When venture capitalists (VCs) and angel investors put their money into startups, they're not just buying shares in office chairs, laptops, or desks. They're investing in the intrinsic value of the business—its intangible assets. These intangibles include goodwill, intellectual property, customer trust, and the innovative code that underpins the company's offerings.
But here's the harsh reality: all of these intangibles can vanish in an instant. A single ransomware attack, a public disclosure of customer data, or a breach exposing proprietary code can render a promising startup worthless overnight. If information security isn't a high priority for the startups you invest in, your money is at risk.
The Fragility of Intangible Assets
Startups thrive on their intangible assets, but these are also their most vulnerable. Consider the following:
- Intellectual Property (IP): Proprietary code, algorithms, or patents are the lifeblood of many startups. If leaked or stolen, these assets can lose their competitive advantage or even fall into competitors' hands.
- Customer Trust and Data: Startups often collect sensitive customer data. A data breach doesn't just result in fines or legal costs—it erodes trust. For a fledgling company, losing customer trust can be a death sentence.
- Goodwill and Brand Reputation: Reputation takes years to build but can be destroyed in hours after a publicized security incident. Startups are particularly vulnerable because they lack the established trust of larger brands.
- Operational Continuity: Ransomware attacks can cripple operations, halting growth and causing investors to rethink their commitment.
For VCs and angels, the question isn't whether these risks exist—they're a given. The real question is: What are startups doing to mitigate them?
Why Startups Overlook Information Security
Many startups operate under tight budgets and focus on speed to market. They prioritize growth over security, assuming they'll "fix it later." This approach creates vulnerabilities:
- Limited Budgets: Resources are funneled into product development and marketing, leaving security as an afterthought.
- Lack of Expertise: Early teams often lack a dedicated Chief Information Security Officer (CISO) or cybersecurity expertise.
- “It Won't Happen to Us” Mindset: Founders often underestimate their attractiveness as targets, assuming hackers focus only on large corporations.
These gaps in strategy make startups particularly vulnerable to cyberattacks, jeopardizing not just their future but also the investments of their backers.
The Investor's Role in Prioritizing Information Security
As an investor, you're not just funding a product—you're protecting your capital. Encouraging startups to prioritize information security is an essential part of safeguarding your investment. Here's how you can take an active role:
- Ask the Right Questions: Include cybersecurity in your due diligence. Ask about risk assessments, data storage, and incident response plans.
- Demand Accountability: Include information security as part of board-level discussions and encourage founders to assign security responsibilities within the leadership team.
- Promote Certifications: Frameworks like ISO 27001 or SOC 2 demonstrate a commitment to security and proactive risk management.
- Invest in Security Early: Encourage startups to allocate budget for security tools, training, and personnel from the outset.
Metrics That Matter for VCs and Angels
To gauge whether a startup is taking security seriously, look for measurable indicators such as:
- Time to Detect and Respond to Threats: Faster response times indicate a mature security posture.
- Phishing Simulation Success Rates: A decreasing rate of successful phishing attempts demonstrates effective employee training.
- Security Budget as a Percentage of Revenue or Funding: Allocating even 5–10% of funding to security demonstrates commitment.
- Incidents and Near-Misses: Track how many incidents occurred and what lessons were learned and applied.
- Compliance with Standards: Adherence to frameworks like GDPR, HIPAA, or PCI DSS depending on the market.
- Frequency of Security Audits and Penetration Tests: Regular testing indicates active risk management.
Case Studies: When Security Is Ignored
Case Study 1: A Startup's Data Breach Costs It All
A promising SaaS startup handling sensitive client data was hit with a ransomware attack. The breach exposed customer information and resulted in regulatory fines. Investors pulled out, and the company shut down within six months.
Case Study 2: The $5,000 Security Investment That Saved Millions
Another startup implemented basic phishing training and endpoint protection early on. When a phishing email targeted employees, the attack was reported before it caused damage. The startup avoided financial loss and reputational damage, proving the ROI of security investment.
The Bottom Line for Investors
As a VC or angel investor, your capital is tied to the intrinsic value of the businesses you back. These intangible assets—IP, data, goodwill—are the essence of a startup's potential, but they're also its most vulnerable assets. Neglecting information security is not just a risk for founders—it's a risk for you.
By demanding accountability, supporting proactive security measures, and monitoring key metrics, you can ensure that startups don't just grow—they grow securely. In today's digital landscape, information security isn't an expense—it's a non-negotiable investment in the future.
The question isn't whether startups can afford to prioritize security. It's whether investors can afford not to.