Last year saw a significant downturn in the U.S. private market's overall deal volume and capital investment. The cybersecurity sector mirrored the broader market pullback, startups especially faced a more turbulent descent, according to the DataTribe Insights Q4 2023 report.

The overall deal volume and capital invested in U.S. private markets continued to plunge to a five-year low at $89 billion across roughly 6,400 deals, marking a return from the highs of 2021 and 2022, according to the report.

The headwinds drove a substantial rise in down rounds and shutdowns. According to the data from equity management platform Carta, nearly 20% of its users reported taking money at a lower valuation, and a record 543 companies closed their doors. Startups, particularly in their late stages, were hit disproportionately, with 26.2% of these companies taking down rounds for a median decrease in valuation of more than 46%.

“In the fourth quarter of 2023, global markets grappled with renewed conflict in the Middle East, economic uncertainty in China, and the Federal Reserve’s continuation of high-interest rates,” the report wrote. “These challenges have been felt throughout the investment ecosystem, culminating in a slowdown in investment and a continued flight to quality on the part of venture capital funds.”

The cybersecurity sector mirrored this broader market sentiment in the last quarter, DataTribe noted.

Completed cybersecurity deals showed a 37% reduction compared to the same period in the previous year. Most of this pullback can be attributed to the decline in seed-round deals, plummeting from 49 in the fourth quarter of 2022 to a mere 21 in this past quarter.

Despite the number of seed stage deals dropping sharply, the total amount of invested capital posted a more modest decline, as an uptick in Series A and B rounds helped balance things out, according to the report.

Median pre-money valuations in the seed stage continued their quarter-over-quarter increase to 16 million, with valuations ranging from $1.5 million to $38 million. Many of those higher-valued startups used artificial intelligence (AI) in their products.

The trend is concurrent with cybersecurity venture capital (VC) firms’ strategy. For example, Evolution Equity Partners has been writing checks to AI and machine learning (ML) cybersecurity companies since 2011.

However, DataTribe’s report found Series A valuations took a big hit with median pre-money valuations dropping from a five-year high of $73.45 million to $29.5 million. “When paired with a decrease in volume, this steep decline in median valuation is further evidence of the increased power that venture capital firms hold in the current market,” the report wrote.

Late-stage funding (Series C and beyond) continue to decline in the last quarter. The number of Series C deals in cybersecurity was down from 6 to 5. The sector also saw the first Series E deal of the year, possibly due to a backlog of companies waiting to go public.

“This increasing demand-to-supply ratio for capital and upward trend in down rounds suggests that the market will remain investor friendly entering FY24, and we are optimistic that the cybersecurity sector is well-poised for truly differentiated opportunities to stand out,” the report wrote.