Q1 marked the lowest security VC funding in a decade, but there is a silver lining

Today, DataTribe has released a new report showing that venture capital activity in the cybersecurity industry fell significantly in the first quarter of 2023, following the collapse of Silicon Valley Bank.

The report showed that while the cybersecurity industry experienced a less dramatic decline than the broader U.S. VC ecosystem, first-quarter cybersecurity deal activity was at or near a decade low, with average seed deal volume of 21 in the first quarter of 2023, compared to 20 in the first quarter of 2015. .

Similarly, the volume of cybersecurity seed deals fell 56% year-over-year, from 48 deals to 21. While the report also noted that the cybersecurity market remained “relatively good” in its early stages, with a median premoney valuation of $15, 5 million, just behind the all-time high of $15.8 million in Q4 2022.

The bright side to lower VC funding

While the overall drop in VC seed funding appears to be a major blow to the cybersecurity industry, the report argues there is an underlying silver lining: consolidation among solution providers.

“Less companies receiving more funding at higher valuations is probably a good thing for the industry, especially the company’s CISO. [who] has already been overwhelmed by salespeople trying to sell the latest product,” the report said.

In an email interview with VentureBeat, DataTribe CEO John Funge reaffirmed the report’s finding, arguing that “while the slowdown is painful in some cases, we consider it an overall healthy thing.”

Funge suggested that larger cybersecurity companies can take advantage of the market environment to make acquisitions and consolidate solutions, while weaker companies struggle to survive.

“The medium to long-term benefit of this is some rationalization of the highly fragmented tech stacks that companies depend on,” Funge said.

One company that seems to exemplify this approach is a cloud security provider Wizthat managed to raise a $300 million Series D financing round and a $10 billion premoney valuation for a solution that combines Cloud Security Posture Management (CSPM) and Cloud-native Application Protection Platform despite the economic slowdown (CNAPP) capabilities into a single solution .

If Funge and DataTribe are right that an economic slowdown will drive rationalization in the industry, then it will probably be a net positive for CISOs. They have the opportunity to reduce the complexity of their entire tech stack and reduce the total number of tools required to secure their organization’s environments.