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Saj Huq

Programme director, LORCA

If cyber startups can survive, the UK could become a global leader in cyber security

For cyber startups, the transformative impact of the global pandemic on business, the economy and society presents the biggest moment of both risk and opportunity they’re ever likely to face.

The LORCA Report 2020, released on Wednesday (8 July) by Plexal, has conducted a comprehensive analysis of the British cyber ecosystem. And what’s clear is that while the ecosystem is growing at a staggering rate, if we don’t act quickly we could experience a shortfall in innovative companies with scaling potential in the future.

British cyber startups have never been more successful. Last year, they raised more than half a billion pounds in investment for the first time. That upward trajectory of funding has continued into 2020, despite the pandemic.

Cyber startups have already raised £496m in the first six months of the year – nearly matching 2019’s performance with half the year to spare.

Since the country went into lockdown, investment into cyber startups has increased by a staggering 940 per cent compared to the same quarter in 2019. Meanwhile, investment for all sectors as a whole is down by 47 per cent – which shows that cyber is outperforming the tech sector as a whole.

And this success is nationwide. 55 per cent of the UK’s cyber startups are now based outside of London, with thriving cyber clusters emerging in the likes of Edinburgh, Manchester, Reading, Bristol, Belfast and Cheltenham.

But while all this is encouraging evidence of the growing maturity of the ecosystem, there is some cause for caution.

Our data shows that this is a challenging time for British cyber entrepreneurs. Less than 1 per cent of the investment raised this year by cyber startups has gone to companies that have never raised funding before and nearly half (44 per cent) of cyber startups in the LORCA programme say that without a significant cash injection in the next four months they expect to fail.

For those that can navigate the economic disruption of Covid-19, this is a time of unprecedented growth but for the majority of entrepreneurs – especially those with early-stage companies – the reality of managing their cashflow could become overwhelming. Without continued public and private sector support, we risk losing a generation of cyber entrepreneurs.

Challenges and opportunities: the impact of the pandemic

Our report examined the priorities and challenges faced by startups, scaleups, the government, academic institutions, investors and security professionals to take the pulse of the sector as a whole and understand the impact of the pandemic.

What we’ve found is that while Covid-19 hasn’t radically transformed the state of cyber security innovation in the UK, it has accelerated some of the trends that were already taking place. It’s also placed a spotlight on the scaling challenges facing cyber startups.

Our findings include:

1. Industry and investors find the market complex to navigate

Cyber startups have a storytelling problem and not enough entrepreneurs can effectively communicate the scale of their vision and the commercial opportunity to mainstream investors or industry buyers.

At the same time, more needs to be done to make the sector accessible for both specialist cyber investors and sector-agnostic technology investors to ensure that startups attract the long-term capital they need to fuel significant growth.

2. Early-stage funding needs greater protection

There’s a growing investment gap for early-stage cyber startups, and Covid-19 is exacerbating this trend as investors shore up their existing portfolios.

One aspect of the problem is that cyber technologies are increasing in complexity, but real-world applications of these technologies often emerge years after the innovation has been developed. Government, universities, industry and investors need to trust the long-term potential of cyber startups and create a pipeline of future innovations and future-proof the sector.

3. The sector needs more consolidation

The cyber industry is crowded and complex. Large corporates told us they want to buy solutions that are easy to integrate and solve a business problem, so there’s more to be done to support integration and collaboration – while protecting our startups.

4. Access to cyber security isn’t evenly distributed

Too often, cyber startups focus on the large corporates that can sign big cheques and present low-volume but high-reward opportunities. The result is that thousands of smaller organisations, charities and individuals are less protected online. By engaging this under-served community, cyber startups can rapidly accelerate their growth while improving access to cyber security tools.

5. Individual security will redefine the sector

With increased remote working, the growing spread of the Internet of Things and the use of personal devices for work, individual security has never been more important. But what’s not yet clear is who will pay to protect the individual online: consumers, the government, insurance companies or larger platforms?

This is a pivotal moment for the UK’s cyber ecosystem. If the government’s economic packages can support cyber startups through the economic disruption ahead, if entrepreneurs can adapt to realise the opportunities presented by the new risk landscape and if industry and investors can rally around them, our sector can continue to grow. More than that, it can become the heart of our country’s economic recovery and enable tech-driven innovations that improve – or save – lives.

Saj Huq is programme director at Lorca, the London Office for Rapid Cybersecurity Advancement