AI set to drive VCs to cybersecurity investments

Venture capital investors are scaling their cyber security investments on the back of advancements in artificial intelligence (AI) and rising instances of data security breaches. Indian cybersecurity startups in the last two years amassed fund inflows of about $130.7 million, nearly a 63% jump from two years prior, according to data collected by Tracxn.

With a boom in technological enhancements incorporated across multiple sectors in India and worldwide, data and security breaches continue to be a cause of concern for companies and individuals which has encouraged investors to invest more proactively. VC firm Accel is currently investing out of its seventh fund, sized at $650 million, and has invested from this fund in five companies in the cybersecurity space, said Prayank Swaroop, partner at Accel.

“Cybersecurity is an important area of investment for us globally, and in India we have significantly increased our number of investments in the last two years. This will continue to be a priority sector for 2024 as well." While the government has also brought in more initiatives to promote rapid digitization, this further exposes entities to malicious activities through ransomware attacks, credential thefts, supply chain attacks, among many others.

These security breaches could lead to substantial losses for organizations and may have severe repercussions, thus making it even more crucial to allocate funds to tackle these concerns. With the current rate of growth, damage from cyberattacks will amount to about $10.5 trillion annually by 2025, a 2022 McKinsey report said.

“New ways to secure customer specific information are expected to emerge, enabling organizations to implement substantial measures swiftly at a considerable pace and magnitude," Google backed cybersecurity firm Mandiant's CTO for JAPAC and Google Cloud, Steve Ledzian, told . About 97% of Indian organizations have begun investing in AI/ML while 84% have also put in money for infrastructure around cloud technology, according to the Data Security Council of India.

“The intersection of AI with cybersecurity is poised to drive a significant increase in investments in the sector this year. The recent adoption of Generative AI is also opening various cybersecurity risks. We expect a few investment opportunities coming to us in AI governance and cyber security governance areas." said Shyam Penumaka, partner at Dallas Venture Capital (DVC) adding that AI technologies, such as machine learning and behavioural analytics, are proving to be game changers in the cybersecurity space.

However, about 90% of Indian business leaders see a significant cyber threat to their business, according to data collected by consulting firm PwC. The report also said cyber security continues to have a share of 10% 15% of IT budgets within Indian enterprises as cyber attacks are posing an increasing threat to business operations.

Nearly all the organizations will increase their cyber budgets, out of which 50% envisaged an increase between 6% and 15% in the next 12 months, as per the report. As a result, fund backers have become more optimistic about investing in this sector. “We have been bullish for a while on the cybersecurity ecosystem out of India and have hence backed a few companies in this space," head of venture capital firm RPG Ventures, Kunjan Chikhlikar said.

It has invested in companies such as Shieldsquare, a bot mitigation business and cybersecurity firm BluSapphire. Several industry experts and executives also said India gains from a structural advantage in security as it houses a large number of security engineers, making it a more attractive market for investors.

“We're seeing a lot of cybersecurity services companies in India transition to product companies. We've also seen a lot of security engineers in the US coming back to India and building security products for the world, and these trends are only on the rise," said Accel’s Swaroop. Still, cybersecurity firms continue to face challenges in keeping pace with the rapidly evolving technological advancements due to factors that include complex regulatory landscapes, balancing security measures with user experience and addressing global threat variations.

Additionally, the frequency of cyberattacks globally and in India has also challenged the readiness of Indian companies. Experts at DVC have said navigating through this complicated landscape involves continuous innovation, interoperability solutions, advanced threat intelligence, talent development, and targeted user awareness programmes.

“This multi vector environment is challenging to traverse for budding cybersecurity companies which must not only build cutting edge technology solutions but also find the product market fit with their target customers," DVC’s Penumaka added. DVC, which expects an increase in global spending, estimates about 14% jump specifically in the Indian cybersecurity market.

The firm forecast 95% of Indian organizations to increase their cybersecurity budget by at least 10% over the next 12 months, compared to 86% globally. Despite increased VC investment in this burgeoning market, experts believe that the market has not reached its full potential. “Cybersecurity landscape is definitely coming up…I would say this is the very early stage of the cybersecurity ecosystem when it comes to manpower and product development.

The expertise exists but I think it would take another 5 10 years before the market matures," Peak XV Partners backed cybersecurity startup SquareX’s founder Vivek Ramachandran told in an interview. Livemint tops charts as the fastest growing news website in the world to know more. Unlock a world of Benefits! From insightful newsletters to real time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away!.