Oct 4, 2022 - Technology

Cyber investors aren't worried about a recession — yet

Illustration of pile of money with hovering cursor

Illustration: Eniola Odetunde/Axios

Forecasts of a years-long economic downturn aren't stopping cybersecurity investment funds from pouring money into both early- and late-stage security startups — at least for now.

The big picture: As the country awaits a potential economic recession, venture capital deals have started to dry up and startup valuations have shrunk. Still, cyber venture capitalists tell Axios their firms are eager to invest.

  • Meanwhile, following two years of sky-high investment activity, some cybersecurity sector investing has slowed, with the number of early-stage deals decreasing 21% between the third quarter last year and the same period this year, according to PitchBook data shared with Axios.

State of play: Four venture capitalists tell Axios their firms are still interested in both early- and late-stage security startups. However, some are shifting to specific product types or asking different financing questions to better protect their investments.

  • Christopher Steed, chief investment officer and managing director at cyber investment fund Paladin Capital Group, tells Axios his firm is in "buy mode" for late-seed and Series A cyber startups. Paladin recently raised a $372 million fund.
  • Hank Thomas, CEO and co-founder of early-stage investment firm Strategic Cyber Ventures, says his firm is focusing more on cybersecurity companies that provide human-focused solutions, like training programs, as well as products for critical infrastructure companies.
  • Morgan Kyauk, a partner at NightDragon, which invests in late-stage companies, says his firm is asking more about what contingency plans their investments have for two years from now if the "financing environment hasn't changed."

Between the lines: Investors anticipate that market demand for new cybersecurity products will continue into a possible recession — justifying continued investor interest in cybersecurity.

  • More than half of cybersecurity professionals said in an ISACA survey earlier this year that they anticipate their companies' cyber budgets to increase in the next year.
  • The biggest cyber investment opportunities lie in cloud security, software-as-a-service and artificial intelligence tools, says Asheem Chandna, a general partner at Greylock Partners.
  • "I do think that despite the [cybersecurity] sector being overfunded, the sector is tremendously ripe for innovation and there are many, many new opportunities," Chandna says.

The intrigue: A forthcoming recession could inspire cybersecurity professionals to turn to entrepreneurship after facing layoffs, Steed says, sparking continued VC interest.

  • Thomas points to the example of bitcoin. The digital asset was born out of the 2008 economic recession and is now mentioned in "every fifth conversation" on business-focused TV networks, he says.

What's next: Investors still expect the bear market to catch up to the cybersecurity sector eventually and have been advising their companies accordingly.

  • Several investors advise cyber startups to put an emphasis on cutting costs, hiring less and getting as close to breaking even as possible.
  • Thomas says some of his consumer-facing companies are also starting to stockpile cash to ensure they have some on hand for future product launches.

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