DataTribe Insights - Q4 2020:
Investment and Valuation Trends in cyber Security
The DataTribe Team
Throughout 2020, the DataTribe team analyzed venture capital deal activity and valuations to report on the impact of the COVID-19 pandemic on U.S. venture capital market trends. The year marked a significant drop in deal flow across all industries in the American market with a 39.7% decrease in deal volume at Seed stage, and a 32.0% decrease at Series A. The chart below summarizes all deal count volumes for Seed and Series A across all of U.S. venture capital investments in all industries.
The cybersecurity industry continues to prove resilient with deal flow in cyber remaining fairly flat throughout 2020 while other sectors saw a downward trend. While there has been a decline in cybersecurity deal volume in the last two years, it’s important to note that this decline happened before the pandemic, occurring mainly between Q1 2019 and Q3 2019. Deal volume in 2020 was relatively steady through the end of Q4.
Pre-money valuations at Seed stage and Series A have significantly increased over the past decade. Seed rounds median pre-money valuations across all U.S. venture capital investments have increased from $3.3M in 2010 to $7.0M in 2020, a 7.1% annual growth rate. U.S. Series A valuations have increased from $5.9M to $25.0M, or 14.1% annually, in the same period2 . Cybersecurity valuations have followed the same trend as the rest of early stage pre-investment.
The size of U.S. median Seed rounds has increased over the last ten years at a faster pace than valuations. Across all industries, the median amount invested in each early-stage deal has increased from $0.5M in 2010 to $2.2M in 2020, a 14.3% annual growth rate. Seed stage cybersecurity investments saw a comparable increase, growing 13.2% annually from $0.8M to $3.0M over the same period.
One implication of round sizes increasing faster than valuations is that the percentage of startups owned by investors has increased.
Looking ahead in 2021, we expect continued economic uncertainty to persist throughout the year, but cybersecurity will remain robust. As everything becomes digital, the strategic importance of cybersecurity will increase for the foreseeable future. In particular, the interplay between nation state actors and commercial enterprises will continue to be a driving force in shaping the long-term future of cyber. Compromises such as the SolarWinds hack will serve to accelerate the trend of cybersecurity entering c-suite discussions which will likely drive larger budgets. In the short to medium term, the foundational shift to work-from-home and a new role for office space in business brought by the pandemic will continue to drive demand for cybersecurity products that defend home networks and devices. Cybersecurity is in general very dynamic, but the current elevated levels of change are creating an especially favorable environment to start new companies.