Understanding the historical rhythms of the cybersecurity market is crucial, as the industry is currently facing a capital constraint. Recent trends, including the buzz around artificial intelligence (AI), the consolidation of security vendors and the shift of equity firms taking security firms private, all fit into this cyclical pattern, Richard Seewald, founder and managing partner of Evolution Equity Partners, told SDxCentral.

Evolution Equity Partners is a cybersecurity venture capital (VC) firm with over $1 billion in assets under management. It has invested in more than 50 cybersecurity companies to date, including Carbon Black (now part of VMware), Snyk and Aqua.

Since 2011, the VC firm has been writing checks to AI and machine learning (ML) cybersecurity companies, such as Cognitive Security, which was later sold to Cisco. “Over the last decade, we've invested in a number of companies that utilize machine learning and AI to better detect and respond to cybersecurity threats,” he said.

Evolution Equity Partners in July participated in Protect AI's $35 million Series A funding round. The startup is building a platform called AI Radar, which is designed to allow customers to quickly identify and remediate risks and maintain a strong security posture for ML systems and AI applications.

Over the past year, large language models (LLMs) have offered both challenges and opportunities in cybersecurity, Seewald noted. “Over the next five years, I'd say the force multiplier of hyperautomation, machine learning and AI, and even potentially quantum computing, are once again changing the game on both the perspective of an attacker and then how to defend against that attacker.”

The cycle of consolidation and the rise of best-of-breed solutions

Much like the AI hype that comes and goes, the security industry goes through periodic consolidations. Currently, the platform approach of offering a suite of complementary solutions has become dominant.

Private equity firm Thoma Bravo recently announced the completion of its approximately $2.3 billion ForgeRock deal. The firm took the security vendor private and combined it into its portfolio company Ping Identity.

This cycle of transitioning from public to private and back again is a recurring trend in the cybersecurity industry, Seewald said.

Additionally, leading security vendors such as Palo Alto Networks, Cisco, CrowdStrike and Fortinet have been touting their platform approaches.

Many organizations are working with different security vendors to meet specific security needs, from identity issues to threat detection to lateral movements. This strategy worked until they got to a point where there are an estimated 3,500 vendors in the market and customers juggle an average of 50-70 vendors, Jeetu Patel, Cisco EVP and GM of security and collaboration, told SDxCentral in an earlier interview.

Seewald said these platform companies offer a portfolio of solutions to address multiple security areas and often expand their portfolios through acquisitions, allowing them to cater to diverse security needs and boost their revenue.

However, this consolidation trend tends to alternate with periods where specialized, best-of-breed companies, focusing on a niche solution, become popular among buyers.

“The ebbs and flows of the market are pretty consistent over the last 25, 30 years where you see platform businesses come in being in demand,” Seewald said. “And as you look out over the next five years, it's somewhat predictable that single-product solutions and best-of-breed focused solutions will once again become in demand from chief security officers.”

Take a historical perspective on the cybersecurity investment constraint

Seewald recommended taking a historical perspective to interpret the ebbs and flows of the cybersecurity investment market, which moves “fairly systematically throughout economic cycles.”

Currently, there's a noticeable imbalance in the supply and demand of capital in cybersecurity, he noted.

“A lot of the generalist investors that were investing in cybersecurity have stepped back, at least for the current moment, and what you have primarily in the market today are specialist investors focused on cybersecurity,” Seewald said. “You also have a function of the market where fundraising has become more difficult so that constraint on capital is an issue in part because of that fundraising environment. ”

However, the next-generation cybersecurity companies are typically built at the point of the imbalanced supply and demand of capital in the cycle, he argues.

That’s why Evolution Equity Partners is sitting on its fourth fund, investing from $5 million to $100 million in best-of-breed cybersecurity companies.

“A lot of people look at the market today and say: Well, this is you know, unusual; it's not unusual. I think if you look back at previous years in previous economic cycles, this is pretty much on par with those previous economic cycles and actually good for the market,” Seewald said. “It allows for a shakeout of both investors and companies' consolidation where necessary, and best-of-breed companies are enabled runway to be successful.”

Image: Richard Seewald. Source: Evolution Equity Partners.