940% increase in cyber funding for start-ups noted during lock-down, but primarily for growth phase, as seed phase start-ups suffer.
Cyber start-ups raised a record half billion pounds in the first 6 months of 2020. In fact, it seems that the Coronavirus pandemic is responsible for creating a 940% increase in cyber funding compared to same period in 2019. But investment is mainly going to growth-stage companies, while early stage start-ups still struggle.
Growth stage companies represented £354m of £521m last year & in 2020 they account for 94% (£465m) of the £496m already raised by cyber start-ups during 2020.
The figures, from The LORCA Report 2020, a detailed analysis of investment activity & growth of cyber start-ups across the UK, show that half (55%) of the UK’s cyber start-ups are now outside London, with hotspots emerging in Edinburgh, Manchester & Reading.
However, there is a funding gap emerging, as only 1% of funding goes to cyber start-ups that have never raised investment before. Companies at the seed & venture stages secured just 6% of investment in cyber start-ups since the start of 2020. For 53% of cyber start-ups, there has been a reduction in investor interest since lock-down, with 44% saying they urgently need cash in the next 4 months to survive.
In 2019, cyber start-ups attracted record levels of investment in the UK, breaking the half a billion-pound barrier (£521m) & showing just how impressive the £496 million in the first half of 2020 really is. In fact, £104m was raised in the 1st 2 months of lock-down alone, a 940% increase on the same period in 2019.
LORCA, the government-backed cyber-security programme delivered by the innovation centre Plexal in partnership with the Centre for Secure Information Technologies (CSIT) at Queen’s University Belfast & Deloitte, produced the report in partnership with Beauhurst, a UK database for high-growth companies.
Findings also include that London is the cyber capital of the UK, with 281 start-ups (44%), while Edinburgh & Manchester are also developing good cyber clusters, & others are thriving in the South East (18%), centred around Oxford & Cambridge & the South West (5%), which is home to the hub around GCHQ in Cheltenham as well as others e.g. Reading.
The number of deals across cyber start-ups at the seed & venture stages fell from 52 in 2018 (worth £91m) to 39 (worth £53m) in 2019, with only 21 in 2020 so far (worth £30m). The research also found that almost half (46%) of cyber start-ups incorporated between 2014 & 2015 remain at the seed stage, higher than fintech (33%) or AI (41%).
5 key trends
Five key trends were identified in the report as defining the future growth the UK’s cyber-security ecosystem as a whole:
- Investors find the market complex to navigate VCs evaluate so many technologies that start-ups are struggling to differentiate themselves. The ecosystem must solve the communications issue preventing cyber companies from receiving the patient capital they need to scale effectively.
- Covid-19 means early-stage funding needs greater protection: Investment moving downstream towards later stage companies is being accelerated by the pandemic, potentially shrinking the number of VCs with capital to invest in start-ups between the pre-seed & Series A stages. Addressing the shortfall will be crucial to ensuring we do not lose a generation of cyber entrepreneurs.
- The sector needs more consolidation: High levels of start-up funding has made the cybersecurity industry crowded & complex. CISOs are prioritising products that can be integrated easily into an existing technology stack, pushing the industry towards ‘platform plays’ & product ecosystems facilitated by larger companies.
- Access to cyber-security is not evenly distributed: As the volume of cyber-attacks on small businesses & charities grows, so does the potential market opportunity. By addressing an under-served segment of the economy, cyber start-ups could help bridge the digital divide and make security accessible for the many & not just the few.
- Individual security could be the next innovation trend: Increasing consumer engagement with technology & the cyber risks that come with it are prompting greater efforts to secure the digital citizen. The market for products aimed at the individual is nascent, but this could change as public awareness grows.
Digital Infrastructure Minister Matt Warman commented, “The tech sector will play a vital role powering an economic recovery out of the pandemic & the cyber security industry plays an important role keeping people safe online.
We are backing our innovative firms to develop cutting-edge solutions & keep one step ahead of tomorrow’s security threats through our National Cyber Security Strategy.”
Saj Huq, Programme Director, LORCA, observed, “We have leading research institutions, technical innovation from start-ups & government-led bodies & growing engagement from investors & business leaders. However, the ecosystem is still nascent, & obstacles remain to its continued growth.
Access to funding for early-stage start-ups is clearly the biggest hurdle that must be overcome for the UK to compete on the world stage.
“Start-ups are uniquely placed to address these emerging challenges of remote working. Our world-leading fintech industry rose out of the recession of 2008; with the right support cyber-security can be the country’s next global success story” he concluded.