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News



ANALYSTS: CYBERSECURITY FUNDING SET FOR REBOUND

Analysts seem bullish about funding and M&A activity for the second half of the
year, though transaction volumes and values dipped again in Q2.
Jai Vijayan
Contributing Writer, Dark Reading
July 10, 2023
Source: emin kuliyev via Shutterstock
PDF


In line with prior expectations, financing deals, and mergers and acquisition
(M&A) activity in the cybersecurity sector appears to have dipped in the second
quarter. However, analysts tracking the market have a more upbeat assessment for
the rest of 2023 — compared to three months ago — with most now expecting a
modest recovery on both fronts by the end of the year.



A lot of the optimism has to do with enterprises continuing to invest heavily in
cybersecurity, despite a slowdown in other expenditures. Market research firm
IDC expects that organizations will spend some $219 billion this year on
security products and services — or some 13% more than they did in 2022 — to
address threats, to support hybrid work environments, and to meet compliance
requirements. The areas that will receive the most spending are managed security
services, endpoint security, network security, and identity and access
management.

"While the theme of conservatism and expectations for continued headwinds have
remained throughout the first half of the year, we do expect to see strategic
activity slowly begin to rebound in the second half of 2023 and into 2024," says
Eric McAlpine, founder and managing partner of analyst firm Momentum Cyber.
Financing and M&A activity will both eventually pick up as companies that were
able to make do financially so far begin to feel the need for fresh capital to
fuel their business, he says.

Data from Pinpoint Search Group shows that cybersecurity companies raised a
total of some $1.9 billion in 97 funding rounds in Q2. That was 35% lower than
last quarter's $2.9 billion, and some 55% lower than the funding that
cybersecurity firms raised in the year-ago quarter.



"As interest rates cooled multiples and the exit market, cybersecurity-focused
venture capital (VC) certainly slowed down, particularly in comparison to 2021
and 2022," says Alex Doll, partner at cybersecurity investment firm Ten Eleven
Ventures. "Valuations got tighter and the demands of investors to see clear
signs of demand and traction were elevated," he says. Hiring by VC-backed
companies too slowed considerably as companies re-forecast expectations and
planned for longer runway times, Doll says.




A HANDFUL OF BIG INVESTMENTS IN CYBER IN Q2

There were several significant investments that venture capital firms and others
made in cybersecurity companies last quarter. Easily the biggest among them was
the $190 million that managed detection and response (MDR) vendor BlackPoint
Cyber raised in a growth investment round led by Bain Capital, with
participation from Accel and several other investors. BlackPoint will use the
funds to fuel further development of the company's MDR, managed application
control, cloud response, and logging and compliance technologies.

Another big transaction was the $132 million that online identity verification
vendor ID.me secured in April in a Series D funding round led by Viking Global
Investors with participation from Morgan Stanley Counterpoint, CapitalG, FTV
Capital, and others. The investment brought to $275 million the total amount the
McLean, Va.-based company has raised from investors since its 2010 launch.



Two other funding transactions hit the $100 million mark. One was a $100 million
investment in Cybereason that Softbank and other investors made in April to
support the company's growth plans in the XDR and EDR market. So far, Cybereason
has raised over $850 million from various investors, including Google. The
latest cash infusion came just six months after the company laid off 17% of its
workforce last October and highlighted the continued confidence investors have
in Cybereason.

Meanwhile, a Series B funding round of $100 million that Cyera raised in June
highlighted investor interest in the emerging market for "data security posture
management" technologies.

"While investment in Q2 has been down overall, high-performing companies with
solid fundamentals are continuing to receive large rounds of financing, even in
a challenging economic environment," McAlpine notes.


STRATEGIC MERGERS & ACQUISITIONS CONTINUE

Pinpoint said it counted 18 M&A transactions in the cybersecurity sector in Q2 —
a significant drop from the 31 similar transactions it counted in the first
quarter of the year.

The biggest of the lot — from a strategic standpoint — was F-Secure's $223
million acquisition of Lookout's mobile consumer security business. McAlpine
says F-Secure has described the purchase as allowing it to nearly triple its
market presence in the US and strengthen its position in the communication
service provider segment.

Rik Turner, an analyst with Omdia, identified Cisco's purchase of Lightspin in
March and Armorblox in May — both for an undisclosed amount — are two other
acquisitions to watch. Cisco's purchase of Lightspin gives it a presence in the
cloud security posture market, though it is still some way behind the likes of
Palo Alto Networks in that space, Turner says. 

"It will be interesting to see whether it combines that technology with what it
got two months later when it bought Armorblox," Turner notes.

IBM's purchase of Polar, again for an undisclosed sum, bears watching as well,
Turner says. "We've been watching DSPM, which, until this acquisition, was a
sector made up almost entirely by start-ups," he notes. IBM's entry into the
space could trigger a landgrab in the market by other major vendors, Turner
notes.


NEW OPPORTUNITIES FOR PRIVATE EQUITY FIRMS

Meanwhile, falling valuations continued to create new investment opportunities
for private equity (PE) firms as they did in Q1. Among the more notable PE
transactions in 2023 was Crosspoint Capital's acquisition of Vancouver-based
endpoint-security vendor Absolute Software for $657 million in May and Cinven's
purchase of governance, risk, and compliance software vendor Archer for an
estimated $1.3 billion in April.

Crosspoint's purchase price represented an approximately 34% premium over
Absolute's share price of $8.58 on May 10, 2023. When the acquisition is
complete, Absolute's shareholders will receive $11.50 in cash per common share.

"One thing to watch is how Crosspoint is amassing a veritable stable of cyber
firms," Turner says. The firm already owns or has stakes in Forescout, ExtraHop,
ReversingLabs, Digicert, RSAC, McAfee, Cyware, and others, Turner notes, adding
that it's possible that Crosspoint could do some "corporate engineering" and
bring different bits of these companies together at some point. Or the PE firm
could "simply inject some capital into all of them with a view to spinning them
back out when the time is right," he says.

Meanwhile, Cinven did not disclose the financial details of its purchase of
Archer from RSA Security in April. However, data that Momentum Cyber compiled
from various industry sources for its second-quarter financial roundup,
estimated the transaction value at $1.3 billion.

Sectors that have received significant funding throughout 2023 include identity
and access management, data security posture management (DSPM), and data
detection & response (DDR), McAlpine says. He adds, "We're also seeing increased
attention from investors on startups helping companies use emerging forms of AI
— large language models and generative AI — securely."

Going forward, Doll from Ten Eleven Ventures says that while VC funding has
slowed overall, compared to other sectors, cybersecurity continues to present an
attractive opportunity for investors. "For the right companies, capital is
definitely available," Doll says. Cybersecurity also continues to be a priority
for enterprise organizations, and there are signs of new investments in areas
such as AI: "We think investing in the sector will accelerate again in the next
12 to 18 months," Doll notes. "There's a lot of growth ahead, as attacks persist
— in fact, enabled by AI — and new attack vectors, such as AI itself become more
apparent."

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