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Technology / Cybersecurity

Investors flock to UK cybersecurity but start-up funding has fallen

Last year saw a boom in investment in the UK's cybersecurity industry but it was dominated by 'megadeals' with established firms.

The UK’s cybersecurity industry is growing and attracting more investment, new research has revealed. But despite a 21% increase in the number of cybersecurity companies in the UK in 2020, investment is dominated by a small number of large companies, leaving less funding for innovative start-ups.

There are currently 1,483 cybersecurity companies in the UK, according to a new report conducted on behalf of the Department for Digital, Culture, Media and Sport. This number grew by 21% in 2020 and has increased by 77% since 2017. The sector’s total revenue grew 7% to reach £8.9bn in 2020, a slower rate of growth than in previous years.

Although the majority of UK cybersecurity companies are small businesses, the industry is relatively concentrated: 22% are medium or large organisations, compared to a cross-industry average of 4%. Nearly three-quarters (74%) of its sales are made by large businesses (250 or more employees).

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UK cybersecurity investment in 2020

Investment in the sector more than doubled in 2020, according to the DCMS report, with £821m raised by 73 companies. But that growth was driven by a small number of big investments in large companies. “There were very few deals led by early-stage cybersecurity start-ups in the last 12 months,” the report says.

This was also the finding of a report from investment data provider Beauhurst, examining investment trends in high-growth UK business from 2011 to 2020. Beauhurst’s analysis found that investment in UK cybersecurity companies jumped 83% in 2020, up to £981m (the discrepancy with DCMS’s figures likely reflects different methodologies for categorising companies and deals).

The pandemic, which triggered an uptick in cybersecurity threats, made the sector an appealing investment, explains Beauhurst strategy associate James Richardson. “These kinds of companies can scale faster than companies that are more reliant on physical operations or premises or things like that,” he says.

But investor interest in the sector was not solely driven by the pandemic, Richardson adds. “Since 2013, the total amount invested in these companies has increased every year,” he says. “From 2019 to 2020 was a huge increase but my gut feeling is that it’s not solely attributable to the pandemic.”

James Chappell, co-founder and chief innovation officer at UK cybersecurity company Digital Shadows, agrees. “I’d characterise the pandemic not as a shift in security, but as an acceleration of what was already happening. Our relationship with work was always going to change in the way that it has changed since March. But it’s just happened way quicker as a result.”

The investment growth was driven by a preponderance of “megadeals”, Richardson says – a relatively recent phenomenon in the UK cybersecurity sector. “Megadeals are where at least £50m goes into a single company, which wasn’t really a thing before 2018,” he says.

The beneficiaries of these megadeals include security analysis tools vendor Snyk, which raised a combined $350m in two rounds bringing its valuation to a reported $2.6b, and security automation platform OneTrust, which raised $510m in two rounds, resulting in a $5.1b valuation.

This shift to megadeals reflects a degree of caution among investors, says Chappell. “It takes quite a lot of guts to put money into a business early on.” He adds: “These sort of later-stage scale-up organisations are more obvious targets for investment.”

Meanwhile, smaller security start-ups are finding it harder to raise early-stage funding, explains Richardson. “We’re seeing the number of first time rounds decrease year on year,” he says. “That’s a problem because these are the companies that will go on to become big. If fewer companies are able to raise money when they’re small, in a few years there won’t be as many companies to put money in when they grow.”

That means the 250 plus cybersecurity companies that were founded last year may not have the same opportunities that their recent predecessors enjoyed.

Nevertheless, Chappell is confident the sector will continue to grow and attract investment. “[It] is absolutely a growth sector and that growth will continue to accelerate,” he says. “There is no doubt in my mind of that whatsoever.”

Home page image by Robert Avgustin/Shutterstock.

Claudia Glover

Reporter

Claudia Glover is a staff reporter on Tech Monitor.