Cyber winds ༄༄

Cybersecurity and infrastructure software trends, supported by 33N ventures

New year, new start! Well, re-start as for now trends haven't significantly changed. With the funding market yet constrained beyond seed (as shown by Carta), M&A continuing at both small and large scale (the latest being Juniper-HPE) and IPOs being pushed forward (Arctic Wolf recently being one of the latest ones), many founding teams and investors continue facing tough decisions on their future and their mission going forward.

At 33N, as the year starts, we also took time to review our mission and the winds pushing our boat. The result? More than ever, we are optimistic about our mission. It require an ecosystem play, committed investors and a new breed of exceptional founders to make a dent in the cyber ecosystem in Europe, but the opportunity is up for grabs. Let's start!

The European Cybersecurity opportunity

A burgeoning market

As the cyber threat landscape continues to evolve and expand, only further accelerated by the threats of the ongoing war in Eastern Europe and Middle East, the demand for robust cybersecurity solutions has never been greater.

In particular in Europe, total spending in cybersecurity is expected to grow at 13.4% year-on-year, faster than North America or any other region, expecting to settle at c. 1/3 of total global spending. 

This growth is fuelled by key attractive characteristics of the European market (among others):

• Public defense and security spending has hit all time highs, and is expected to continue accelerating (among others, supported by strong threat activity driven by the conflict in Eastern Europe)

• The European Union has historically been among the fastest to respond to the growing threats and emerging technologies by enforcing EU-wide public strategies (the case in point is the EU directive about AI)

• The European Union combined employs more software developers than the United States, representing a huge addressable market

Generally, Europe was coming from a lower base of spending versus more advanced markets such as the US or Israel, and, coming from a lower base, is now catching-up at increased speed.

A breeding ground for cyber leaders

Europe is also emerging as a thriving breeding ground for cybersecurity start-ups. There are several factors driving this:

• Abundant talent: Europe has a skilled workforce in computer science and cybersecurity, thanks to its top universities and research institutions

• Strong data protection regulations: The GDPR and similar regulations promote data security and privacy, driving demand for cybersecurity solutions

• Diverse market: Europe's interconnected markets expose start-ups to a variety of cyber threats, making it an ideal testing ground for innovative security technologies

• Supportive ecosystems: European cities offer incubators, accelerators, and funding opportunities, fostering the growth of cybersecurity start-ups through mentorship and access to capital at pre-seed and seed stages

A testament to the volume and quality of European innovative cybersecurity vendors, Europe has been gathering a larger share of the cybersecurity funding market.

While the absolute funding contraction is relevant, Europe was able to increase its share of Cyber VC investment to 21%. Considering also that the European VC ecosystem is richer in early stage (ie, seed) versus regions such as the US, reaching 21% share in 2023 is quite relevant and likely even more relevant in deal volume.

An opportunity, with a flipside

Opportunities don’t come without its challenges. Today, there are still key factors that hinder Europe from becoming a cybersecurity powerhouse:

• Heterogenous market across different EU countries, with varying languages, laws and culture (although on the surface acting as a single market made)

• Funding gap at post seed stage, especially from specialised and supportive investors

• Lack of innovation-savvy sales and go-to-market partners, that are glad to support and work with innovative vendors

• Still early pool of 2^nd or 3^rd time founders and management teams, a by-product of being an emerging market that only started a few years later than the US or Israel

Mindful of these challenges, at 33N we've leveraged our foundations as a team to address these precise challenges.

Having seen from the trenches the evolution of professional and managed services markets across Europe for more than a decade, we strongly believe that enterprises will increasing follow a 'managed security' approach. Managed Security Service Providers (MSSPs) and Value Added Resellers (VARs), among others, will then be the prescribers of cybersecurity technologies to enterprises and hold the key to a centralised access to the heterogenous European market.

At 33N, we look to leverage our extensive network of MSSPs/VARs as well as MDRs to bring strong awareness to disruptive cybersecurity vendors and drive adoption across Europe. We’ll look, together with founders, to tap on a network of top CISOs/CTOs at top flagship enterprises, but wide adoption will require a true ecosystem play.

Secondly, we've seen Series A/B as the stage in which there is larger gap in funding in Europe. Simultaneously, at these stages when typically Product Market Fit (PMF) has been achieved, is when sales acceleration will mean building relationships with flagship enterprises as well as building channel partnerships to support international expansion, both in direct and indirect sales motions.

Thirdly, and despite having been operators ourselves, we’ve built a network of successful serial entrepreneurs and founders, on which to tap to support our founders in growing their maturity. In addition, keeping connections to more advanced markets such as the U.S. and Israel, particularly in cyber, helping to keep clear perspective on the experience of founding teams and the competitive market landscape. If European cyber start-ups are to build solid differentiation and tap into emerging and less crowded market segments, it’s paramount to keep an ear on the ground.

Finally, in our opinion, it’s clear that Europe won’t grow to a cybersecurity powerhouse overnight and a multi-stakeholder effort is needed. We for sure expect the European defence, security and in particular, cybersecurity, to catch-up quickly with the maturity of more advanced ecosystems. The answer will lie in making the most of the existing strengths while benefiting from the right ties to advanced markets such as the US and Israel. 33N is certainly committed to heavily contributing to it.

We’re on a mission; if you’re a founder, tech executive or investor and want to take part, feel free to reach out.