TL;DR:
- Richard Seewald of Evolution Equity Partners discusses the cyclical nature of the cybersecurity market.
- The VC firm has invested in over 50 cybersecurity companies, emphasizing AI and ML solutions.
- They recently backed Protect AI, a startup focused on risk identification and mitigation for ML and AI systems.
- Seewald highlights the impact of large language models (LLMs) on cybersecurity.
- The article explores the consolidation trend in the industry, with platform approaches dominating.
- However, best-of-breed solutions are expected to make a resurgence.
- Seewald suggests viewing cybersecurity investment trends from a historical perspective.
- There’s currently a capital imbalance in the market, with specialist investors taking the lead.
- Evolution Equity Partners remains committed to investing in best-of-breed cybersecurity companies.
Main AI News:
As the cybersecurity industry grapples with a capital constraint, understanding its historical ebbs and flows becomes paramount. Richard Seewald, founder and managing partner of Evolution Equity Partners, a cybersecurity venture capital (VC) firm boasting assets surpassing $1 billion, offers insights into the cyclical nature of the market. SDxCentral sat down with Seewald to glean his perspective.
Over the years, Evolution Equity Partners has judiciously invested in more than 50 cybersecurity companies, including notable names like Carbon Black (now a part of VMware), Snyk, and Aqua. Since 2011, the firm has been keen on channeling funds toward AI and machine learning (ML) cybersecurity enterprises. Notably, Cognitive Security, a company in its portfolio, was later acquired by Cisco. Seewald emphasizes, “Over the last decade, we’ve invested in a number of companies that utilize machine learning and AI to better detect and respond to cybersecurity threats.”
One of their recent investments, Protect AI, secured a substantial $35 million in its Series A funding round. The startup’s offering, AI Radar, is designed to empower customers to swiftly identify and mitigate risks while maintaining robust security for ML systems and AI applications.
Reflecting on the past year, Seewald acknowledges the profound impact of large language models (LLMs) on the cybersecurity landscape. He envisions the upcoming five years as transformative, with hyperautomation, machine learning, AI, and even quantum computing reshaping both attackers’ perspectives and defensive strategies.
The Cycle of Consolidation and the Rise of Best-of-Breed Solutions
In an industry marked by cyclicality, cybersecurity is no stranger to periods of consolidation. Presently, the prevailing approach involves providing a suite of complementary solutions under one platform. Notably, private equity firm Thoma Bravo recently sealed a deal worth approximately $2.3 billion, taking security vendor ForgeRock private and integrating it into its portfolio company, Ping Identity.
Seewald observes that the transition from public to private and vice versa is a recurring theme in cybersecurity. Leading security players like Palo Alto Networks, Cisco, CrowdStrike, and Fortinet champion the platform approach. However, the sheer volume of security vendors—estimated at 3,500—has left organizations managing 50-70 vendors on average, according to Cisco EVP and GM of security and collaboration, Jeetu Patel.
Platform companies extend their offerings through acquisitions, catering to diverse security needs and expanding their revenue streams. Nevertheless, the consolidation trend periodically gives way to specialized, best-of-breed companies that focus on niche solutions, capturing the attention of buyers. Seewald foresees a resurgence of demand for single-product and best-of-breed solutions among chief security officers in the coming years.
Taking a Historical Perspective on Cybersecurity Investment Constraints
Seewald advises adopting a historical lens to interpret the cybersecurity investment market’s ebbs and flows, emphasizing that it moves “fairly systematically throughout economic cycles.” Presently, there’s a notable discrepancy between the supply and demand of capital in the cybersecurity sector.
Generalist investors have pulled back from cybersecurity investments, leaving specialist investors to dominate the market. Fundraising has also become more challenging, contributing to the capital constraint. Yet, Seewald contends that next-generation cybersecurity companies often thrive in such imbalanced supply and demand conditions.
Evolution Equity Partners, sitting on its fourth fund, remains committed to investing in best-of-breed cybersecurity companies, with investment ranges spanning from $5 million to $100 million. Seewald emphasizes that the current market conditions, although seemingly unusual, align with previous economic cycles and may prove beneficial. They allow for a necessary shakeout of investors and companies, fostering consolidation where needed and providing best-of-breed companies with the runway for success.
Conclusion:
The cybersecurity market is undergoing a predictable cycle of consolidation and specialization. Specialist investors are taking the lead, and next-gen cybersecurity companies may flourish despite the capital constraint. The future holds opportunities for single-product solutions and best-of-breed-focused companies to regain prominence in meeting evolving security needs.
