Highly publicized hacking incidents and data breaches on the likes of Target, JP Morgan, Snapchat and Skype have made security a top priority and concern for corporations, governments and even consumers. The fear that these attacks has created also has spurred an opportunity for emerging companies to fill those gaps resulting in increased corporate, venture capital and private equity investment and exit activity in the sector.
Of course, with increases in investment and acquisitions, the market for cybersecurity firms has become increasingly crowded and competitive. And so all this increased activity also has served to create a great deal of noise.
491 Private Cybersecurity Companies
Our financing, exit, competition and chatter/sentiment data on the industry all unequivocally point to cybersecurity as a secular trend. But with all things that become “hot”, separating the wheat from the chaff becomes particularly difficult especially as new trends, buzzwords, companies and sub-trends emerge (and disappear). Cybersecurity also has geopolitical factors adding to the complexity, as some foreign buyers appear reticent to buy services from US vendors for fear that their data would be more secure outside of the U.S. driven by the revelations of Edward Snowden.
There are a staggering number (491 and growing by our count) of private cybersecurity tech companies attacking this market, but as is always the case, private companies are terribly difficult to understand. The opacity of private companies makes it difficult to:
- Identify relevant companies – New companies are emerging weekly given investment flows into the space. How do you track them?
- Assess company health/momentum – How do you scalably, objectively and reliably analyze nearly 500 private cybersecurity companies efficiently?
With this in mind, we are issuing Mosaic Ratings on 491 private cybersecurity companies.
For those unfamiliar, Mosaic, built with the support of the National Science Foundation, uses public data and predictive algorithms to help understand the momentum and health of private companies.
Cybersecurity Trends Are Positive
As a result of the rise in cybercrime threats, investments into the cybersecurity innovation landscape are skyrocketing, hitting $1.74 billion across 265 deals in 2013. The influx of venture capital has gone hand in hand with growing exit activity including a flurry of venture-backed IPOs from Proofpoint to Palo Alto Networks to FireEye.
While the cybersecurity industry was pioneered by early giants including McAfee and Symantec, emerging companies in the growing security market span a diverse array of services and technologies from mobile security (AirWatch, Mocana) to virtualization security (Catbird, HyTrust) to cloud identity management (Okta, Ping Identity).
Our data shows significant momentum for cybersecurity on several dimensions:
- Strong financing activity – Not only is the quantity of investment growing but the quality of investors in the market is also high (smart money vs. dumb money). Financing is strong across the maturity spectrum, i.e. seed/angel through to pre-IPO companies.
- Growth in exits: Cybersecurity exit activity has stepped up via IPOs and large acquisitions by well-heeled tech buyers.
- Competitiveness: The number of new companies coming into the market is increasing as is the level of overlap and competition among firms.
- Chatter & Sentiment: Based on a combination of overall news mentions, sentiment analysis, search engine trends over time and changes of sentiment over time, we are also observing favorable chatter & sentiment trends for the cybersecurity space.
Below is some more detail on industry trends observed followed by some data on the Mosaic company ratings.
As mentioned, overall cybersecurity financing is booming. On a year-over-year basis, 2013 saw funding to cybersecurity startups accelerate 40% as deals grew 14%. And VCs have shown an increasing willingness to back cybersecurity firms at the early-stage. Seed-stage deals took 37% of all investments in 2013, while Series A activity comprised 30% of all deals.
The cybersecurity industry has also seen an influx of “smart money” rush to back innovative startups in the market. Below is a selection of “AA”-rated cybersecurity startups based on CB Insights’ Company Mosaic models and their corresponding “AAA” or “AA”-rated venture investors behind the top-rated cybersecurity firms. As the chart highlights, top investors tended to invest at the early-stage of the highest-rated cybersecurity firms.
Peeling back cybersecurity’s financing index, which quantifies and tracks the amount, investor quality and stage distribution of VC deals and dollars, we see that cybersecurity has seen increasingly strong financing health.
A Steady, Strong Exit Picture
The growth in cybersecurity funding has come as IPO and M&A exit activity has remained at a consistently high level as can be seen by the cybersecurity exit index below.
Of note, the M&A markets have seen a diverse group of acquirers that go far beyond traditional security providers ranging from content delivery network Akamai to information services firm Experian to recently IPO’d FireEye. A cross-section of the notable exits within cybersecurity from last year are below.
Competitive Intensity Increases
Our competition index for the cybesecurity industry has remained high and has actually increased through the end of 2013 as more players enter the market resulting in more noise and competition for players. We expect competitive intensity in the space and noise to increase for the foreseeable future.
The 491 private cybersecurity companies we are initiating coverage on are quite diverse in terms of geographies and stage.
Geographically, almost 3/4 are in the US. We are observing more non-US companies getting funding as of late. Whether that is due to mistrust of US cybersecurity firms as alluded to above or just a short-term anomaly is something we continue to track.
From a stage maturity perspective, just over 1/3 of the companies are at the mid- to late-stage with the remainder being at the early stages. It is clear that the coming disruption in the space will be driven by some of the still early-stage players. In addition, many of these early players are great indicators of technology and business model developments within the cybersecurity sector.
Cybersecurity Mosaic By Last Round Raised
Many of the 491 companies have received backing from some of tech’s most notable investors including Intel Capital, Kleiner Perkins, Accel Partners and Sequoia Capital. Some additional high-level stats on the most frequent investors in the 491 companies are below.
Cybersecurity Mosaic – The Investors