Introduction: Cybersecurity is Now a Funding Requirement
Venture capital (VC) firms are no longer just evaluating revenue potential, product-market fit, and leadership teams—they are now scrutinising cybersecurity posture before committing capital.
Why? Because startups are prime targets for cyberattacks, and poor security can lead to data breaches, regulatory fines, reputational damage, and loss of customer trust—all of which devalue an investment.
📌 66% of VCs now conduct cybersecurity due diligence before funding rounds.
📌 Over 50% of startups experience a cyber incident within the first two years.
📌 Cyber risks can reduce startup valuations, delay funding rounds, or even result in deal cancellations.
🔹 If your startup is preparing for investment, cybersecurity is no longer optional—it’s a critical due diligence factor.
🔹 This article explores how investors evaluate cyber risk, what startups need to prepare, and how to make cybersecurity a competitive advantage in funding rounds.
1️⃣ Why VCs Are Prioritising Cybersecurity in Due Diligence
🔹 1. Cyber Risk Directly Impacts Valuation
Investors don’t just assess current revenue and growth potential—they evaluate risk exposure. A startup with weak security controls is more likely to suffer a data breach, IP theft, or regulatory penalties, making it a riskier investment.
💡 Example: A fintech startup raising a £10M Series A lost a major investor after a security audit revealed unprotected customer data in a test environment.
✔ VC Perspective: “If a startup can’t secure its data, how can we trust it to scale securely?”
🔹 2. Cyber Incidents Kill Deals & Cause Funding Delays
🚨 Investors walk away from deals when startups fail cybersecurity due diligence.
🚨 Funding rounds are delayed when VCs uncover security gaps that require urgent fixes.
🚨 Regulatory non-compliance can lead to deal renegotiations or valuation cuts.
💡 Example: A healthtech startup’s funding round was delayed by 3 months after investors found GDPR compliance issues in their data handling practices.
✔ VC Perspective: “Startups with unresolved security issues pose a liability to investors.”
🔹 3. Regulatory Compliance is Now a VC Requirement
📌 Investors don’t want to be exposed to compliance violations.
📌 Startups operating in finance, healthcare, SaaS, and AI must meet GDPR, ISO 27001, SOC 2, and industry-specific security standards.
📌 Many VCs now require evidence of compliance before closing funding rounds.
💡 Example: A SaaS startup had to implement SOC 2 controls before securing its Series B round, delaying the process by 6 months.
✔ VC Perspective: “We prefer investing in startups that have security and compliance built in, not patched in later.”
2️⃣ What Investors Look for in Cybersecurity Due Diligence
📌 VCs Will Ask These Cybersecurity Questions:
✅ Do you have a cybersecurity policy in place?
✅ Is customer and company data encrypted?
✅ Have you ever experienced a security breach?
✅ Do you comply with relevant data privacy regulations (e.g., GDPR, SOC 2)?
✅ Do you use multi-factor authentication (MFA) on critical systems?
✅ Are employee security awareness training programs in place?
✅ Do you have an incident response plan in case of a cyberattack?
💡 If your startup can’t confidently answer these questions, funding may be at risk.
3️⃣ How Startups Can Prepare for Cyber Due Diligence
✅ 1. Implement Multi-Factor Authentication (MFA) Everywhere
🔹 Require MFA on all critical accounts (email, cloud services, developer tools, finance systems, etc.).
🔹 Enforce biometric authentication or hardware security keys for privileged accounts.
🔹 Avoid SMS-based MFA—use app-based authentication instead.
📌 Why It Matters: 80% of breaches happen due to compromised credentials—MFA blocks 99% of these attacks.
✅ 2. Encrypt Data & Secure Customer Information
🔹 Encrypt sensitive customer and company data at rest and in transit.
🔹 Use strong encryption standards (AES-256, TLS 1.2+) for databases, backups, and communication.
🔹 Implement access controls to restrict who can view sensitive data.
📌 Why It Matters: Investors will assess how well your startup protects customer trust and regulatory compliance.
✅ 3. Conduct Regular Security Audits & Risk Assessments
🔹 Perform internal security reviews every quarter.
🔹 Engage a third-party cybersecurity firm to conduct penetration testing and compliance audits.
🔹 Document security policies and track remediation of vulnerabilities.
📌 Why It Matters: Investors want evidence of proactive risk management, not reactive damage control.
✅ 4. Adopt a Recognised Security Framework (SOC 2, ISO 27001, NIST)
🔹 If your startup is SaaS-based, aim for SOC 2 compliance.
🔹 If operating in finance or healthcare, consider ISO 27001 certification.
🔹 For AI or emerging tech startups, use NIST’s Cybersecurity Framework.
📌 Why It Matters: Startups that meet industry security standards face fewer funding delays and attract better investors.
✅ 5. Train Employees on Cybersecurity Awareness
🔹 Conduct regular phishing awareness training to prevent social engineering attacks.
🔹 Implement access control policies to limit exposure to sensitive data.
🔹 Require cyber hygiene training for all employees handling customer data.
📌 Why It Matters: Human error causes 90% of security breaches—investors want to see security awareness built into company culture.
✅ 6. Have an Incident Response Plan Ready
🔹 Define a step-by-step response plan for cyber incidents.
🔹 Appoint a dedicated security lead or outsourced CISO to handle breaches.
🔹 Test incident response drills regularly to ensure your team is prepared.
📌 Why It Matters: VCs want assurance that your startup can quickly contain security incidents without damaging business continuity.
4️⃣ Final Thoughts: Cybersecurity Can Be a Competitive Advantage
💡 Startups that embed cybersecurity early gain investor trust and competitive edge.
To attract VC investment:
✔ Proactively address cyber risk before due diligence begins.
✔ Demonstrate strong security policies, compliance, and risk management.
✔ Implement security best practices (MFA, encryption, access controls, etc.).
✔ Adopt industry standards like SOC 2, ISO 27001, or NIST Cybersecurity Framework.
✔ Be transparent about cybersecurity measures in investor discussions.
🚀 VCs now see cybersecurity as a core business requirement, not an afterthought. If your startup isn’t secure, your funding may be at risk.
📢 What’s Next?
💡 Next in the series: “Why Your Next Funding Round Could Depend on Your Cybersecurity Posture”
Would you like a cybersecurity due diligence checklist for your startup? Get in touch today. 🚀
