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"We're business as usual and very bullish on the industry," said Yoav Leitersdorf, managing partner at YL Ventures, a cybersecurity-focused venture capital firm.

Photo: Courtesy of Kfir Ziv
Yoav Leitersdorf
Power

Cybersecurity investors are still writing checks amid coronavirus

"I haven't been this busy in months."

No matter the market pressures, no organization can afford to get hacked. And that's a good thing if you're in the cybersecurity industry.

Investors and analysts say that cybersecurity is one of the few industries that can thrive during times of crisis and is better positioned than other sectors to weather the coronavirus outbreak.

Several cybersecurity firms saw their stocks soar over the last week, and cybersecurity startup investors say deals have shown no sign of slowing down. "We're business as usual and very bullish on the industry," said Yoav Leitersdorf, managing partner at YL Ventures, a cybersecurity-focused venture capital firm with offices in Tel Aviv and Silicon Valley.

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Although many big corporations will be looking for ways to reduce spending, few will be willing to cut cybersecurity budgets because the cost of an attack can far exceed the price of security tools. Additionally, cyberthreats are increasing as organizations shift to more remote work, and hackers try to take advantage of coronavirus fears.

Not all cybersecurity companies will fare the same. Some — like those that provide security tools that support telework or have cloud-based security solutions that can be remotely managed — will likely receive a boost during the outbreak. Others, including legacy companies that sell firewalls and physical devices, are expected to take a hit. Cybersecurity investors and analysts explained who they think the winners and losers are.

Cash is still pouring into cybersecurity startups

Cybersecurity is a relatively new and fast-moving industry, and many of the firms in the space are backed by venture capital; there are more than 1,000 cybersecurity startups, according to data from Crunchbase.

Investors in the industry say they are still pouring money into these companies. Leitersdorf said his firm closed a multimillion-dollar investment with a software development security startup last week, and has eight other deals in the works. "I haven't been this busy in months," he said.

Alberto Yepez, managing director of ForgePoint Capital, another cybersecurity-focused VC firm with $750 million in assets under management, said his company has issued two new term sheets since the beginning of March and plans to complete those investments in the next month. "We're actively investing," he said. "People might think deal flow would slow, but in cybersecurity our deal flow has increased."

So far, the outbreak's main effect has been on the process of how deals get done. Leitersdorf said he hasn't had in-person meetings with about half of the companies that he's currently considering investing in.

"Online video meetings provide us with a fair amount of comfort, but there's nothing like being in the same room with someone," he said. "We've never closed an investment with a group that we haven't met in person, so that will be a first. Maybe we'll find a way to meet them in a park standing far away from each other."

Leitersdorf said that two types of organizations in the cybersecurity startup ecosystem may face challenges in the near future from COVID-19: startups that don't have a lot of cash on hand to get them through the crisis, and VC firms that are looking to raise funds from institutional investors. "If you've not raised your fund yet, don't do it. Go to the beach, relax for about six months. There are hardly any VC firms that can raise capital in this environment," he said.

You can't cheap out on security right now

With record drops in global markets over the last month and the International Monetary Fund warning that a coming recession could be "as least as bad" as the global financial crisis of 2007-'08, companies across the board are assessing their budgets and trying to tighten up where they can.

Cybersecurity, however, has become an area that few companies will be willing to cut.

"What board of directors is willing to cut spending on security and increase exposure to cyberattacks?" Leitersdorf asked.

For one thing, attacks are increasing and companies are especially vulnerable as they transition into remote work environments. Coronavirus phishing scams have exploded in recent weeks, and health care organizations including University Hospital Brno in the Czech Republic have been targeted by ransomware attacks. Cybersecurity experts have warned that the coronavirus outbreak is a perfect time for nation-state hackers to strike, and the effects of such attacks might not be felt for months.

"The volume and sophistication of attacks is increasing, and people are looking at cybersecurity as a must-have, not a nice-to-have," Yepez said.

These attacks can cost a lot more to an organization than the price of technologies that can defend against them. Ransomware attacks, for example, have cost firms like Merck and FedEx an estimated $870 million and $400 million, respectively, in lost revenue and other damages.

"When the dust settles, it is very likely that most organizations will assess that they are not as resilient as they thought they were from a cybersecurity standpoint, and increased investments are likely," Katell Thielemann, research vice president at Gartner, said in an email.

Winners: Cloud and remote services

Several publicly traded cybersecurity companies, such as Crowdstrike, Okta and Fortinet, have rallied over the last two weeks, climbing 25% or more. "Many cyber companies in the public market have fared better than most in the tech sector," Yepez said.

After experiencing a drop in early in the month, Crowdstrike's stock, for example, is up almost 78% since March 16. In a regulatory filing issued on Monday, the company said it's not yet clear what the impact of COVID-19 will be on its financials or operations. But cybersecurity investors and analysts said that cloud-based security providers like Crowdstrike stand to gain a lot.

"Everything they've done for years plays out very well with this crisis — the cloud elements, protecting phones, laptops and other devices that people are taking home," Leitersdorf said.

"If you provide cloud-based security solutions that can be remotely managed, you are probably rather busy," Thielemann said.

Other winners include managed service providers, which handle security for small- and medium-size businesses that may opt to outsource security instead of having a full-time team or CISO, Yepez said. And companies involved in securing remote workers, like VPN providers, will also see an uptick in business, Thielemann said.

Losers: Legacy providers and security auditors

Although the cybersecurity industry will likely be resilient during the outbreak, some companies will suffer.

Legacy companies that sell tools like firewalls and physical devices will likely take a big hit. One reason is because restrictions on movement will make it difficult for companies to install and manage these tools, Yepez said.

Another reason is because the corporate attack surface has changed due to coronavirus, according to Leitersdorf. "On-premise firewalls aren't relevant when people are working all over the place. Companies that provide solutions for anything with a physical perimeter will not do well," he said. These companies likely have contracts that will sustain them for some time, but the disruptions caused by the coronavirus outbreak will likely accelerate the move away from these companies toward more innovative solutions, he said.


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Another part of the security industry that will probably experience disruptions or a drop in revenue are companies that offer auditing and security assessments, Thielemann said. These companies typically send teams to clients to probe them for vulnerabilities and other weaknesses, which is sometimes required by regulators.

"It's difficult to conduct assessment and audits at client locations. In some verticals like Energy, NERC/FERC [regulators for power system operators] have temporarily suspended standards-compliance audits, for instance. When that side of the market will return to normal is unknown," Thielemann said.

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