Cybersecurity startups around Washington have been on fire this summer. A handful of companies collectively have raised more than $100 million in the last six weeks or so, all approaching cybersecurity from different angles despite similar goals. The capital is just the most eye-catching aspect of the escalation. Startup incubators and accelerators specifically aimed to nurture cybersecurity startups have opened or expanded this summer, while some of their graduates have landed partnerships or otherwise staked a claim to the sector.
Throwing Money at the Problem
"Cybersecurity will be a growth industry over at least the next decade, but it's hard to know how to read into the funding news," Rick Gordon, a managing partner at Herndon-based cybersecurity startup accelerator Mach37 told me. "Bessemer [Venture Partners, a Silicon Valley-based venture capital firm] has been around here investing quietly for a while, now other folks are starting to get it and starting to make investments here. I think the cyber funding is an indicator of greater things to come for the region."
In August, Bessemer participated in the $21 million round for Distil Networks and led the $29 million round for Virtru, both local cybersecurity startups. Distil specializes in blocking malicious automated attacks on company servers, detecting and stopping bots. Virtru works on data encryption and digital privacy protection, keeping data sent online private for individuals and organizations.
Cybersecurity has always had a large part of the D.C. area's tech startup scene. Arguments about whether there was a bubble have been constant. One potential sign was the way that cybersecurity giant FireEye saw its stock plummet in May. FireEye's prominence in D.C. skyrocketed after it bought local firm Mandiant for $1 billion in 2013. The company followed that up this year by buying iSight Partners, a Texas-based cybersecurity company with a large analytics center in Virginia for $200 million and Alexandria-based Invotas for an undisclosed amount. But FireEye's stock hasn't recovered from its May slump and it is still trading below its IPO price.
"The cyber funding is an indicator of greater things to come for the region."
If FireEye may have been caught on the downside of a boom and bust cycle, but some entrepreneurs and investors clearly see the pendulum swinging upward again.
"There was something like a micro bubble from about 2013 to 2015, with ridiculous valuations for cybersecurity startups that was completely unjustified," Rohyt Belani, whose company PhishMe raised $42.5 million at the end of July, told me. "What's occurring now is the normalization of that value. We've seen a steep rise in demand [this year]."
Accelerators on the Ground Floor
If venture investors are on fire for cybersecurity opportunities, a group of D.C.-based accelerators are cropping up to supply the fuel. Mach37 graduates around half a dozen startups from its program twice a year, with notable successes like Virgil Security, which partnered with Twilo, one of the fastest-growing cloud computing companies around, in April.
Similarly, the founders of encryption startup IDVector, give due credit to Kyrus Tech, another Virginia cybersecurity accelerator, for helping them reach the point they could come out of stealth. Even 1776, which doesn't exclusively deal with cybersecurity startups, is looking for a cybersecurity ventures director to support members in that field and look for potential new investments.
To add to the list, a trio with a deep background in cybersecurity startups announced their own accelerator, called DataTribe, this summer. Operating with a smaller cohort for a longer time than Mach37, DataTribe has already found a Maryland cybersecurity startup to invest $1.2 million in as part of its program.
"We work very closely with the people we choose," DataTribe co-founder Michael Janke told me, explaining that some of the DataTribe team actually become temporary executives for the companies in a sense, operating as though they run product development, sales and marketing or other aspects of the startups. "When they leave, they will be ready for VC funding."
A Headline-Fueled Boom Phase
Fear of hackers has taken up a major chunk of the news cycle this summer. The biggest may have been that Russia-supported hackers got into Hillary Clinton's campaign, leaking embarrassing emails to damage her presidential prospects. That wasn't the only incident though. The Democratic Congressional Campaign Committee was hacked, with personal information stolen and leaked. Beyond political targets, large health data centers were successfully hacked multiple times this summer, as were major hotel chains. All of which has made cybersecurity a vital topic in political and business circles.
"I used to go to a cocktail party and no one would talk to to me about cybersecurity, it was not interesting," Gordon said. "Now I'm the popular guy."
Projecting whether the growth in the local cybersecurity startup scene is sustainable isn't easy. You can't necessarily say that a change in behavior is permanent and not a fad, especially when the latest news plays a factor in those decisions, like it does in cybersecurity investing. But those who are bullish on cybersecurity point to a growing demand among mid-market customers and an acknowledgement that technological advances are needed.
"The 'hair on fire' fear money coming in may dry up," Gordon said. "But, the market growing and the growth in the mid-market makes up for other losses. For Fortune 2,000 companies and below, the biggest macro factor is that threat is real and we, meaning the cyber defense industry, are behind. We haven't kept up, but we have to, and they know that."
