After a robust comeback in the second quarter of this year, funding to cybersecurity startups tumbled 51% in Q3 as investors pulled back.
Venture dollars to cyber startups fell to only $2.1 billion in Q3 — a steep drop from the $4.3 billion raised by such startups in the previous quarter — per Crunchbase .
Perhaps surprisingly, the quarter also saw the lowest amount of deal flow since Q4 2013, with only 116 announced rounds. The number represents a drop of 41% from last year and 35% from Q2.
What happened?
In Q2, it seemed as if cyber venture funding was well on its way to a rebound.
However, the global venture market continues to slow and this last quarter cyber couldn’t overcome that trend.
The biggest difference between Q2 and the most recent quarter was the amount — or lack thereof — of big rounds. In Q2, cyber saw 10 rounds of $100 million or more, including Cloud security startup in May locking up the biggest cybersecurity round of the year thus far as it raised $1 billion at a $12 billion valuation.
However, last quarter saw only four — all much smaller when compared to Wiz:
- In August, San Mateo, California-based secure communications company raised a $456 million round from and . While the company did not specify a valuation, it did state it was a minority investment, meaning its valuation is greater than $1 billion.
- That same month, San Francisco-based — which aims to stop attacks and find compromised accounts across email and connected applications through leveraging machine learning and AI to understand human behavior — closed a $250 million Series D led by that valued the startup at $5.1 billion.
- In July, compliance startup raised a $150 million round led by that valued the company at $2.45 billion.
- Also in July, Kirkland, Washington-based software supply chain security startup locked up a $140 million Series C that minted it a unicorn at a $1.12 billion valuation. The round was led by , and .
While one could argue the Wiz round skewed the numbers for Q2, it is worth pointing out even without that deal, Q3’s dollar amount was still 36% below the previous quarter.
Investors bullish
Even with the drop in dollars and deals, investors remain optimistic about what they’re seeing in the sector.
“I think valuations are in a good place right now and there are some exciting new cyber architectures coming out,” said — a managing director at who specializes in cyber, cloud and AI infrastructure — mentioning specifically autonomous agents trained on massive amounts of data to more effectively diffuse security issues.
Several factors likely are at play concerning the down numbers, Padval said. That includes seasonality issues — with Q3 mainly being in the slower summer months — how cyber deals are classified due to its crossover with the burgeoning AI sector and even possibly the AI craze taking time away from some investors looking at new cyber deals.
“I think it’s likely a combination of several things,” said Padval, adding the dollar total in Q3 is very comparable to that of last year.
Israel cyber funding down
One region known specifically for cybersecurity — Israel — has had significantly more important issues for the past year. With funding to Israel-based startups down, it comes as little surprise its marquee startup industry is also suffering.
Funding to cybersecurity startups in the country last quarter hit only $135 million in eight announced deals, per Crunchbase . While that dollar figure is double Q2’s amount, it is still down 49% from Q1 and 62% from Q3 2023.
The largest round for a cyber startup in Israel last quarter was an $80 million deal that went to , which enables enterprises to share, protect and govern files from any device.
“In Q3, Israeli cybersecurity funding saw a slight drop in both the number and sum of rounds, much like the global trend,” said , senior partner and head of the Israel office for cyber venture firm .
“I don’t believe that one quarter indicates a yearly slump unless this trend continues in Q4,” he said. “Early-stage Israeli cybersecurity startups (seed, A) raised the majority of funding rounds this quarter … This may help explain the overall decline in funding this quarter.”
Schreiber said he sees U.S. VC firms remain extremely active in the Israeli cybersecurity ecosystem, with some firms opening or reopening Tel Aviv offices or hiring an investment professional in Israel.
“In Q4, we anticipate several large funding rounds, the likes of Q1 and Q2, that have been on the back burner for the past few months and may compensate for the slight drop in Q3,” he added.
Methodology
Cybersecurity is defined by the industries of network security, cloud security and cybersecurity, according to Crunchbase data. Most announced rounds are represented in the database; however, there could be a small time lag for rounds reported late in the quarter.
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