Over the last 12 months, the cyber industry has experienced an increase in the average, per-round funding provided by venture capital firms. The average round size for IT Security, Cloud, and Big Data firms increased by 77% from 4Q11 to 3Q12.
Figure A shows that the cyber Series D funding average has substantially increased over the last four quarters, driving the total cyber average higher. The surge in average Series D funding indicates that strong later-round funding is available to cyber firms that need liquidity, but may not yet want to sell or execute an IPO. As the cyber industry continues to mature, large Series D (and later funding rounds) could delay M&A activity as private cyber companies opt for competitive funding from interested venture capital (“VC”) firms in the sector.
Figure B displays that while the number of cyber M&A transactions has steadily declined, the total cyber VC deal count remains firm. Additionally, the Series D deal count has recently rebounded as established cyber companies garner more VC funding.
Even though macroeconomic concerns have led cyber firms to delay liquidity events this year, the considerable VC activity in the sector demonstrates that the technology is still in high-demand. With later funding rounds receiving greater interest and participation from venture capitalists, we expect that liquidity events are on the horizon in the near-term, reversing the decline in M&A activity. However, higher per-round funding often indicates higher pre-money valuations, so it will be interesting to see if returns will meet shareholders’ expectations.
The chart below highlights some of the largest funding rounds through September 2012: