Fueled by considerable interest in generative artificial intelligence, startups filled their coffers much faster in the first half of 2024.
After venture capital and equity records investing in cybersecurity companies in 2021 and 2022, the sector faced a sharp decline, with a drop in financing of 37% in the fourth quarter of 2023 according to a study by DataTribe information.
While this follows broader trends, last year’s crisis significantly reflects a decline in early-stage financing deals. There were less than half as many early-stage investment deals in 2023 (21) as in Q4 2022 (49) – even though the overall amount of capital invested in these young cybersecurity developers has not decreased also sharply.
In the first months of this year, seed and pre-seed capital investments in cybersecurity are rebounding. Venture capital investments in cybersecurity are on the rise overall in the first half of this year and are on track to exceed 2023, according to Wayne Schepens, chief cyber market analyst at CyberRisk Alliance (parent company of SC Media) and managing director of LaunchTech Communications.
“We are still far from the peak, but probably for good reason,” Schepens said. “Venture capital firms have played it safe and continue to do so. » But the deals already closed so far this year are encouraging, as early-stage investors are going all-in on cybersecurity startups that focus on using generative AI, expanding roles in identity management and access, and exposure to threats. management and third-party risk management solutions, he added.
“I’ve seen larger seed funding rounds than usual,” Schepens said. “This is coupled with extended tracks made possible by additional stage-based slices. »
Many venture capital firms like Glasswing Ventures focus specifically on early-stage technology companies that use AI, according to Rick Grinnell, the firm’s founder and managing partner and head of its cybersecurity funding. “Last year was really slow…the pace of deals was less than half of what was typical,” said Grinnell, whose firm invests in companies focused on machine learning and increasingly AI. advanced since 2016. A third of the nearly 50 Glasswing companies have invested in cybersecurity companies.
Early-stage AI companies attract investor attention
Given fervor for AI, as well as technology is rapidly increasing maturity, investors look more favorably on startups that can use AI to better detect and fend off attackers – who themselves leverage AI to increase the number and apparent credibility of their attacks. When Grinnell began investing in early-stage cybersecurity companies at Glasswing, and at his previous job, “AI wasn’t even on the roadmap for many investors.”
With the arrival of AI not only in the world of cybersecurity, but also in social media and the public consciousness, companies that use generative AI are becoming as attractive to investors as the technology seems. be for the mass market, Grinnell added. The use of AI is driven in part by the need to refine security tools as attack waves increase, alert fatigue increases, and it becomes harder to find a signal in the noise.
Additionally, investors are seeing demand for enterprise users to adopt intelligent tools that will fight fire with fire.
“We’re seeing cyberattackers adopting it more and more,” Grinnell said, talking about attackers using AI to clone or copy corporate websites, launch more complex and authentic phishing campaigns and counterfeits. deep, which often cross several channels. “Many of (these attacks) are motivated by the ease of exploitation of AI,” he added.
On the other hand, cybersecurity startups are making great strides in detecting and responding to these attacks using AI themselves.
“It’s much harder for humans to stop these threats alone,” Grinnell said, comparing the increasing pace of cyberattacks to the rise of high-frequency trading over the past two decades.
In many ways, the investment community mirrors the broader market in building a customer base for cybersecurity software and service providers. A Deloitte center for integrated research investigation Late last year, 500 U.S. business and technology executives found that among more than 20 capabilities, top technology investments included analytics, cloud, mobile and AI.
More than half of business leaders (58%) responding to the Deloitte 2023 survey said they are focused on investing their cybersecurity budgets in identity and access management, according to Chris Thomas, director of Deloitte Consulting LP.
Improving identity security has also driven startup investors, looking to fund developers who can help companies better design access control and deployment, according to a recent Identverse report earlier this year .
(Editor’s note: This is part of a series featuring the top 15 cybersecurity trends of 2024 and 2025)
