Investing in cybersecurity startups

April 28, 2020

As mobility and smart cities are developing, cybersecurity is becoming the hottest ticket to investing. Michael Blakey, Managing Partner and co-founder of Cocoon Capital shared his insights as an experienced angel investor and VC leader at this ICE71 Investor Series webcast.

Why invest in cybersecurity?

The amount of data and things that need to be secured is growing on a regular basis. Security business is fast-paced, with unfilled gaps along with rising technologies.

For large corporations and even governments, Michael said, “The big fear at the moment is not about the technology. It’s not about the IoT nor the smart devices, it’s about whether we will lose control (and be vulnerable to attacks). You’ve got to protect all these little devices, the cars and everything else which are moving around, and it’s much harder to do.”

There will be huge investment opportunities for cybersecurity companies if they can solve a relevant problem waiting to be solved. He opines, “If cybersecurity companies get their solution right, they can grow very quickly.”

Newbie tech investors: Good to know

For tech investments, it would take about 7 to 8 years before you see any returns, said Michael to would-be tech investors.

New investors can join other investor networks to gain experience and learn from them. This would also generate better deal flows as like-minded investors come together. “In Singapore, there’s a number angel investor networks like Angel Central and Bansea, you can join them and find people that have similar interest (in terms of the type of investee companies), and these people might be a little bit more experienced, people whom you can learn from. You can start small and learn through your mistakes. How everybody does investing would be different, there aren’t many many wrong ways of doing this but definitely not one right way of doing,” Michael shared.

People, especially founders, are key to an investor’s decision

A lot of emphasis is given to the founding teams when investors like himself needs to make a decision on what to invest in, especially when he can only invest in a few startups per year.

Founders must have the ability to build good teams that will consequently see through their product development and take to market. They should also have extensive market experience within the market of their target customer, particularly in cybersecurity. Any founder should correctly define the problem statement in those few crucial slides of their pitch deck. They must stand out to investors in the way they approach them. To Michael, demonstrating efforts in doing so would translate to how the same founder would attract a potential customer, a proof point for an investor to take the leap of faith.

Michael cites an example of investing in an ICE71 Accelerate cohort 2 startup, GuardRails, even though it is unusual to invest in a one-man team: “We invested in (one of your accelerator cohort companies, which was pretty much a one-person company and (the founder) had a couple of contractors that were were helping him. We spent a lot of time getting to know them figuring out if they have the right skill set, not just to build a technology but to build a team to one of the leadership capabilities.”

The other factors that influences his decisions as an investor include whether the startup is solving a real problem, and timing.

“Are they solving a real problem? I see some amazing technology that’s being built. But quite often, it’s technology that’s looking for a problem, not the other way around,” Michael lamented. “This is why I do more B2B than B2C. It’s harder with the consumers. With B2B, cybersecurity is (a real issue) that the board discusses.” He points out that cybersecurity is quite an interesting space to be in because it is something every board of every major corporation is concerned about. On timing, he’d ask if the cybersecurity startup is coming in too early or too late. He’d also ask, ”Where are they in terms of where the spaces (of opportunities) are?”

Investing in cybersecurity post COVID-19

Investing will still continue, albeit at a much slower pace, so founders need to work a little bit harder and yet lower their expectations of fundraising.

He said, “The reality is, as you might have noticed, I never talked about traction, rather I’m looking at people. Whether it’s today, last year, or next year, good teams are still good teams. And if you talk to most people who’ve been around long enough, they’ll all say the best investments they have ever made are the ones in a downturn. So, for founders, you’ll just have to work that a little bit harder. Change your expectations. If you were looking to raise one and a half million, maybe reduce the target funding amount and expect the fundraising period to take longer.”

He cautions that valuations are going to be around 20 to 30% of what companies would have gotten in 2019. To tide through COVID-19 effects, he advises startups to look into sensible cost-cutting, like making necessary salary cuts to prep for the worst, and also demonstrate adaptability during this time.

Watch the full video to learn more!

Be a part of our ICE71 community for more updates like this. Join our mailing list.