Key takeaways

• Regulations:

  • Federal and state actions are underway to protect cyberspace: The release of the US National Cybersecurity Strategy in March marks a milestone that could incentivize and promote long-term investments in cybersecurity. This, combined with the pace at which US states are implementing privacy regulations, demonstrates the firm stance of lawmakers to protect the digital ecosystem and citizens' personal information.

• Funding:

  • Turbulent financing markets and inflated valuations slow investment, but some verticals remain resilient: 1H 2023 total funding declined ~40% YoY to USD 2.8 billion, with a ~33% decline in average deal size. The largest decline came from Next-gen Cybersecurity startups (down USD 1.8 billion). Despite the unfavorable macro environment, funding in Identity and Access Management and Cyber Insurance increased, with the former driven by the USD 205 million debt round by identity and access governance company Saviynt. Overall, the sector saw an increased share of seed rounds (~30% vs. ~21% 1H 2022), as early- and growth-stage funding rounds slowed.

• Product updates: 

  • Generative AI (GenAI) integrations stand out as cybersecurity players explore various use cases: 1H saw the launch of GPT-4 based Security Copilot and Google Cloud’s Sec-PaLM, a purpose-built LLM for cybersecurity. This leads to the incorporation of GenAI to cybersecurity platforms; a notable use case has been the ability to use natural language queries that help to better handle the complex stream of information relayed by these platforms. In addition, digital privacy players are developing products that act as a layer between users and GenAI applications to help protect against data breaches and comply with privacy regulations.

• Partnerships:

  • A primary motive is realizing synergies by combining products: Most collaborations in cybersecurity have involved combining product features and launching joint solutions. Alphabet (via Google) appears to have a head start, forming GenAI partnerships with Accenture and Thales to power its cybersecurity products with the latter's LLMs.

• M&A:

  • Acquisitions remain a proven strategy to accelerate growth: We observed nearly 25 notable deals during 1H 2023. However, deal sizes were significantly lower than the year prior. The largest deal recorded in the half was Hewlett Packard Enterprise's acquisition of Axis Security in a deal valued at ~USD 500 million.

• Outlook:

  • Pressure to comply is expected to drive cybersecurity spending: The tightening of regulations at both the national and state levels will require organizations to increase their investments to comply and avoid hefty fines, driving top-line growth for cybersecurity players.
  • GenAI could enhance platform utilization and unlock new business lines: The emergence of GenAI facilitates the use of cybersecurity platforms via natural language, helping to address the underutilization of advanced features offered by these players. This also helps augment current cybersecurity staff in an environment in which cybersecurity skills are already in short supply, increasing the appeal of such platforms. GenAI is also unlocking potential revenue opportunities in other areas such as development of data breach prevention tools using LLMs. We already see several startups beginning to offer this and expect more to follow.