Venture capital (VC) investments in the security technology space experienced a fluctuating trend in 2018, as the share of deals valued <=US$1m registered consistent growth, while the share of deals in all other value ranges displayed wide fluctuations, says GlobalData, a leading data and analytics company.

Last year, a total of 375 VC funding deals took place in the security tech space. Of these, 313 deals had a disclosed funding value of around US$5bn. This was an increase from 322 deals in 2017, out of which 264 deals had a disclosed funding value of US$4.3bn.

The number of deals valued <=US$1m as a percentage of total deal volume increased from 5.1% in the first quarter (Q1), to 5.6% in the second quarter (Q2), 7% in the third quarter (Q3) and 17% in the fourth quarter (Q4) 2018.

In contrast, the share of deals in all other value ranges registered inconsistent growth. Moreover, the total number of deals announced during each quarter also witnessed a fluctuating trend. Overall, deal volume witnessed a decline in Q2 and Q3 before returning to growth in Q4 2018.

Low value deals (investment <=US$10m) continued to dominate VC investments with 57.5% share in 2018. There were relatively fewer high value deals (investment >US$100m) in the security technology space as compared to other emerging technologies such as artificial intelligence, Internet of Things and payment technologies.

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In Q1 2018, 78 deals were announced, out of which low value deals accounted for 57.7% share. This quarter did not witness any US$100m+ deal.

Deal volume declined by 7.7% in Q2 2018 as compared with the previous quarter. Low value deals as a percentage of total deal volume also declined to 44.4% during this period. This quarter witnessed three US$100m+ deals announcements.

Deal volume declined by 20.8% in Q3 2018 as compared with the previous quarter. Overall, 57 deals were announced during this period. A total of 30 deals with value up to US$10m were announced during this quarter, accounting for 52.6% share of the total deal volume.

Among all the quarters, Q4 2018 witnessed the highest number of deals. Deal volume registered a massive growth of 86% in this quarter as compared to the previous quarter. Low value deals as a percentage of total deal volume was also the highest in Q4 2018. Overall, 73 such deals were announced, accounting for 68.9% of total deal volume. The quarter witnessed two US$100m+ deals.

Aurojyoti Bose, Financial Deals Analyst at GlobalData, says: “With cyber-threats increasingly posing challenges, there are ample opportunities for companies offering innovative/breakthrough solutions in the cybersecurity segment. This was also reflected in the growth in funding value and volume in 2018 as compared to the last year. However, lack of skilled workforce and cybersecurity companies’ inability to generate consistent returns might act as headwinds for the sector.”

To address the of lack of a skilled workforce, companies are considering automation and AI-based cybersecurity solutions. In February 2019, Microsoft launched Azure Sentinel, an AI-based cybersecurity solution. During the same month, Palo Alto Networks introduced its AI-based security platform, Cortex.

Another key challenge is security companies’ inability to maintain consistent returns. For example, Finnish cybersecurity company, F-Secure, witnessed decline in its net income from EUR11.1m in 2017 to EUR0.8m in 2018. Another cybersecurity company, Sophos Group Plc reported increase in net loss from US$46.7m in 2017 to US$60.9m in 2018. US-based cybersecurity company Palo Alto Networks, Inc. also reported net loss of US$216.6m in 2017 and US$147.9m in 2018. Dwindling return might also chase away investors from this space.