Investment in cyber-related ventures is predicted to reach a four-year minimum this year.
In the dynamic world of technology, venture capital (VC) investments in the cybersecurity sector are undergoing a significant transformation. A strategic shift towards consolidation and AI-driven solutions is reshaping the industry, as investors favour larger, late-stage, and platform-centric companies over numerous smaller startups.
According to Crunchbase data, venture capital investments in cybersecurity firms have shrunk compared to the year prior, with cybersecurity startups raising approximately $1.9 billion during Q3, a 30% drop from the $2.7 billion raised in the same quarter last year. This decline is partly due to the focus on quality over quantity, with investors concentrating on companies that can integrate AI and identity management into comprehensive security platforms.
The Moody's survey suggests that organizations are increasing their spending on cybersecurity. The projected spending on cybersecurity next year is $215 billion, marking a 14% year-over-year increase from 2023. This growth in spending is driven by the growing complexity of cyber threats demanding all-in-one, scalable solutions.
However, this surge in spending does not necessarily translate into an increase in VC funding. During Q3, Crunchbase tracked only 5 deals of at least $75 million, compared to almost a dozen such deals in the same quarter last year. The number of deals in the third quarter also decreased by 17% year-over-year, totaling 153.
The current period of VC activity in cybersecurity reflects an industry that is oversaturated with vendors. Market turmoil has led to layoffs in multiple cybersecurity companies, including Dragos, Secureworks, Sophos, Okta, Rapid7, and Malwarebytes. Despite these challenges, the industry continues to attract funding, with the top three funding rounds in Q3 allocated to Cato Networks, Nile, and OneTrust, accounting for about 30% of all venture capital raised during the quarter.
The cybersecurity startup scene is on pace to reach its lowest point of venture capital funding on a yearly basis since 2019, with $8.8 billion attracted. However, this decline does not necessarily indicate a slowdown in the sector's growth. Instead, it reflects a strategic shift in VC investment priorities, with investors favouring quality, strategic consolidation, AI-driven innovation, and late-stage funding, resulting in fewer but larger and more focused deals in cybersecurity firms.
The surge of venture capital into AI startups (capturing nearly 58% of global VC funding in Q1 2025) diverts some attention and capital away from traditional cybersecurity startups. This shift creates competitive funding pressure on pure cybersecurity newcomers unless they align with AI integration trends.
In addition, broader macroeconomic uncertainties, tougher exit markets, and an emphasis on risk management encourage VCs to back startups tied to mature platforms or demonstrating clear adoption of AI, rather than broad-based early-stage investing.
Despite these challenges, the cybersecurity sector continues to grow, with organizations dedicating a median of 8% of their technology budgets to cybersecurity in 2023, up from 5% in 2019. Global spending on cybersecurity is projected to reach $215 billion next year, marking a 14% year-over-year increase from 2023.
[1] VentureBeat, "VC activity in cybersecurity: The good, the bad, and the ugly," link [2] TechCrunch, "AI startups capture nearly 58% of global VC funding in Q1 2025," link [3] Crunchbase, "Q3 2023 Cybersecurity Funding Report," link [4] Moody's, "Global Cybersecurity Spending to Reach $215 Billion in 2024," link [5] CB Insights, "The Future of Cybersecurity: Consolidation and AI-Driven Solutions," link
- The decline in venture capital (VC) investments in cybersecurity startups doesn't necessarily signify a slowdown in the sector's growth, but rather a strategic shift in VC investment priorities, focusing on quality, strategic consolidation, AI-driven innovation, and late-stage funding, resulting in fewer but larger and more focused deals.
- As organizations increase their spending on cybersecurity, with a projected spend of $215 billion next year, marking a 14% year-over-year increase from 2023, there is a growing emphasis on solutions that integrate AI and identity management into comprehensive security platforms, posing a significant risk management challenge for finance and business sectors.
