Investors Mesmerized by Cybersecurity

Hackers are perceived as sinister

Headlines are one reason cybersecurity is trending among venture capitalists. The Equifax and Uber hacks, among others, are de facto marketing campaigns for the industry. Ransomware headaches like Bad Rabbit and WannaCry remain prominent. At the local level, hackers continue to be lured to school districts and hospitals.

In 2017, investors poured some $7.6 billion into cybersecurity startups, across 548 deals, according to data from CB Insights. That is a 100% increase in value over the previous year. While momentum may subside, investors will likely remain spellbound by the industry.

Cybersecurity firms are not household names. Prominent publicly-traded players can be found in the constituency lists of focused ETFs like HACK and CIBR. Over the past year, Pitchbook identified two privately-held firms with unusually large funding rounds: Rubrik at $180 million and Illumio at $125 million. Both of these California-based companies appear to be valued at more than $1 billion each.

What macro-trends will continue to propel the industry over the year ahead? Intensified activity by state-sponsored actors is a given, but more nuanced points include:

National Regulation. The European Community is leading the way with its Global Data Protection Regulation. The law will come in force in May, levying heavy fines on companies for inferior data management practices. GDPR may quickly become the gold standard among countries worldwide.

Public Relations. Companies will become more astute at managing hacks promptly with customers and constituents. Case experience, such as the fumbling at Yahoo, is guiding development of ready-to-go crisis management strategies by in-house teams and outside consultants.

System Maintenance. Patching and updating is an obvious, low-cost measure to prevent cyberattacks, but the practice remains weak among businesses, especially smaller ones. Executives who are hesitant to roll-out pricey defense programs may latch onto lower cost maintenance activity.

Our best guess on a red herring influencing the industry outlook is artificial intelligence and machine learning. Quickly isolating attacks with next-generation technology sounds like a sure win for investors. But black hats can use the same capabilities to infiltrate government and commercial systems. Pavlovian-like reliance on artificial intelligence and machine learning could mean that some breaches are missed altogether.

Our Vantage Point: Expect macro-trends to further amplify the cybersecurity business. Heightened national regulation and elevated system maintenance, in particular, are likely to sustain revenue potential for industry players.

Learn more at CSO

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Image: Hacking is an epidemic. Credit: BeeBright at Can Stock Photo Inc.