Third, the leadership team has a track record of success in the identity space. Lastly, the company has operational deployments with sophisticated customers. Additionally, they see a need in the market for passwordless cybersecurity solutions. In fact, many Fortune 500 companies that they speak to have more password resets per month than they have employees. For these reasons, ForgePoint Capital decided to invest $15 million in 1Kosmos’ series A funding in February 2021.
Is Cybersecurity a Strong Investment in 2021?
Overall, cybersecurity is a strong investment in 2021. Before investing in a cybersecurity company, research the market, the technology, the leadership team, and the customers. The best cybersecurity investments are backed by seasoned leadership teams with proven track records and are eager to fill urgent market needs, like securing the remote workforce.