The Growing Threat of Cybersecurity

The Democrats have been hacked.

Yahoo was a victim of a massive hack of 500 million user accounts.

Target. Home Depot. The Office of Personnel Management. All hacked.

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Two Loose Cannons, Two Bad Looks

The subject of hacking was briefly brought up in Monday’s presidential debate.

It wasn’t a good look for either candidate.

Clinton accused Trump of “publicly inviting” Putin to hack into American communications.

He didn’t deny it. In past comments, he said he wasn’t serious. But cybersecurity is no laughing matter.

Responding to Clinton, Trump said it could have been China or a 400-pound guy behind the hacks.

Sadly, he’s right. We just don’t know. The U.S. government’s ability to trace these hacks is sadly lacking.

Of course, Clinton is tainted in this area too. Her “private” emails most certainly were hacked.

“It was a mistake,” she said. Ya think?

America Is No. 1 in Breaches

What wasn’t addressed was the sad state of America’s cybersecurity.

We’ve had more breaches recently than any other country or region, and it’s not even close…

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Well, actually it was addressed in a roundabout way by Trump. He went on a rant about how the folks in government (he said political “hacks” – that word again) don’t know what they’re doing.

But he was referring to the notion that the U.S. government makes terrible deals. He did not have cybersecurity in mind.

Maybe he should have.

A study by the Government Accountability Office last year found that many federal examiners in charge of bank information security audits have little or no IT training.

According to a post by Eliot Peper (author of several stock strategy books, his latest being Uncommon Stock: Exit Strategy), the study also reported that regulators are not even doing comparative analysis on system-wide deficiencies, limiting their scope to individual banks.

Everything Is Vulnerable

That includes your credit card information and other personal information.

Well, I know where mine is. I worked briefly with the CIA. I’ve been to Russia and China several times. I have no doubt that both countries have big fat files on me. But you?

I’m the exception. But for how much longer?

The ability to protect our expanding cyberworld must drastically improve. Or sooner or later all of us will be victimized.

But the chart you see above also shows that this is a global problem. The cost of data breaches around the world this year? Juniper Research says it will be $2.1 trillion – four times last year’s cost!

As all our products gradually become smart – meaning they’ll have sensors and will become connected to each other and us via the cloud – the cybersecurity bar keeps getting higher and higher.

Case in point: the connected car.

A cybersecurity report this year pointed out that connected cars average 100 million lines of code, compared to only 8 million for a Lockheed Martin F-35 Lightning II fighter jet.

Hacking a phone is one thing. But hacking a car involves our physical safety.

So does hacking airports. Southwest and Delta both had “system outages” earlier this summer.

Also at risk are our nuclear power facilities… missile silos… utility grid… urban traffic control systems… and smart homes.

A Fast-Growing Market

The list goes on and on.

As I said, everything and everybody is vulnerable. Which is why the cybersecurity space is exploding.

In a recent report by Bessemer Venture Partners (The State of the Cloud Industry 2016), BVP estimates the global cybersecurity market will grow to $170 billion by 2020 – up from $75.4 billion in 2015.

Markets and Markets has come out with somewhat higher estimates. It says that the cybersecurity market will grow from $122.45 billion in 2016 to $202.36 billion by 2021.

The size and growth of the market opportunity is attracting plenty of tech companies. For example, IBM announced Watson for Cyber Security. The company says the new technology will offer cognition of security data at scale using its ability to reason and learn from “unstructured data.”

IBM says that 80% of all data on the internet – including blogs, videos, reports and alerts – lie outside traditional security tools but are accessible to the Watson system.

Increasing Specialization in the Cybersecurity Space

Watson’s broad coverage is the exception. I predict dozens of startups will attack the problem of cybersecurity vertically – that is, sector by sector. A technology solution for self-driving cars, another for smart homes, another for drones, another for banks, etc.

They represent potentially exceptional investment opportunities for early investors.

The markets are big and growing. And lives are at stake. So the need is real and urgent.

Maybe our next president will actually do something impactful about this.

But who can count on that?

The growing problem of cybersecurity will be addressed in the private sector by tech companies, many of them startups.

It’s a tremendously large opportunity.

We’ll keep an eye out for you for companies that impress us. There’s a good chance that at least some of them will be crowdfunding.

Invest early and well,

Andy Gordon
Founder, Early Investing