If cybersecurity isn’t recession-proof, what is?

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It is always hard to know how a startup category will fare in a downturn. But if you had asked me a few months ago, I would have expected cybersecurity to be relatively recession-proof, just like data observability. What I didn’t have in my cards yet, though, was generative AI and animal agriculture. — Anna

A tough H1

Numbers are out on investment into cybersecurity last quarter, and they are not good, to a surprising extent. According to Crunchbase, cybersecurity startups only raised $1.6 billion in venture funding in the second quarter of the year.

Not only does this represent a 63% quarter-on-quarter decline, but this is also the lowest amount this sector raised in any given quarter since Q4 2019.

For comparison, cybersecurity venture funding reached $4.3 billion in the second quarter of 2022. This was more than double than last quarter, but already almost half less than its $8.4 billion Q4 2021 peak.

Deal volume is also down, with 312 deals announced over the first six months of this year, compared to 507 during the same period the year prior.

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“While the numbers are not dissimilar to the venture capital world in general right now,” Crunchbase noted, “it is somewhat stunning that a sector always thought to be ‘recession proof’ or able to hold strong in a downturn has shifted so much.”

Cybersecurity was long thought to be relatively immune from downturn because cybercriminals don’t care about budget cuts. If anything, malicious actors had a pretty busy 2022. As a result, cybersecurity spending isn’t very elastic.

Solving problems is better than fearmongering

“Cybersecurity spending is still a priority for enterprises,” Ten Eleven Ventures founder and managing general partner Alex Doll told TechCrunch+ as part of our latest survey of cybersecurity investors.

How long, then, will venture investing into this space remain out of sync with enterprise priorities? Maybe not long. Doll, for instance, expects cybersecurity investing will accelerate again “within the next 12 to 18 months.”

While cybersecurity startups hoping to raise funding should be mindful that investors “are now more heavily weighting capital efficiency metrics,” Doll warned them against another pitfall: “Companies should be mindful of not ‘starving growth’ by underinvesting in sales and marketing or, importantly, R&D.”

Doll also called for tracking progress and success in R&D more closely. “For example, there is always a lot of attention on quantifying the marketing/sales funnels and channels (and for good reason), but I am always amazed at how little time is spent on R&D productivity metrics,” he said.

Will we eventually see a category of tools and startups emerge to assist with this endeavor? I will definitely keep an eye out.

A $1 billion commitment

VC firm Sapphire Ventures plans to invest more than $1 billion in AI-related enterprise startups, my colleague Kyle Wiggers reported. “AI represents a profound technology shift, and our $1 billion commitment reflects our conviction in the opportunity,” co-founder and CEO Nino Marakovic said in a statement.

Sapphire is not the only firm to be bullish on the category, regardless of the downturn. “AI startups, supercharged by the hype around generative AI, continue to perform exceptionally well relative to the broader market — collectively raising $15.5 billion this year, according to PitchBook data,” Kyle wrote. And as The Exchange reported, corporate venture arms are particularly eager to write them checks.

Big Tech corporate venture capital 🤝 generative AI startups

Same as 2022?

When Performance Livestock Analytics (PLA) decided it would be spinning out from its acquirer Zoetis, venture firm Builders VC jumped at the opportunity to back it again, my colleague Becca Szkutak reported in her latest Deal Dive. And yet, as she noted, “we aren’t talking about the hottest AI company that now thinks it could do better on its own with the recent surge of investment; [PLA] is a company that monitors cows!”

PLA is no outlier here; its entire category seems to be faring OK in the current downturn. Says Becca: “PitchBook data shows that in Q1 of this year, the latest data, animal agriculture startups raised $326 million, which puts it on pace to match 2022’s record $1.3 billion investment total.”

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