Report: VC Security Funding Is Down, But M&A Activity Is Up

Venture funding of cybersecurity startups may be cooling off, but M&A activity involving security companies young and old has definitely heated up in recent months.

A new report from Progress Partners, a Boston-based investment bank, said that the amount of venture funds invested in cybersecurity companies declined in the third quarter compared with the same period last year, to $3.3 billion from $5.6 billion, or by 41 percent.

The pullback comes amid uncertain economic times, with market gyrations, high inflation and predictions of a coming recession dominating recent headlines.

But Eric Bell, a managing director at Progress Partners, said he’s still encouraged by VC activity in cybersecurity, noting that the number of cybersecurity funding deals actually increased to 221 in third-quarter 2022 from 182 in third-quarter 2021 for a 21.4 percent increase.

Despite all the economic headwinds, the spike in deals shows that interest in cybersecurity investing remains solid, driven by high demand for security products and services amid a spike in cyberattacks across the world, Bell said.

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“There’s still strong interest in cybersecurity,” he said. “Investors see opportunities.”

Year-to-date VC figures show roughly the same trend—a decline in total dollars invested from $18.8 billion so far in 2022 to $14.1 billion during the same time period in 2021, but with the number of deals increasing to 650 from 505, according to Progress Partners data. 

With the falloff in VC dollars and corresponding rise in the number of VC deals, the average dollar amount per cybersecurity transaction declined in the third quarter to $14.9 million from $30 million during the same period in 2021. But that trend can actually benefit investors.

“There’s no lack of [startups] looking for money, so investors are more in the driver’s seat,” said Bell, noting that VC valuations in general are down.

Progress Partners’ VC outlook generally confirms what other analysts are seeing: a cooling-off of early stage cybersecurity investments in dollars but an increase in deals.

Earlier this year, DataTribe, a self-described “cybersecurity foundry” that invests in early stage startups, reported a marked decrease in early stage funding in second-quarter 2022.

Maurice Boissiere, chief customer officer for DataTribe, agreed with Bell that cybersecurity generally remains strong, especially compared with other tech sectors that have gone through even tougher financial times.

“As [tech] sectors go, cybersecurity is less down than others,” he said. “The need for cybersecurity remains high.”

Boissiere added that “we’re actually seeing better-quality deals,” with investors spending more time reviewing investment opportunities and working to improve the performance of newly funded companies.

The data, operations and identity access management security categories saw the most funding last quarter, according to Progress Partners. Switzerland-based Acronis netted the most funding in the third quarter, $250 million, according to the report

As for M&A activity, Progress Partners said the pace of takeovers through the third quarter is set to break last year’s record.

In the third quarter, there were 104 cybersecurity M&A deals totaling $11.7 billion, compared with 75 deals in third-quarter 2021 totaling about $12 billion. 

Year-to-date, there were 330 deals in the third quarter totaling $60.4 billion, compared with 237 deals totaling $50 billion during the same time period in 2021. 

Among the largest M&A deals in the third quarter was private equity firm Thoma Bravo’s move to acquire Ping Identity for $2.8 billion. Earlier this year, Thoma Bravo also moved to buy SailPoint for $6.9 billion and just recently announced its intention to buy Forge Rock for $2.3 billion.

“Thoma Bravo has been on a tear,” said Bell. “In general, private equity is playing a huge role in cybersecurity.”

The strong M&A activity involving cybersecurity companies is yet another sign that investors have confidence in the sector, said Bell.  

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