Why is it a Great Time to Invest in Cybersecurity? Industry Resilience in the Face of Economic Headwinds (Nasdaq)

07.31.23 | Alberto Yépez | Blog Post

Person holding a phone in front of her laptop with a cybersecurity graphic displayedCREDIT: TEROVESALAINEN / STOCK.ADOBE.COM

This is a challenging moment for our economy with lingering inflation, high interest rates, recovering supply chains, and an unpredictable stock market. This year alone, we’ve seen a slowdown in venture capital investments and companies across the spectrum from startup to enterprise tighten budgets and lay off employees amid recession fears. At the same time, the promise of generative AI is spurring innovation industry-wide.

As a longtime entrepreneur, executive and investor in cybersecurity, I can say that this uncertainty is no different in our industry, and that this is a familiar cycle in tech. This market correction is driving a “return to normal” after sky-high valuations and increased venture capital investment in 2021 and 2022.

However, the cybersecurity industry remains resilient. Here’s why investing in cybersecurity companies is a smart long-term play and what we can expect to see in the future.

History shows that economic hardship leads to innovation

Moments of destabilization, correction, and retraction have set the stage for innovation and later market booms.

Take the 1990’s dot-com bubble burst as an example. The challenges companies faced led to a surge of innovation in the early 2000’s. Fortinet (FTNT) seized the opportunity to create next-generation firewalls and antivirus software and was thus well-positioned to meet cybersecurity challenges as smartphones revolutionized communication and mobile computing. They successfully went public in 2009 and have experienced high growth since then.

The 2008 recession taught us a similar lesson. During one of the darkest moments in economic history, some of the most successful tech companies of today were forged including Palo Alto Networks (PANW), Zscaler (ZS), and Cloudflare (NET). These companies saw the chance to innovate around network security, nation-state cyber-attacks and simplified enterprise cybersecurity. Today, they are market leaders.

Following the onset of COVID in early 2020, we saw nimble companies jump to address security issues around remote working and cloud infrastructure. A new class of companies like Uptycs and Huntress are now pushing the industry to new capabilities around cloud security, protecting distributed workforces, and threat monitoring and response.

The current struggles we face are simply the next great opportunity for companies who will thrive in the future.

Cybersecurity is transformative for modern organizations

Today, cybersecurity both protects against cyber threats and enables digital business transformation to take companies to radically higher levels of capability. Take JPMorgan Chase’s (JPM) approach to fraud prevention as an example. The company processes a massive number of complex derivatives trades and was facing issues efficiently checking trades for signs of fraud. By working with AI-powered knowledge process automation pioneers DeepSee.ai, JPMorgan Chase is able to automate post-trade checks that were previously manual, transforming the company’s ability to efficiently process trades and prevent fraud.

The regulatory and compliance environment is also elevating cybersecurity in the enterprise. Regulations around cybersecurity compliance will elevate the Chief Information Security Officer (CISO) role as a core business position in companies, much like the Chief Financial Officer (CFO) did following regulatory changes around financial reporting in the Sarbanes-Oxley act in 2002.

Additionally, the need for unified cybersecurity across all organizations has never been more important as cyber threats become more sophisticated and complex. Governments and companies now must grapple with cyberattacks from nation-states. Securing a global community requires public-private partnerships to achieve a collective defense against attacks. Recent efforts like the Shields Up initiative (created by the United States government in response to Russia’s invasion of Ukraine) are necessary to protect communities.

With the rise of generative AI, hackers and criminal groups are now launching even more effective attacks. At the same time, cutting-edge AI tools like Microsoft’s (MSFT) Security Copilot can enhance a company’s cybersecurity efforts. Companies that use generative AI to improve products or processes face a unique set of cybersecurity risks as well. Both the opportunities and challenges from generative AI will embed cybersecurity at the core of modern organizations.

The road ahead in cybersecurity

The cybersecurity industry is resilient and will be an engine of innovation in the coming years. Emerging and established cybersecurity companies will continue to solve emerging issues around cloud, AI, identity verification, and an approaching quantum computing revolution. However, the road is a tough one.

Venture capital funding for startups is down, with longer funding cycles and reduced funding rounds. There will be a wave of correction and consolidation in the market in which only the best companies in each market category will make it through.

Mergers and acquisitions (M&A) will become more common as enterprise companies see opportunities to gain complementary strengths. Take Google’s (GOOGL$5.4 billion acquisition of Mandiant in 2022 as an example. Google saw an opportunity to strengthen its products, protect its users and differentiate itself in the market by acquiring Mandiant’s attack prevention and threat intelligence capabilities. Today, Google is a market leader in cybersecurity among large enterprises.

Legacy companies like Cisco (CSCO) and Fortinet (FTNT) may consider acquisitions to stay relevant and fuel growth via new markets. Market-leading companies like CrowdStrike (CRWD), SentinelOne (S), and Cloudflare (NET) will make build/buy decisions to stay ahead of the pack.

Cybersecurity is a strong investment over the long term

History has taught us that moments of turmoil give rise to the companies and innovations of tomorrow. The cybersecurity industry is resilient and there is an opportunity for companies of all sizes to solve current problems and become future market leaders. Cybersecurity is a key business enabler of digital transformation and the strongest companies will innovate, strengthen their security capabilities and thrive in the years ahead.

As businesses and our daily lives become increasingly digital, cybersecurity will remain a smart investment for companies and investors over the long term.

 

***This blog was originally posted on Nasdaq.com. You can read it here.***

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