A new report today from Crunchbase Inc. has found positive news in the troubled venture capital landscape, with funding into cybersecurity startups increasing in the third quarter.

The report found that funding in cybersecurity startups increased 12% in the quarter, with nearly $1.9 billion invested through 153 deals, up from $1.7 billion across 181 deals in the previous quarter. Although the amount invested rose, the number of deals fell by 15%.

Though any increase is positive, the report does note that when compared with the same quarter of last year, funding is down 30% from $2.7 billion and deal flow is down 17%. Based on the figures year to date, the amount of funding into cybersecurity startups is set to hit its lowest point since the sector saw only $8.8 billion invested in 2019.

The missing components, according to the report, are big rounds and late-stage deals. In the third quarter of 2022, there were nearly a dozen rounds of $75 million or more each, whereas the third quarter of this year saw only five deals of $75 million or more and only one bigger than $200 million.

The biggest cybersecurity round in the quarter was Cato Networks Ltd., which raised $238 million on Sept. 19 in a round led by LightSpeed Venture Partners LLC. The second-largest round was into network-as-a-service startup Nile Global Inc., which raised $175 million from March Capital Partners LLC and Sanabil Investments LLC, among others, on Aug. 1.

“The story of these numbers is the decline in the number and size of growth rounds in cyber,” Alex Doll, founder and managing partner at Ten Eleven Ventures Inc., said ahead of the release of the data. “The growth rounds in ’23, rather than being ‘down’ from COVID era … are really going back to a decade-long trend or more healthy normal levels of investment.”

Umesh Padval, venture partner at Thomvest Ventures Inc., argues that tensions in the Middle East, as well as other issues in Europe and between the U.S. and China, “will keep venture funding in cyber relatively flat — or maybe even slightly in decline — for the next two or so quarters before flattening out.”

Padval also said that higher interest rates have hurt the ability of investors to raise new funds this year — which, in turn, hurts a startup’s ability to raise money. However, it’s not all bad, with Padval adding that he does believe a leveling off is occurring. Cybersecurity investing is returning to its “right range now” and the “euphoria” of the venture highs of 2021 has worn off, he said.

The report concludes with a sober warning, noting that “even though funding dollars showed a slight bounce back, the decline in deals is alarming. The total number of deals is the lowest amount in years and shows the difficulty some are seeing in getting funded. With the decline in companies being able to raise cash — including those in the late stage — and the cyber M&A market at a low ebb, security companies simply closing up shop could become a cold, harsh reality.”

Photo: Wikimedia Commons