In the first quarter of 2024, funding deals within the cybersecurity sector experienced a significant decline of 20% year over year, amounting to $2.3 billion, according to Pinpoint Search Group.

Despite the decrease, cybersecurity vendors closed 77 funding rounds during the quarter, a slight uptick from the 75 funding rounds recorded in the same period last year. Notably, seed rounds constituted 40% of the Q1 funding transactions, mirroring the figures from the previous year.

The Pinpoint Search Group report also highlighted a decline in merger and acquisition activity within the cybersecurity market, with the number of deals decreasing from 31 in Q1 2023 to 24 in the most recent quarter.

Positive Signs Amid the Slowdown

Mark Sasson, founder and managing partner at Pinpoint Search Group, said the fact that Q1 2024 numbers came in as they did is a good sign.

“The first quarter of 2023 represented the tail end of an explosive two-year period of funding for cybersecurity vendors that quickly trended downward in parallel with the broader economic downturn,” Sasson explained. “The Q1 2024 numbers represent a potential upward trajectory following three quarters of decline.”

Seed rounds dominated funding transactions throughout 2023. It’s not surprising that the trend is continuing into Q1 2024, Sasson said. “As many late-stage security vendors failed to adapt to changing market conditions, investors moved on,” he explained. “It seems many decided to make low-risk, low-dollar investments into early-stage companies proposing solutions that address the biggest security holes today.”

Seth Spergel, managing partner at Merlin Ventures, said from what he’s seen, seed funding has remained strong, and the primary drop-off has been in the later stages. “While there is a small dip in seed deals, even as the individual deal sizes get larger, the number of A, B, and especially later stage deals has fallen off dramatically,” Spergel said. “I believe some of this is due to a stagnant IPO market.”

Without IPOs happening, Spergel said, it’s harder to justify an investment in a late-stage company that does not have an obvious path to exit.

Confidence in Cybersecurity Innovators

Spergel sees signs that the market is opening. He hopes that the pressure will begin to alleviate over the next six to twelve months.

In terms of innovation, Spergel pointed out, many of the newest developments come from new companies that are raising their seed rounds, and there the market remains strong. “Given the time horizons for a company to raise a series A after a strong seed round, I believe companies raising seed rounds now will be raising their A rounds in a much stronger later-stage market, as they will likely not need to raise for 18 months or so,” he said.

As far as the market outlook is concerned, Sasson said, it’s too early to tell. But his confidence in cybersecurity remains high. “March 2024 was a particularly encouraging month, with vendors exceeding $1 billion in funding for the first time in thirteen months,” Sasson said. “However, we really need to see how funding shapes up in the next few quarters to determine if we saw a temporary spike versus a stabilizing trend.”

People with bad intentions and nation-state competition and conflict will compel all parties to continue innovating, investing in, and purchasing modern security solutions, Sasson said.

Strategically, investors are expected to continue to track new technology innovations and how threat actors might exploit them. “From there, they’ll invest in founders that present a credible solution,” Sasson said. “A few segments of security I’ll be watching with interest will be Web3 and blockchain, firmware and supply chain, critical infrastructure, and, of course, AI model security.”

Spergel said companies that can drive reductions in cost and complexity for buyers will be the winners. “Novel approaches to the market that rethink old ways of doing things and improve both service levels and cost efficiencies become even more critical as organizations struggle with both budgets and finding qualified staff,” he said.

Photo credit:  Jakub Żerdzicki on Unsplash