A new report today from cybersecurity recruitment firm Pinpoint Search Group has found a rise in the number of cybersecurity companies funded in 2023 but a less surprising fall in the amount of funding raised.

The Pinpoint U.S. 2023 Cybersecurity Funding report found 437 transactions in the cybersecurity market, totaling $8.7 billion across 346 funding rounds and 91 mergers and acquisitions. The transaction volume rose 14% from 303 rounds in 2022, but the amount raised fell 40% from the $14.5 billion raised in 2022.

Those numbers were also reflected in the fourth quarter of 2023, with cybersecurity companies raising $1.6 billion in funding, down 45% from the $2.9 billion raised in the fourth quarter of 2022. But as per the whole of 2023, the number of companies raising money in the fourth quarter was also up: Some 85 companies raised venture capital in the quarter, up 21% from 70 companies in the fourth quarter of 2022.

According to the report, the decline in total funding raised can be attributed to a shift in investor focus in 2023. Similar to broader market trends detailed by PitchBook-NVCA Venture Monitor and Crunchbase Inc. last week, investors have adjusted their approaches, directing a more significant portion of their funds into early-stage initiatives within the cybersecurity sector.

The evidence of the shift can be found in the data, as seed, Series A and Series B rounds comprised a considerable share of overall funding. In 2023, seed rounds accounted for 42% of all funding deals, accounting for more funding transactions even at a time when overall funding was falling.

The report also highlights other elements at play, including broader economic factors influencing VC firm operations. These include inflation, rising interest rates and a market adjustment to correct excessively high valuations seen in previous years.

“Overall, professionals in the cybersecurity sector have reason to be optimistic,” said Mark Sasson, founder and managing partner at Pinpoint Search Group. “While the industry experienced real pain in 2023, the demand for security solutions continues to grow. The impact on the professionals in the space will depend on how quickly investors and founders can transition from early-stage innovation to growth.”

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