VC firms back record number of cybersecurity startups in 2016

Venture investors are clamoring to back cybersecurity startups after record hacking last year and calls by U.S. President Donald Trump and other global leaders to do more to protect against digital attacks.

VC firms invested $3.1 billion in a record 279 cybersecurity startups in 2016, according to research firm CB Insights. That compares to $3.7 billion in 272 startups the year before and $833 million in 117 in 2010.

Specialized cybersecurity VC funds have sprouted, suggesting this area of the startup world will stay busy. The latest example is Trident Capital Cybersecurity, which said Wednesday it closed a $300 million fund. Others include Allegis Capital and TenEleven Ventures.

“Over time, I think they’re going to win,” said Geoff Beattie, former deputy chairman of Thomson Reuters and current General Electric director who invested some of his own money in Trident Capital Cybersecurity. “We want to be in on the growth of cybersecurity.”

More than 4.2 billion records were exposed during data breaches last year, easily eclipsing the previous record of 1.1 billion in 2013, according to a January report by Risk Based Security Inc. Corporate cybersecurity spending is growing at twice the rate of overall IT budgets and will reach $101.6 billion by 2020, research firm IDC estimates.

Governments may pay for more cybersecurity in coming years too, with Trump and Israeli Prime Minister Benjamin Netanyahu among leaders prioritizing this technology.

Trident Capital Cybersecurity leaders Alberto Yépez, Don Dixon, Sean Cunningham and Will Lin increased their fundraising target to $300 million from $200 million last year at the suggestion of pension funds seeking to invest in the field.

Yépez, a co-founder, said the firm is tracking about 1,400 startups and has invested in five so far. It has 47 advisers, including Keith Alexander, the former head of the U.S. National Security Agency who met with President Trump and other experts in the field last month.

In exchange for their help and participation at biannual meetings, the advisers can invest up to $100,000 in an affiliate fund which, for no fees, allows them to own a share in the firm’s portfolio companies. Most have chosen to do so, with the affiliate fund now around $4 million, according to Yépez.