A major increase in cyber security innovation – coupled with a growing number of lucrative exits — is fueling investor interest in the sector. The expansion is likely to continue as the mounting frequency, severity and costs of corporate breaches leave enterprises little choice but to boost security spending.
For investors, the numbers are compelling. According to CB Insights, cyber-security exit activity grew 109% in 2011 and almost another 50% in 2012. This year is shaping up to be even more active, with some 78 cyber security firms exiting via M&A or IPO.
In addition to high-profile IPOs like Palo Alto Networks, and FireEye, M&A activity includes mobile sensor startup AuthenTec’s purchase by Apple, Credant Technologies’ purchase by Dell and Zenprise’s acquisition by Citrix Systems. The pipeline remains full of promising cyber-security-related IPOs expected from IO, Palantir Technologies, Mandiant, and MobileIron. SINET has identified more than 1,100 cyber security startups, while Signal Hill says VCs funded 132 cyber security companies 2012, up from 72 in 2011.
The Boom Is Not Discretionary
The reason investors are pouring nearly $1.4 billion into these firms is that enterprises can’t afford not to spend on cyber security. The cost of “getting it wrong” has become too prohibitive. Estimated cyber security losses related to intellectual property top $400 billion in the U.S. alone. In response, IT security budgets are predicted to mushroom from $65 billion this year to $93 billion in 2017.
Enterprises need help facing two big challenges. First, they must secure a legacy infrastructure never intended to operate in today’s world of hyper-connectivity, ubiquitous data access and real-time processing. Meanwhile, they need to simultaneously invent, design, and deploy next-generation computing platforms with baked-in security strong enough to protect the digital economy from sophisticated criminal gangs, “hacktivists,” and even foreign governments.
Identifying The Opportunities
What shape will those solutions take? Some of the biggest opportunities lie in seven critical areas:
- 1. Active defense solutions to protect websites from Botnet attacks;
- 2. Security/authentication/identity access and management for mobile devices as enterprises increasingly let employees bring their own devices to work – the widely discussed BYOD movement;
- 3. Securing communications;
- 4. Identifying and mitigating malware once it’s gotten inside the network;
- 5. Innovative “big data” solutions applied to cyber security threats;
- 6. Secure cloud computing solutions, a key requirement for enterprises to more broadly adopt cloud computing;
- 7. Integrated, enterprise-wide security solutions to replace collections of “point” products that solve a single problem.
None of these problems will be solved overnight and the nature of cyber threats evolve and morph daily. This creates a long-term opportunity to bring innovative solutions to the market place. That said, cyber security innovation is complex for both investors and innovators. Success requires a great deal of technical expertise and market knowledge. While fast money will be tempted to jump on the cyber security bandwagon, savvy innovators can benefit most from investors with deep experience in cyber security.
Robert R. Ackerman Jr. is the founder and a managing director of Allegis Capital, an early stage Silicon Valley venture capital firm that invests heavily in cyber security.
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