Why is cybersecurity venture funding so tepid despite the strong demand?

If you took a look at venture capital investment trends in the cybersecurity market, you’d be excused for thinking that the sector was struggling.

Crunchbase data indicates that cybersecurity startups raised $1.9 billion in the third quarter, across 153 deals. The amount was better than the $1.7 billion startups in the sector raised in Q2 2023, but deal count declined from 181 deals.

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But Crunchbase goes on to note that with third-quarter cybersecurity venture funding down 30% compared to the year-ago period, investment in the category could fall to its lowest level since 2019. Other sources are also tracking a decline in cyber venture investment this year.

That’s not a huge surprise since venture capital investment has largely been in retreat in 2023 compared to the past several years, but given public cybersecurity companies’ performance these days, we’re a little bit puzzled at just how tepid venture investment in this space is.

It makes sense that fintech as a sector is suffering, since those companies’ growth rates have come down, and the startups that benefited from pandemic-driven tailwinds have since seen their valuations slashed.

PayPal’s revenue, for example, rose 8% in the third quarter, and the company’s price/sales multiple has collapsed in recent years (price/sales is the grown-up version of a startup revenue multiple). Observe:

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