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Spending on security is anticipated to significantly increase due to the growth in the frequency and intensity of cyber hacks. Research from Gartner indicates that global information security spending topped $76 billion in 2015. By the year 2020, spending on security is anticipated to reach $170 billion, representing a growth of more than 100% in just over five years. At the same time, venture capital investments in cybersecurity startups have grown at a steady pace. Just over the past five years, VC investments in cybersecurity startups grew at a rate of 40% each year. (For more, see: Invest in Cyber Security With These Stocks.)

Startups Benefiting From Rising Interest in Cybersecurity

Among the companies benefiting from such investments is Authy. The two-factor authentication company raised almost $4 billion. Yet another two-factor authentication company, Toopher, raised more than $2 million and was later acquired by Salesforce.com Inc (CRM). Acquisitions in the cybersecurity space have continued to increase, with Aorato being acquired by Microsoft for an astounding $200 million.

With cybersecurity hacks growing in intensity, security awareness is a trend that is definitely on the rise. As more businesses begin the transition of shifting their operations to the cloud, those same companies take on increased exposure to hackers. High-profile attacks, including those that targeted Sony Pictures (SNE) and Target Corp (TGT), focused the world’s attention on the growing risk among hackers attempting to appropriate customer data. In an effort to combat the growing threat, cybersecurity startups have become one of the hottest areas in Silicon Valley. Venture capitalists are responding by funneling hundreds of millions of dollars into those startups.

Cybersecurity became such a hot area last year that three of the companies ranking on the “Hottest Startups of 2015” included cybersecurity firms Menlo Security, Tanium and Illumio. The companies were ranked based on the fastest growing valuations between funding rounds. Among those companies, Tanium proved to have one of the highest valuations. In 2015, the company brought in more than $290 million in funding and acquired a new valuation of $3.7 billion. Menlo Security, a company that works to isolate malware in the cloud, landed a $25 million Series B round of funding last June, while Illumio, with a $100 million funding round, attained a billion-dollar unicorn valuation status last year. (For related reading, see: 4 Cybersecurity Value Stocks to Watch for.)

The risk for cybersecurity hacks certainly should be taken seriously. While there is sometimes a perception that only large corporations are at risk for hacking, the reality is that regardless of size, no business is immune. A new breed of startups holds the best promise to giving companies the peace of mind they need for protecting customer data. Venture capitalists are following that promise by providing the funding necessary to equip cybersecurity startups with the tools and technology they need. According to research from CB Insights, over the past five years some 1,028 investments were made in cybersecurity startups. Those investments totaled more than $7 billion.

Private and Federal Organizations Beef up Funding for Cybersecurity Protection

Innovation is the key to winning a growing cybersecurity war, especially as hackers and other cyber-criminals have proven they are quite adept at evolving. As hackers continue to deploy virtually unlimited amounts of capital into their quest to steal data, cybersecurity firms must be responsive. Whereas companies may be willing to cut budgets in other areas, IT budgets for protecting infrastructure have become a new priority.

Cybersecurity has become such a rising concern that President Obama's budget proposal for the 2016 fiscal year sought $14 billion for cybersecurity efforts to improve protection for both federal and private networks. An increasing number of federal agencies have also received permission to hire cybersecurity professionals. The Office of Personnel Management alone recently received the go ahead to fill some 1,000 cyber positions.

In the private sector, security was ranked as a top spending concern for chief information officers, with 75% of respondents in a survey indicating that they planned to increase cybersecurity spending in 2015. That is an increase from only 59% the previous year. Moving into 2016, the number of companies projecting an increase in cybersecurity spending has grown even more. A survey of more than 300 IT security professionals conducted by Wakefield Research discovered that 59% of respondents reported having experienced a data breach in the last year. Furthermore, 95% of survey respondents believed their organizations would increase spending on security over the next year. Even more telling is the fact that of that number of respondents, 44% anticipate their companies will increase cybersecurity spending by at least 20%. (For more, see: Cybersecurity: Why Your Firewalls Aren't Enough.)

The Bottom Line

As cybersecurity spending across both government and private sectors continues to increase amid rising concern of security threats, the potential for cybersecurity startups has never been greater. 

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