Facebook, Adobe, Evernote, Home Depot, Target and even the Federal Reserve Bank have all fallen prey to cyberattacks. As the attacks have gotten more frequent, smarter and larger in scope, investor interest in the cybersecurity market, at both the consumer and the corporate level, has also intensified. 2013 saw a record level of investment funding and deals to the space with $1.71 billion invested in 240 deals to emerging cybersecurity companies.
According to Ted Schlein, a general partner at Kleiner Perkins and one of VC’s most connected partners, a massive shift is currently taking place within the cybersecurity universe. Schlein asserts that evildoers are inevitably going to get on your network, so “it’s a matter of preparation and staying vigilant when the invaders land inside the wall.”
“There are two types of companies: those that know they’ve been breached, and those that haven’t figured it out yet…The game is no longer about prevention; it’s about detection.”
— Ted Schlein
This analysis takes an in-depth look at the financing and exit landscape in the cybersecurity industry as well as the investors and companies fueling the cybersecurity startup ecosystem.
Specifically we’ll cover:
- Financing trends by stage
- The most well-funded cybersecurity startups
- Investor league tables
- Exit activity
The cybersecurity industry has received $5.2 billion across 807 deals in the past five years, and cybersecurity investment has been steadily increasing in terms of both funding dollars and number of deals. Last year, the industry hit a five-year high in both funding and deals, reaching $1.71 billion across 240 deals which represented 18% deal growth and 31% funding growth on a year over year (YoY basis). A few recent notable investments include app virtualization firm Illumio‘s $34M Series B, OpenDNS‘s $35M Series C in May and Bit9’s $38.3 million Series E funding in February.
Q2 2014 was also a peak in cybersecurity funding on the back of many large deals. The average deal size in the second quarter was $13.5, a 113% increase from the first quarter’s average deal size of around $6.3 million. Last quarter was bolstered by big deals such as Okta’s $75 million Series E round in June, and Centrify’s $42 million Series E funding in May and Skyhigh Networks which raised $40M in a Series C from Salesforce, Greylock Partners and Sequoia Capital in June.
Financing Trends by Stage
In terms of dollar share, late stage investments at the Series E stage have seen steady and significant growth over the last five years, going from 1% of dollar share in 2009 to 19% in 2013. On the other hand, funding for mid-stage investments has been decreasing slightly, falling from 54% of dollar share in 2009 to 33% in 2013. Amid new and proliferating threats, early-stage investors are also writing bigger checks to cybersecurity startups. In 2013, Series A funding share hit a five-year high at 35%.
In terms of deal share, early-stage activity has gained significant share in recent years. Of note, seed and Series A stage deals have trended above 60% of aggregate cybersecurity deal share since 2011 as seed financing deal share rose to hit a five-year high in 2013. Despite notable growth in funding amount, Series E+ investments’ deal share has remained range-bound for the last five years which is not wholly unexpected given the dynamics of the venture capital funnel.
Most Well-Funded Cybersecurity Startups
Of the most well-funded and un-exited cybersecurity companies, mobile security provider Good Technology takes the number one spot followed by cloud identity management firm Okta. Good Technology competes in the mobile device management space, which has in the past year seen Accel-backed AirWatch exit to VMWare for over $1B and Sequoia-backed MobileIron IPO at a valuation of over over $670M at the time of exit. Now Good Technology appears to be on the IPO track as well – having revealed a confidential IPO filing in May.
Here are some of the earliest and most active investors in the most well-funded private cybersecurity startups:
- Good Technology: New Enterprise Associates, Draper Fisher Jurvetson, Oak Investment Partners
- Okta: Andreessen Horowitz, Sequoia Capital, Floodgate, Greylock Partners
- OpenPeak: Blackstone Group, GMG Capital Partners, RRE Ventures
The most active investor in cybersecurity startups across all stages is Intel Capital, one of two corporate VC firms on the list of top investors overall. A few of its investments include PacketMotion, Onset Technology, PerspecSys, and mFormation. Although the firm is missing from the list of top early-stage investors, it ranks highly on both the mid-stage and late-stage lists.
Andreessen Horowitz is the most active VC investor at the early stage, getting in early on companies such as Pindrop Security, Signifyd and Bromium. Silicon Valley-based investors like A16Z dominate the list of top early-stage investors, taking 10 out of 12 spots.
The most active micro VC investor group in early-stage cybersecurity startups is Paris-based Kima Ventures, which has funded companies such as Tektrak, Covertix, and Spotflux. Kima Ventures is closely followed by Maryland-based Dingman Center Angels, which invests in companies from the mid-Atlantic region. Its portfolio includes Distil Networks, Spotflux, and ZeroFOX.
Take a look at our snapshot of early-stage cybersecurity investments for a more in-depth look at recent trends.
Kleiner Perkins Caufield & Byers takes the top spot at the mid-stage, having invested in 10 cybersecurity companies including Apperian, Endgame, and Reputation. Silicon Valley monopolizes this list as well, as every single investor in the top 13 is based in the Valley.
The most active late-stage VC investor is Intel Capital, which has invested late in companies such as TriCipher, PGP Corporation, and Solera Networks. The list of top late-stage investors has a bit more diversity in terms of geography compared to the other stages, as Chicago-based Adams Street Partners and Boston-based Sigma Partners are among the investors tied for the number two spot. However, eight of the top 11 investors are still based in Silicon Valley.
Exit activity in the cybersecurity space actually decreased slightly in 2013 after three years of increasing exit numbers, decreasing 26% from 101 exits in 2013 to 75 in 2013. Some of cybersecurity’s recent notable exits include AirWatch’s acquisition by VMware for $1.54 billion in February, Cyvera’s acquisition by Palo Alto Networks for $200 million in April, and Prolexic Technologies’ acquisition by Akamai Technologies for $370 million in February.
IPO’s are 4% of exits for the last three years as most of the exits in the space are via M&A. The IPO’s from 2013 include malware and cyber-attack protection company FireEye, email and web security developer Barracuda Networks. There have already been a couple of cybersecurity company IPO’s so far in 2014: enterprise mobility management company MobileIron (valued at $672 million) and identity and access management appliance company Imprivata (valued at $342 million).
Three companies tie for the top acquirer in cybersecurity: Google, McAfee, and Symantec, all having acquired eight companies each in the cybersecurity space.
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