By Mohit Ralhan
Cybersecurity is an integral part of Industry 4.0. In the current era of fast technological advancements and innovations, cybersecurity is the key to continued success and business longevity. As highlighted by Check Point Research (CPR), global cyberattacks surged by 38% in 2022, primarily fuelled by nimble hacker groups exploiting vulnerabilities in work-from-home collaboration tools. Cyber attackers are driven by diverse motives, encompassing economic gains, corporate espionage, and the desire to infiltrate infrastructure and development environments to understand a product’s capabilities for potential future exploitation.
The technology sector, teeming with startups revolutionizing various industries, faces heightened vulnerability due to the immaturity of emerging technologies and limited funds allocated for robust security infrastructure. Tech startups face significant challenges navigating the evolving cybersecurity landscape. Startups often handle sensitive information, including customer data, financial records, and intellectual property. A breach of this data can inflict severe damage on a business, leading to loss of reputation, legal ramifications, and revenue loss. Cyberattacks result in downtime and system failures, causing significant disruptions. Given the limited resources of startups, they cannot afford the time and money lost due to such disruptions. Moreover, the implementation of data protection regulations such as the General Data Protection Regulation (GDPR) and the Digital Personal Data Protection Act (DPDP) has made compliance a paramount concern. Startups adhering to these regulations not only mitigate legal risks but also gain a competitive edge in the eyes of investors.
The frequency and sophistication of cyberattacks have elevated cybersecurity from a peripheral concern to a central focus. A survey by Embroker, a business insurance platform in the US revealed that founders with cyber coverage are more likely to secure funding for their venture. Nearly half of the surveyed startup founders cited cybersecurity insurance protections as a requirement from investors or board members. Startups that incorporate cybersecurity as a fundamental element of their overarching business strategy convey a message to investors, showcasing their proactive and forward-thinking approach. By demonstrating a steadfast commitment to protecting sensitive data, intellectual property, and customer trust, these startups position themselves as resilient and thoroughly prepared to tackle the challenges posed by the digital age.
In the investing framework of venture capital, cybersecurity risk has emerged as one of the primary risk factors and investment committees look for an effective mitigation and monitoring plan before approving investments. The cost of implementing such a plan should also be incorporated in the business plan and financial projections, with allocation of adequate resources. VCs are increasingly looking at the thought process of startups and whether they consider cybersecurity as a profit centre or a cost centre. Cybersecurity is a tool to create long-term trust with customers, which should result in more business and growth. The founders should be able to clearly articulate the threats and opportunities that cybersecurity offers for their businesses.
Besides a risk of investment loss, VC investors can encounter other diverse risks stemming from cyber incidents, spanning from legal complications to potential harm to their reputation. The prospect of a cyberattack culminating in the sale of critical user data on the dark web could lead to legal implications for the board members. Meanwhile, such acts can pose substantial reputational cost for the fund involved which might lead to early redemptions from their investors and lower participation in their subsequent funds. Cybersecurity breach in any portfolio company reflects poorly on the due diligence process of a VC fund. It is imperative for tech entrepreneurs to invest in cybersecurity early on. It should be considered as essential as marketing, accounting, or product development.
In a tech landscape where innovation is synonymous with vulnerability, cybersecurity emerges as a key determinant in attracting venture capital for startups. Founders must recognize the symbiotic relationship between cybersecurity and successful fundraising, while investors must ensure that startups allocate sufficient budgetary resources to cybersecurity. The proactive integration of such measures not only safeguards a startup’s future but also enhances its attractiveness to potential investors in an increasingly digital and interconnected world.
(The author is Mohit Ralhan, Chief Executive Officer – TIW Capital, and the views expressed in this article are his own)
