Q1 marked lowest VC funding for security in a decade, but there’s a silver lining 

Today, DataTribe released a new report showing venture capital activity in the cybersecurity industry dropped significantly in Q1 2023, following the collapse of Silicon Valley Bank. 

The report showed that although the cybersecurity industry experienced a less dramatic decline than the wider U.S. VC ecosystem, cybersecurity deal activity in Q1 was at or near decade lows, with an average seed deal volume of 21 in Q1 2023, compared to 20 in Q1 2015.

Likewise, year-over-year cybersecurity seed deal volume was down 56%, from 48 deals to 21. Although, the report also noted that the seed-stage cybersecurity market remained “relatively bright,” with a median premoney valuation of $15.5 million, just behind the all-time high of $15.8M in Q4 2022. 

The bright side to lower VC funding

While the overall decline in VC seed funding appears to be a major blow for the cybersecurity sector, the report argues that there’s an underlying silver lining: consolidation among solution providers. 

“Fewer companies receiving more funding at higher valuations is likely a good thing for the sector, particularly the enterprise CISO, [who] is already overwhelmed with vendors trying to sell the latest product,” the report said. 

In an email interview with VentureBeat, John Funge, managing director at DataTribe, reaffirmed the report’s finding and argued that “while the slowdown is painful in some cases, we see it as an overall healthy thing.” 

Funge suggested that larger cybersecurity companies will be able to take advantage of the market environment to make acquisitions and consolidate solutions while weaker companies struggle to survive. 

“The medium- to long-term benefit of this will be some rationalization of the highly-fragmented tech stacks that enterprises depend on,” Funge said.

One company that appears to illustrate this approach is cloud security provider Wiz, which despite the economic slowdown, managed to raise a $300M series D funding round and a $10 billion premoney valuation for a solution that consolidates cloud security posture management (CSPM) and cloud-native application protection platform (CNAPP) capabilities into a single solution. 

If Funge and DataTribe are correct that an economic slowdown will encourage rationalization in the industry, then this will likely be a net-positive for CISOs. They’ll have an opportunity to reduce complexity throughout their tech stack and decrease the overall number of tools needed to secure their organizations’ environments.