As cyber threats have rapidly increased in sophistication and frequency in recent years, the demand for innovative cybersecurity solutions has snowballed. Cybersecurity support may have once felt like an optional extra for companies, but it is now truly essential: taking robust and effective measures is a question of do or die. Without them, the safety of a company’s customer base, and so the survival of the whole business, is at stake.
As the cyber industry has grown, so too has investment in the sector. Venture capital funding for cybersecurity reached a high of $23.3 billion in 2021, and though it fell again last year, investors remain optimistic about the future of the space. I interviewed Ben Nye of Venture Guides and Alex Pinchev of Capri Ventures – two venture capital firms with extensive cybersecurity portfolios – to hear why they made this sector a priority, and the trends and shifts they’ve noticed over time. Read on to hear the experts weigh in.
Global investment funding has decreased significantly since the huge growth we saw in 2021, when global VC funding records were topped. How has your investment strategy changed to reflect the new market conditions?
Ben Nye, Venture Guides: Firstly, we believe that the 2021 venture investment pacing was an anomaly. Investors raised ever larger funds and deployed capital ever faster chasing yield. Years of loose monetary policies resulting from the Fed’s quantitative easing and an extended zero percent interest rate environment perpetuated these practices by inflating exit valuations and rewarding both public and private investors.
For us at Venture Guides, despite the public markets taking a more narrow cash flow and value-oriented point of view, we focus on long-term company building in which we have not seen a slow down. True innovation is consistently disrupting older legacy technologies. We invest within a domain focus in which we understand the customers’ requirements, competitive dimensions, and strategic vendors’ needs so that we can enhance our selection rigor and actively help our portfolio companies’ prospects. We believe strongly in the adage: “know what you own, know why you own it, and know how to improve it.”
Alex Pinchev, Capri Ventures: Our strategy didn’t change much as we were always very conservative and realistic on valuations and investing only in the markets and areas we understand very well and that can help our portfolio companies. We invest in a strong management team, “must-have” disruptive technology, and the companies which showed good initial traction.
How much do you think this decrease has impacted the number, or nature, of companies being founded (if at all)?
BN: We are exceedingly busy given the size, importance and growth of the cloud, data, and security software markets. Globally, our investment domain is growing at 2.5x the world’s GDP – effectively driving the world economy. We are accustomed to a fast pace of innovation and disruption across several thematic sub-sectors that we track closely. Since January 2023, we have evaluated nearly 400 investment opportunities and invested in five core positions and two seed opportunities. This overview and pacing enables us to meet many great entrepreneurs – but back only those who are truly the best.
AP: The impact of the current big slowdown in venture investments is huge. Some change has been negative and some positive. The negative is clear: VCs are very much focused today to support and finance their best portfolio companies in this very difficult environment, so many good companies are struggling to raise money. Moreover, the crazy valuations we’ve seen in 2021 created a lot of down rounds or shutdowns in today’s environment.
On the positive side, the number of “me too” companies is declining, the innovation is accelerating (I’ve seen the same trend in the 2000 and 2008 crashes), valuations are getting back to normal, and the young entrepreneurs are starting to understand that just starting a “me too” company is not enough; you have to innovate and listen to the market. Another positive trend we see is that the companies with disruptive and very important technologies are getting a lot of attention and visibility.
Both of your funds focus on, among other things, cybersecurity. What drove you to prioritize this sector?
BN: Exfiltrating data, ransoming operations, and attacking brands’ customers can be very profitable for nefarious nation states, criminal organizations, and other bad actors seeking to exploit vulnerabilities resulting from changes in platforms, operations, and personnel. Customers cannot afford to sit idly when confronted with such risks – they need solutions. Our investments create innovative technologies and services that reduce or even eliminate customers’ exposures to these strategic governance issues.
AP: Yes, cybersecurity is one of our top priorities. The priorities are not coming from us, rather, they are coming from the market situations and corporations. Cybersecurity is the only IT budget within corporations that have not been reduced. I probably don’t have to explain the reason, as everybody is aware of the growing amount of digital fraud, which is getting more and more sophisticated, that is going on in the current environment. This is for sure justifying the attention and budgets from corporations. On another note, there are so many new cybersecurity companies with different solutions to the extent that CISOs are getting overwhelmed. That’s why in cybersecurity, the startups with the most innovative and disruptive technologies are very important.
The cyber sector has grown and changed significantly during your years monitoring the industry. What’s one trend you’ve noticed, or something that has surprised you?
BN: Two decades ago, cybersecurity was focused on defending the corporate perimeter and end points. Competitive intensity of the sector was moderately dominated by a few highly conglomerated, publicly-traded, security vendors. Cybersecurity management was largely a delegated matter within a customers’ organizations. Over time, however, with the rise of bad actors, modern dynamic platform adoption, and an erosion of the corporate perimeter, customers are experiencing an ever expanding number of attackers, attack vectors, and attack severity. These trends have given rise to a new class of security vendors with greater competitive intensity. Today, Boards of Directors no longer delegate cybersecurity and compliance management and, as a result, customers value best of breed innovation.
AP: The cyber sector changed a lot, but also became very fragmented, as during the “bubble” time of 2021, many new cybersecurity companies showed up with very narrow solutions. Sometimes, when looking at the companies during the bubble time, we wondered how they were able to raise a lot of money, as their solutions were more “functions” as opposed to disruptive, must-have products. This was a surprise.
On another note, when the companies with a great vision and team raised the right amounts of money, we saw very good and fast innovation.
What’s your advice to cyber founders looking to stand out in today’s more cautious market?
BN: Cybersecurity is fragmented, crowded, shifting, and noisy. Founding teams must focus their limited resources and time. Solutions must not only address material threats, but also GTM requirements such as ease of use and time to value. Developing strong design partners and a robust engagement process will help address clear, meaningful, and budgeted customer issues in a far more capital efficient manner. Fundamentally, founders are best served matching their burn rate to the customer demand and growth that the companies are experiencing.
AP: First of all, founders looking to raise capital should learn to listen to the market. This is a very new concept for younger companies with young founders, as during the bubble time, they were dictating the valuations. Those days are over. I was trying to convey this message to the young founders during the bubble time as well, but they were struggling to understand it. The times have changed and now they are (I hope) learning from it.
Experienced founders are different. They don’t waste time on raising money. They listen to the market, produce a great product, show progress, raise money fast, and put all their focus on building and growing the company.
What do you look for in companies when evaluating potential investment opportunities?
BN: We concentrate our investments in a portfolio of 15-20 core positions within the cloud and security domains to strengthen selection and help scale operations. Historically, our rigor has delivered more than an 80 percent success rate. We look for creative, driven, and collaborative founding teams who understand their current domain and are seeking to challenge the status quo for the betterment of their customers.
For example, Memcyco, one of our security investments, met these criteria with a strong and experienced management team which has successfully built disruptive, venture-backed companies previously. In our examination, we interviewed dozens of prospects and customers to learn about the nature, vulnerabilities, and risks of “brandjacking” to both brands and their customers. Our research concluded that the market was accelerating and would continue to grow in both size and importance. Furthermore, we found that Memcyco had developed the only pure technology solution addressing the core fraud and brandjacking threats that currently undermine consumers’ digital trust in web commerce.
AP: First of all, the founders and management team. The knowledge, experience, teamwork, and ability to listen are the most important initial factors in our process. Total Addressable Market (TAM) size, importance of the company’s solution – what we call “must-have solutions” – and very good, modern technology.
We invest only when the product is ready and once the company has shown initial progress and has customers who can validate the value. And last but not least, we only invest in the markets our team and our advisory team understands well and feel can help the company.
Ben, you launched Venture Guides earlier this year. What motivated you to start your own firm?
BN: We believe the venture industry is ready for a more active and focused approach to early-stage ventures. We started Venture Guides to share our experience and help entrepreneurs succeed in building differentiated cloud and security businesses. Our unique team-based investing and guiding approaches have returned profit dollars across 80 percent of our companies (the inverse of typical venture investing) and helped grow 45 percent of them into multi-billion dollar valuation companies. Our concentrated fund size, portfolio strategy, and analytical framework helps us deploy resources to the right companies at the right time. Backed by a 10 percent personal GP co-investment (which is 10x the industry norm) and a strong, realized early-stage track record, we are proud to enjoy the support of the most sophisticated venture, growth, private equity and family office investors.
Alex, Capri Ventures prides itself on having the “scars” to help its companies navigate the path to commercial success. Can you explain this, and why this is a company value for you?
AP: Capri Ventures is a different VC fund. All our LPs are former or current software or IT executives with vast knowledge, experience and a large network. They are all very active in helping and advising our portfolio companies. If you look at our advisory team on our website, they are also limited partners (LPs), and you will see many known names. These names are not just pictures on the website, they are all personally involved in our companies and many of them are also official advisors to our portfolio companies.
Moreover, my partners and I are all former software executives with many years of accumulated knowledge and operational experience.
We built Capri Ventures with the idea of giving back to the community we all came from with a lot of success to help young companies, young people and young families be very successful. We work extensively with our companies and I believe that each of our portfolio companies will testify to the great value we bring them.