Co-founder and CEO at Cloudflare Matthew Prince shares the stage with venture capital leaders at TechCrunch Disrupt Berlin 2019. Cloud is among the factors influencing massive investments in the cybersecurity space during 2020. (Photo by Noam Galai/Getty Images for TechCrunch)

Early fears about the coronavirus and the economic impact of business shutdowns appear to have had little impact on the flow of venture capital investment, at least in the cybersecurity industry.

A new report by Crunchbase found that 2020 was a great year for cybersecurity startups, even as it was perhaps less than a banner one for the rest of the world. According to the findings, 2020 brought with it record levels of investment, with a combined $7.8 billion poured into cybersecurity startups compared to $7.6 billion last year. That’s nowhere near the more than $2 billion jump between 2018 and 2019, but it indicates that a post-pandemic business world is still squarely focused on developing new and better solutions for its cybersecurity woes.

The short and long-term factors driving these investments are easy to guess: media coverage of industries and governments getting pummeled by nation state and ransomware hacking groups, new security vulnerabilities from digital transformation initiatives spurred by the coronavirus and longer term shifts to the cloud all play a role.

“With cyberattacks continuing to threaten businesses and jeopardize personal privacy, cybersecurity remains not only a hot topic, but an imperative investment for any company, government or organization,” the report states.

That funding total also happened through significantly fewer investment deals. While 2017, 2018 and 2019 all saw at least 700 deals, there were just 665 in 2020. The findings jive with other research suggesting that the average VC cyber investment is getting bigger, particularly in the early Series A or B stages of development.

“The thing we didn’t see coming was that it’s not just 2020, but 2019 [as well],” DataTribe cofounder Mike Janke told SC Media in January. “What we’re seeing is across all valuations in venture capital the average seed sits somewhere around $2.2 million in other industries, and cyber averages about $3 million [today]. The other thing we’re seeing is a 30-something percent drop in volume in 2020, but the amount of dollars on average that are going in are more.”

While U.S. companies tended to reap the lion’s share of these investments, over the past decade approximately $2.7 billion went to Israeli startups – most of it in the last three years – further cementing the small nation’s reputation as a cybersecurity powerhouse. Chinese companies received about $1.8 billion over that same time period, though there has been a steep drop off in the past two years. It’s a sign that the trade wars, geopolitical tensions and debates in Washington D.C. about cyber exploitation of Chinese-owned companies by Beijing in recent years is spooking investors.

While other states in the U.S. have cultivated their own tech hubs, nearly half of all the cybersecurity investment dollars flowing to the U.S. in 2020 went to companies based in California, demonstrating how Silicon Valley still holds a dominant place in the tech incubator space. The Big Apple was the other most lucrative space, with $874 million poured into cybersecurity startups in New York City. Massachusetts, Texas, Maryland and Minnesota also claimed significant though much smaller market stakes.

The long-term shift to the cloud has (logically) resulted in a robust and ever-growing market for startups that focus primarily or exclusively on providing cloud security. From secure identity and access management and tools to secure the software development process to cloud-native security solutions and automated configuration and remediation, 2020 marked a year where investors made a significant down payment on companies that they're hoping will only become more relevant to the security space as cloud migration continues.

Early signals from 2021 indicate the pace of investment has only quickened. Last year, 15 cybersecurity companies announced funding rounds of $100 million or more, a record. That number has been matched in the first four months of 2021 alone.

“The first months of 2021 indicate there’s no slowdown in sight for the industry, with over $3.7 billion invested and the emergence of nine new unicorns in Q1 alone,” the report concludes. “If the industry continues to grow at this pace, some predict this year’s total investment could reach a whopping $15 billion.”