It feels to us that the Cybersecurity venture market is a bit overheated (listen to our recent podcast on the subject, Ep. 104 CEORater Podcast). The National Venture Capital Association does not break out the Software industry by subsector, therefore it’s difficult to find precise numbers. However, our unscientific analysis (industry publications, reported deal flow, social media postings and direct conversations), suggests that the Cybersecurity sector is currently enjoying robust venture capital investment activity.
This begs the question – how much is too much? There are a number of well-established Cybersecurity vendors as well as a number of laggards (“zombie companies”). Thus the market already feels a bit crowded.
In addition, we expect large platform players such as Amazon, Google and Microsoft to secure their cloud offerings through a combination of internally developed Cybersecurity tools complemented by acquisitions.
VCs: only so many Cybersecurity software vendors will be acquired which should not provide you comfort if M&A is your exit strategy.
Before venture capital firms invest in Cybersecurity companies it’s best to make sure that Cybersecurity management teams have defined strategies and execution plans for sustainably differentiating its products and services. Cybersecurity is a “cat and mouse” game, therefore some minimal investment will be required by each vendor to keep its product set fresh. This minimal R&D investment level is likely higher than what one would typically find at a non-Cybersecurity software company (measured as a percentage of revenue) – which in of itself implies that Cybersecurity is a scale game.
Further, given what we have articulated to this point it would be wise for Limited Partners (“LPs”) to quiz their VCs as to why they are investing in the latest Cybersecurity firm. Is the VC truly impressed with the founding team, or, is the VC more interested in “keeping up with the Joneses” and making sure that at the end of each quarter its investment count in the Cybersecurity sector is competitive with the level at which other VC firms are investing? (i.e. investing for the wrong reason). This last point matters when VCs work to raise funds from their LPs. It helps to have good performance numbers but also to provide examples of current investment activity. Often the sexier the investment sector the better. However, in a rational world the amount of hype surrounding a particular sector should not unto itself justify investment allocations.
To quote Ben Franklin “if we all think alike, no one is thinking.”