Cyber Startup Funding Jumps 69 Percent As AI, Operations Focus Offered

In an otherwise relatively sluggish venture funding environment, investor interest in  cybersecurity startups has jumped 69% between Q1 2024 and the last quarter of 2023.

Among the reasons are the proliferation of AI applications for cybersecurity as well as solutions focused on operational needs that may become among the first AI offerings designed to immediately address specific threats to business and other organizations' needs. JL 

Chris Metinko reports in CrunchBase:

Venture funding was still sluggish, but cybersecurity startups saw love from investors in the first quarter of 2024. Cybersecurity startups raised $2.7 billion in 154 deals in Q1, a 69% increase from the previous quarter, when cyber startups raised just $1.6 billion in 148 deals. VCs see value investing in cyber even as IT budgets are cut and competition increases. A big difference between Q1 and the previous quarter was 9 cybersecurity startup funding rounds of $100 million or more. Cyber startups trumpet the use of AI for automation or help provide guardrails, but operational technology security, IoT security platforms and cybersecurity for small and medium-sized enterprises also attract interest.

Venture funding overall was still sluggish, but cybersecurity startups saw some love from investors in the first quarter of 2024.

To be sure, this is not the salad days of 2021 — cybersecurity funding was still down year to year — but the sector saw its best funding quarter in three quarters.

All told, cybersecurity startups raised nearly $2.7 billion in 154 deals in Q1, per Crunchbase data.

That dollar figure is the highest since Q1 last year, when similar startups raised just less than $2.9 billion in 228 deals. However, the Q1 2024 dollar figure represents a 69% increase from the previous quarter, when cyber startups raised just $1.6 billion in 148 deals.

The numbers seem to show quite a rebound for a sector that in the last quarter of 2023 saw its lowest amount of funding since Q3 2018, when cyber firms raised just $1.3 billion.

Big cyber deals rebound

One of the big differences between Q1 and the previous quarter was the comeback of big rounds in the cybersecurity realm — something that seems to be happening more often again in a lot of sectors.

While no round topped $140 million in Q4 2023, three big rounds were greater than that amount in Q1:

• Broomfield, Colorado-based Quantinuum locked up a $300 million fundraise at a pre-money valuation of $5 billion led by JPMorgan Chase in January. The startup was spun out of Honeywell in 2021 and merged with Cambridge Quantum Computing;
• In February, Austin, Texas-based NinjaOne, which provides endpoint management, security and monitoring, raised a $231.5 million Series C led by Iconiq Growth at a $1.9 billion valuation; and
• Finally in March, New York-based Axonius, a cybersecurity and SaaS asset management startup, secured a $200 million Series E extension led by Accel and Lightspeed Venture Partners. The company had originally raised another $200 million in the Series E in 2022 at an announced $2.6 billion valuation.

In fact, big rounds were somewhat the story of the quarter, which saw nine cybersecurity startup funding rounds of $100 million or more. That’s three times as many as there were in Q4 2023.

Not just AI

The easy thing to do is write off the jump in cyber funding solely to AI — after all, many cyber startups trumpet the use of the technology in their platform for automation or help provide guardrails for companies using it.

But a look at some of the firms that raised big in the quarter seems to tell a different story.

Two of the bigger raises in Q1 were Nozomi Networks locking up a $100 million Series E from investors including Mitsubishi Electric and Schneider Electric, and New York-based Claroty securing $100 million in strategic debt/credit financing led by Delta-v Capital.

The companies both offer industrial security — also called operational technology security — and IoT security platforms, a subsector of cybersecurity that had seen a dearth of funding in recent quarters.

Another big round went to New York-based Coro, a cybersecurity platform purpose-built for small and medium-sized enterprises. The company announced a $100 million Series D led by One Peak last month to serve what many believe is an underserved market.

That is not to say many of these companies don’t have an AI story to tell — especially to investors — but that is not the entirety of their businesses.

Better days ahead?

All of that said, this does not mean cybersecurity is headed back to the heights of 2021, when the sector raked in nearly $24 billion — an amount that seems ludicrous today.

It does mean VCs and strategics continue to see value in investing in the industry even as IT budgets are cut and competition continues to increase.

Already this month, data security startup Cyera raised a $300 million Series C led by Coatue at a $1.4 billion valuation, so the second quarter is off and running.

Most cybersecurity executives will proudly proclaim the resilience of their security offering to any malicious attack — it seems their startups may have a little of that virtue when it comes to securing funding in a tough market.