What VC Funding Reveals About the Future of Cybersecurity

Venture capital isn't the answer for every cybersecurity company.

Edward Gately, Senior News Editor

July 22, 2019

6 Min Read

This year has brought a flood of new venture capital funding in cybersecurity, following up on last year’s record of $5.3 billion.

Security is continually evolving, and what worked to protect customers just a year ago might not be effective today. Solution providers might not have the time or expertise to evaluate new options among the growing number of startups and others in the industry.


Merlin’s Seth Spergel

During his presentation titled, “Security 2020: What VC Funding Reveals About Future Trends,” part of the security track sponsored by Nextiva at Channel Partners Evolution, Sept. 9-12, in Washington, D.C., Seth Spergel, vice president of emerging technology at Merlin International, will discuss some of the recent trends in security venture investment. He’ll cover what VCs look for in a company that can inform your selection process and how MSPs can buck conventional wisdom and find hidden gems of security startups to work with.

In a Q&A with Channel Partners, Spergel gives a sneak peek of the information he plans to share during his presentation.

Channel Partners: There’s been a flood of cybersecurity investment during the past several months. What’s fueling this trend?

Seth Spergel: I think a lot of it is fear of missing out due to some of the insane exits and valuations people read about cybersecurity companies getting. In 2013, there were 39 “unicorns” (venture-backed companies valued at over $1 billion). Today there are over 300, with 112 added in just 2018. When those companies go public, as seven of them did in 2017 and 2018, people hear about the significant returns early investors made. No one wants to miss out on the next one, and that, combined with the sheer amount of venture capital funds that have been stood up in the last few years, means there is a lot of money that people are very eager to deploy. It doesn’t hurt that cybersecurity is finally starting to impact financial performance of companies — for example, with Moody’s downgrading of Equifax following their breach. That drives additional interest in the cybersecurity market, and everyone wants to find the next unicorn.

Hear from Spergel and a great lineup of speakers at Channel Partners Evolution who will help you improve your business. It all happens Sept. 9-12, in Washington, D.C. Register now!

CP: Are investors looking for particular indicators in cybersecurity companies?

SS: Every investor has different things they look for. Typically investors want to see a founding team that understands their market, has a track record of success, and has something unique about them that makes them have a higher likelihood of success than others. The cybersecurity space is so crowded right now, it’s unusual to find a company that has a truly unique product, so an investor needs to know why this one company will succeed when others will likely fail. It’s also important to understand that there are different types of investors. Whereas VCs are more focused on generating financial returns to their limited partnerships (LPs), strategic investors may be looking for something that complements their product/service portfolios, accelerates their product road map or provides them a competitive advantage. Ultimately, both financial and strategic investors are looking for deals that will generate outsized returns.

CP: Is VC funding becoming a competitive advantage, and if a company isn’t getting any, are they doomed to fail?

SS: If there is one thing I’ve learned working in this space it’s that VC is not the answer for every company. For some, it’s a huge advantage, especially if you have the right investors or cutting-edge technology that requires capital to invest in R&D or sales. But it has to be the right type of company, and the management team of the company has to …

… understand what they are signing up for. I was recently speaking to an investor who teaches an entrepreneurship class at Georgetown, and he tells his students that venture funding is like rocket fuel. It’s awesome if you want that rocket trajectory, but not everyone wants to be on a rocket ship. It means a lot of pressure and expectations (and hours), and anything that isn’t astronomical growth is going to be viewed as a failure.

Venture capital funds make their money on the one or two hits they happen to find, companies that sell or go public at 10 times or more the valuation the investor invested. Companies that double or triple in valuation tend to get ignored, and I’ve seen companies essentially get shut down by their investors when they didn’t see a path to that significant exit. There are plenty of successful, sustainable companies out there that are not VC-backed. They may not be rocket ships, but that doesn’t mean their technology isn’t extremely strong, and it doesn’t mean you shouldn’t buy from them.

That said, for companies interested in being a rocket ship, the right investors can be hugely helpful. Many bring a strong network of contacts they can introduce you to, operating experience in building successful companies, and a stamp of credibility that they did their diligence and believe in you enough to put their money into the company. For a channel partner looking for a product to bring in, VC-backed companies may also make more of a splash due to that “rocket ship” trajectory, which may help from a name-recognition perspective. Venture investment also typically means there is more funding available to invest in engineering, which means they will likely be able to add new and innovative features more quickly than a non-venture backed startup.

CP: How does an MSP find a hidden gem of a cybersecurity startup whose funding hasn’t been widely publicized?

SS: There isn’t any magic formula or secret website that I’ve found. It’s about the legwork of building up a network of trusted advisers, going to conferences, reading and listening to customers. Funding is not necessarily the best indicator that it’s a company you want to work with; and in fact, if you’re an MSP just looking for companies that are venture-backed but haven’t really publicized any of their funding, you’re probably looking at companies that are a little too early for you. Most venture-backed companies will make a lot of noise about their funding and their amazing new product when they are ready to go to market in a broad way. Keep in mind that oftentimes what separates an amazing startup from one that doesn’t go anywhere is its ability to sell product, not its actual technology. As an MSP, you have the ability to influence their ability to sell product, taking a diamond in the rough and turning it into a much more successful company.

CP: What do you hope attendees learn and can make use of from your presentation?

SS: That I’m a nice guy they should buy a beer for after the conference ends? Also that there is no right answer to picking the best company, but there are indicators you can use to filter out which companies have a higher likelihood of success. And perhaps most importantly, that MSPs have something that startups desperately need — a channel to sell their technology. If you find amazing technology, even if it’s not the latest hot company, don’t be afraid to leverage your sales channel to help turn that company into a success.

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About the Author(s)

Edward Gately

Senior News Editor, Channel Futures

As news editor, Edward Gately covers cybersecurity, new channel programs and program changes, M&A and other IT channel trends. Prior to Informa, he spent 26 years as a newspaper journalist in Texas, Louisiana and Arizona.

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