The cybersecurity capital market remains volatile, but there are encouraging signs in the latest Q2 2024 cybersecurity funding report from Pinpoint Search Group. The report revealed a slight increase in the number of transactions compared to Q2 2023 but a significant increase in the total amount of funding raised. The rise in funding year-over-year is a positive indicator for an industry that has undergone considerable changes over the past year, said Mark Sasson, co-founder and managing partner at Pinpoint Search Group.
“Last year was a challenging year economically, likely contributing to the dip in cybersecurity funding we experienced throughout 2023," Sasson said. "Additionally, there has been growing evidence of an industry reset, with investors spreading their funding dollars among new technologies designed to address the IT threat landscape of tomorrow, including AI, crypto and automation."
In Q2 2024, Pinpoint Search Group’s research team recorded 120 transactions in the cybersecurity vendor space, totaling $3.3 billion across 98 funding rounds and 22 M&A events. This represents approximately a 1% increase in transaction volume (up from 97 in Q2 2023) and a 71% increase in fundraising from the previous year's $1.9 billion. However, Pinpoint noted that the year-over-year increase over Q2 2023 is skewed due to the $1 billion raised by Wiz in May 2024; yet, even excluding that round, Q2 2024 still saw a 21% increase over the previous year.
Cybersecurity is still a maturing industry driven by start-up innovation; annual investment in security has swung wildly over time, Sasson told ChannelE2E. While there is no question that investment rebounded compared to last year's period, funding for Q2 2024 remains below Q2 funding for 2022 ($4.3 billion) and 2021 ($4.9 billion), he said.
When it comes to hot areas for investment, Sasson noted that AppSec and identity remain consistent while companies protecting operational technology (OT), AI/LLMs and Web3 are picking up steam, and added that funding trends and baselines are still developing for security vendors. Just like in Q1 2024, early-stage rounds (seed and series A) dominated funding volume in Q2 2024 and accounted for 55% of funding rounds, according to the Pinpoint Search Group research. The growing investor interest in budding companies indicates continued confidence in a new generation of vendors addressing not only current but also future business challenges like AI-powered threats, the report noted. Foreseeing this trend, investors began spreading their investments among emerging technologies last year. In 2023, Pinpoint found that seed-stage rounds accounted for 42% of the tracked funding rounds.
"In hindsight, massive investments in 2021 and 2022 may have been driven by hype. Last year's economic challenges may have caused the pendulum to swing far in the opposite direction. As opposed to a surge, we may simply be seeing the shaping of a more sustainable trendline with the numbers in 2024," Sasson said.
There's been a lot of buzz about consolidation in the cybersecurity market, too, Sasson said, but the general consensus is that no single vendor is comprehensive enough to cover an enterprise's entire environment, so multiple vendors for different attack vectors are still necessary.
"Yes, consolidation remains a consistent feature in the market, but the consensus shared with me by my network of security professionals is that no one vendor can 'own' an enterprise’s security environment. So, while consolidation seems to be of interest, numerous vendors will continue to be deployed," he said.
That opens up plenty of opportunities for MSPs and MSSPs to help customers better protect their environments, especially SMB customers who aren't typically well-served by cybersecurity vendors. There's also plenty of opportunity to continue delivering cybersecurity solutions and respond to ever-evolving threats with tools from existing vendors who continue to receive funding in growth and later rounds, according to the Pinpoint research.
"From my point of view, the MSSP market continues to grow and has a place. SMBs underserved by the security industry are finding cost-effective and efficient solutions with MSSPs," Sasson said.
While later-stage financing (such as growth funding, Series C, D and E) only represented 13% of the total deals in Q2 2024, it was 65% of the total funding during that period, according to the research. The interest from investors in later-stage rounds can be attributed to their ongoing investments in established security vendors. These vendors have adapted to market changes driven by increased demand, with cybersecurity budgets rising 59% year-over-year due to the growing number of breaches and cybersecurity incidents affecting more organizations. Since these later-stage rounds usually indicate companies aiming to expand their product lines and enter new markets, vendors and investors can anticipate a rise in hiring cybersecurity professionals, the research noted.
Of course, in cybersecurity, the only constant is change, so MSPs and MSSPs should stay vigilant and make sure they are ready to adapt quickly to whatever comes next in the industry.
"While the numbers for H1 2024 are promising, there still seems to be volatility in the space. Given the rapid advancement of technology and the need for vendors and investors to adapt quickly, that may be a constant moving forward," Sasson said.
