Insufficient Funding for Cyber Security Start-ups

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Hundreds of security startups have sprung up in recent years, promising cutting-edge solutions for their customers. But new ventures have struggled to gain traction.

“Investors are looking at balance sheets and saying, ‘You raised $100 million and you have nothing to show for it?’” said Promod Haque, senior managing partner at Norwest Venture Partners, which manages about $6 billion in capital.

CB insights have shown that Private investors pumped a record $3.3 billion into 229 cyber security deals last year, but Venture capitalists, dealmakers and entrepreneurs said funding is drying up for all but the most mature cyber startups with substantial sales.

“Almost every other company I knew who was on the road raising money at the same time had to pull their rounds back and were not able to close,” said Michael DeCesare, chief executive of ForeScout Technologies Inc, a network security firm.

Sean Cunningham, managing director at Trident Capital Cybersecurity said “It now takes six to eight months to close deals, up from about three to four months a couple years ago”.

iSight Partners that has uncovered major cyber campaigns from Iran, Russia and other nations was acquired by FireEye Inc (FEYE.O) for $200 million in cash plus another $75 million in cash and stock if it meets certain sales targets. iSight CEO John Watters said last year that the company would be public in 2016 with a valuation of least $1 billion but afterwards he said that the plans changed because market conditions shifted.

The value of cyber M&A activity more than doubled last year to $26.8 billion from $10.3 billion in 2014, according to data from consulting firm EY. The number of deals increased 46 percent to 287.

David Cowan, a partner at Bessemer Venture Partners¬† said that there are too many start-ups that has already copied what’s on the market, or products that hackers had figured out how to circumvent. Some highly touted products sold by private companies were found to be “obsolete from the moment they were launched,”.

In the broader market Cyber stocks have fallen. FireEye, warned that cyber spending could slow down this year and it has in fact fallen 35 percent over the past three months, compared to a 12 percent decline in the Nasdaq Composite Index.IXIC. Qualys Inc (QLYS.O) tumbled 38 percent over the same period, while Palo Alto Networks Inc (PANW.N) dropped 26 percent and the Pure Funds ISE CyberSecurity ETF (HACK.K) fell 21 percent.

Robert Thomas, CEO of cloud security firm CloudPassage, which raised $36 million last July, said he expects the funding crunch for startups to last. “I feel fortunate that we got in under the wire and were able to raise (money) for the next two years to carry us through,” he said.

Source: Akati

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