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Photo: Philippe Huguen/AFP/Getty Images

The market for cybersecurity startups is bubbling, but more of these new firms are choosing to sell out to larger companies than to grow into major independent players.

Between the lines: As a result, the big winners in cybersecurity investing right now tend to be founders and early-stage investors rather than larger venture capital and private equity (PE) firms.

There's strong interest from private equity firms: "Every color of private equity — VC, growth, and buyout — is chasing cybersecurity," says Kristjan Kornmayer, director of M&A Advisory Services with the Chertoff Group, a global security advisory firm. "But it’s especially tough for the big buyout shops. There are not enough mature, scaled opportunities to put real money to work."

  • Private equity firms often have large minimum investment amounts, but companies "get snapped up before reaching any significant size to be of interest to private equity," Kornmayer said.
  • Some PE firms are so interested in investing in cybersecurity firms, they're lowering their minimum investment expectations to get in the game before companies get acquired. "We are seeing some funds revisit their minimum equity checks to accommodate the realities of this market’s structure," Kornmayer tells Axios.

By the numbers: In the general market, PE firms normally invest a minimum of $100 million in a company. But in the cybersecurity market, PE firms' average investment, not their minimum, is approximately $80 million, per data PitchBook shared with Axios.

Driving the market: Cybersecurity firms are often formed to quickly meet and beat new threats as they emerge, and bigger firms are prone to snatching them up to show they are prepared to meet threats better than their competitors. "On the early stage side, corporate buyers are looking to add new technology capabilities as soon as the company proves itself," Kornmayer said.

The other side: The fast pace of acquisition is also rooted in how hard it is to make a cybersecurity solution that's relevant. RSA Security CTO Dr. Zulfikar Ramzan tells Axios that cybersecurity startups often end up "stumbling":

They haven’t been able to prove out they can do a proper go-to-market...By then their investors have sort of run out of patience and steam and they say 'Okay, we’re done, let's wind it down and sell the company for whatever we can get.'
— Dr. Zulfikar Ramzan, RSA Security's CTO

The bottom line: The pace of the market doesn't appear to be slowing anytime soon.

  • The cybersecurity M&A market is active and getting more active. Already in the first half of 2018 there were 101 M&As in the cybersecurity market, which is well on track to surpass the number of M&As that took place in all of last year, 178, per Momentum Cyber, a cybersecurity advisory firm.
  • Just this year, for example, cybersecurity firm Splunk has already acquired Phantom at $350 million and VictorOps at $120 million, and Palo Alto Networks has acquired Evident.io at $300 million and Secdo at $90 million.

What's next: PE firms are still hungry to invest in cybersecurity businesses — despite having to shift their expectations. "The industry’s size and growth justify the enthusiasm. We are talking about an $87 billion market growing 12% per year — that’s not easy to find," Kornmayer said.

Go deeper

The hard math behind America's labor shortage

Data: Bureau of Labor Statistics, Congressional Budget Office; Chart: Axios Visuals

Yes, the pandemic has created unusual temporary labor market dynamics. But in the bigger picture, the 2010s were a golden age for companies seeking cheap labor. The 2020s are not.

The big picture: In the 2010s, the massive millennial generation was entering the workforce, the massive baby bo0m generation was still hard at work, and there was a multi-year hangover from the deep recession caused by the global financial crisis.

Advocates fret Roe v. Wade's 49th anniversary could be its last

Photo: Leigh Vogel/Getty Images for Women's March Inc

As Saturday marks the 49th anniversary of Roe v. Wade, the Supreme Court's landmark decision that legalized abortion access in the U.S., advocates warn the ruling is "more at risk now than ever."

The big picture: The Supreme Court in December heard a challenge to a Mississippi 15-week abortion ban that could throw Roe's survival into question, or at least narrow its scope.

Updated 13 hours ago - Politics & Policy

Omicron dashboard

Illustration: Brendan Lynch/Axios

  1. Health: Pfizer and Moderna boosters overwhelmingly prevent Omicron hospitalizations, CDC finds — Omicron pushes COVID deaths toward 2,000 per day — The pandemic-proof health care giant.
  2. Vaccines: The case for Operation Warp Speed 2.0 — Starbucks drops worker vaccine or test requirement after SCOTUS ruling — Kids' COVID vaccination rates are particularly low in rural America.
  3. Politics: Biden concedes U.S. should have done more testing — Arizona says it "will not be intimidated" by Biden on anti-mask school policies — Federal judge blocks Biden's vaccine mandate for federal workers.
  4. World: American Airlines flight to London forced to turn around over mask dispute — WHO: COVID health emergency could end this year — Greece imposes vaccine mandate for people 60 and older — Austria approves COVID vaccine mandate for adults.
  5. Variant tracker