Since 23 March 2020, Plexal (which delivers the government-backed LORCA cyber programme) has been working with Beauhurst to analyse the impact the pandemic is having on the funding landscape for startups. We analyse over 30,000 startups and fast-growth businesses and publish the figures on our Startup Tracker page each week. A consistent picture has emerged across sectors: overall funding is lower than in the same period the previous year, but it’s early-stage startups seeking investment for the first time that are seeing an even more significant drop. In December 2020 we also looked at the funding trends in the UK’s cyber sector, which has enjoyed significant growth in the last few years. We discovered that cyber startups raised £651m last year since the start of the first lockdown in 2020 (a 52% increase), but only £11.9m went to companies looking to raise investment for the first time – a 96% year-on-year drop.
Comparing the cyber sector to broader trends in tech funding
The pandemic has accelerated digital transformation and highlighted the need for solutions capable of meeting security challenges. Investors recognise this and have been willing to back security businesses with funding already behind them. In contrast, startup funding across all sectors is 10% lower, year-on-year.
The total number of deals involving cybersecurity startups also increased by 33% year-on-year. In contrast, there were 23% fewer deals across all sectors compared to 2019.
And only 23 cybersecurity startups entered into administration, liquidation or dissolution since the first lockdown in 2020, compared with a total of 1,715 across all sectors – again highlighting the sector’s resilience.
Storing up problems
However, despite the confidence they’re displaying in the cyber sector as a whole investors remain hesitant to commit significant funding to early-stage startups. They secured just £11.9m (across 13 deals) since the beginning of lockdown in March 2020, compared to £265m (across 9 deals) in the same period in 2019 – a 96% decrease.
Funding was also dominated by a few very large follow-on investments such as OneTrust (£224m), Snyk (£154m) and Privitar (£70m).
Commenting on our research, Saj Huq, director of innovation at Plexal, said: “While increased total funding demonstrates the relevance of cybersecurity and shows that the UK’s cyber industry has not been impacted to the same extent as others, the almost complete absence of backing for early-stage firms puts the sector’s future at risk. It is these companies that we will ultimately rely on to solve the inevitable new cyber challenges arising from a society that is increasingly digital-first.
“COVID-19 has accelerated digital transformation, increased the demand for digital services and reinforced the relevance of security as a crucial business enabler. More cybersecurity companies are receiving investment as a result, but the caution exercised by investors is preventing the UK’s cyber sector from becoming the key driver of the economic recovery that it should be. Investors, industry, academic institutions and government must come together to safeguard the future of our brightest early-stage cyber startups or they could become a lost generation.”
Meanwhile Henry Whorwood, head of research and consultancy at Beauhurst, said: “The cybersecurity sector has retained a strong flow of investment compared to many others which have struggled throughout the Covid-19 pandemic. However, the small proportion of this funding going to first-time raises indicates that investors are hedging their bets by committing far less per deal. Despite the relevance of the sector, it looks like the challenging year facing early-stage cyber companies is set to continue.”
Check back each week at plexal.com/startup-tracker for all the investment trends surrounding startups and support our Spend to Save campaign, which is calling on large organisations to support startups by giving them pilots, proof of concepts and contracts.