Executive Summary
- Healthcare SMBs are facing an escalating cybersecurity crisis. Once considered low-priority targets, these organizations now face rising ransomware attacks, third-party breaches, and phishing scams. The average cost of a healthcare data breach exceeds $9 million, and many SMBs have paid millions in ransom—some even shutting down after devastating attacks.
- The cybersecurity market is rapidly growing, but SMBs remain underserved due to their lean budgets, small IT teams and limited protection offered by current cybersecurity tools. Many rely on MSPs, MSSPs, and VARs that often sell scaled-down enterprise products, and stop at risk identification, leaving the execution to understaffed IT teams.
- AI presents a major opportunity to reshape SMB cybersecurity. We believe AI-powered security solutions can deliver affordable, turnkey protection that allows SMBs to reduce alert fatigue, automate threat response, and secure legacy medical devices—effectively expanding their capabilities.
- We see a significant opportunity to build scalable, cost-effective security solutions that bridge the gap between protection, affordability, and execution for healthcare SMBs. We’re eager to connect with founders passionate about tackling these challenges and driving the next wave of healthcare cybersecurity solutions.
State of the Market & Key Challenges
Market Overview
Healthcare data breaches are reaching unprecedented levels, affecting hundreds of millions of Americans annually. The high-profile attack on Change Healthcare in 2024 compromised 190 million records, with an additional 70 million exposed through third-party vendors.
Stolen health records command a premium on the black market, and ransomware attacks yield significant payoffs for cybercriminals. The impact of such attacks is staggering: the cost of the average healthcare data breach exceeds $9 million, while ransomware incidents often cost over $4 million. As cloud-based systems and connected medical devices proliferate, the attack surface continues to expand – magnifying the need for constant vigilance. Larger health systems have responded by partnering with top cybersecurity firms and investing heavily in robust security frameworks, but smaller providers with lean budgets and fewer security staff are ill-prepared for such a rapidly evolving threat.
The broader U.S. cybersecurity market is set to grow from $59 billion in 2023 to $66 billion by 2024, reaching $167 billion at a 12.3% CAGR by 2032.
Moving Beyond the “Big Company” Myth
For a long time, small and medium-sized healthcare providers assumed they weren’t attractive targets. That assumption no longer holds. As attackers become more sophisticated, they recognize that SMBs often have fewer defenses and limited personnel – making them easier to breach. Several smaller breaches can be as lucrative as a single attack on a large health system, but with less effort. When these smaller organizations are compromised, the ripple effects on local communities and patient care can be devastating:
- Three regional medical centers in Alabama were crippled by a ransomware variant that forced patients to seek treatment elsewhere. In 2019, the DCH Health System—which operates three hospitals in Alabama—was hit by a ransomware attack that encrypted critical systems, including patient records and scheduling software. These hospitals lacked a dedicated cybersecurity team and had vulnerabilities in their remote access systems. Attackers exploited these weak points, shutting down digital operations and forcing hospitals to divert emergency patients to facilities hours away. DCH ultimately paid the ransom to restore systems, incurring significant financial and reputational costs.
- A 2019 ransomware attack on Brookside ENT and Hearing Center in Michigan demonstrates the devastating impact cyber threats can have on healthcare providers. After attackers gained access through a phishing campaign, they encrypted all patient records and demanded payment for the decryption key. The small specialty practice had minimal cybersecurity defenses—lacking advanced threat detection, formal backup procedures, and comprehensive staff training on recognizing phishing attempts. Without the resources to either rebuild their systems or pay the ransom, the two physicians made the difficult decision to retire and close their practice permanently. This closure not only disrupted continuity of care for their patients but also eliminated a vital healthcare resource in the community, creating a care desert in their specialty.
Why SMBs Are at Risk
After conversations with healthcare provider organizations generating under $1.5B in annual revenue, we believe the root causes of SMB cybersecurity vulnerability are:
- Financial Constraints: SMBs often view cybersecurity as a cost center rather than a strategic necessity. While many allocate 10–15% of their IT budgets to security initiatives, this investment remains insufficient due to stagnant overall IT spending. Critical security measures like simulation training frequently go underfunded. Budget authority typically resides with leadership outside the IT department, hindering proactive investment in turnkey solutions despite the escalating costs of cyberattacks.CIOs consistently report "struggling to know how much cybersecurity is enough," creating a fundamental decision-making challenge. This uncertainty transforms cybersecurity into an opaque investment area where the return is difficult to quantify, making it challenging for leadership to justify increased budget allocation despite growing threats.
- Limited In-House Cybersecurity Resources: In smaller facilities, 1–2 IT staff members juggle everything from infrastructure to security, making 24/7 threat detection nearly impossible. Even mid-sized systems with 10–25 cybersecurity FTEs struggle to maintain around-the-clock monitoring. Rural hospitals find it difficult to recruit cyber experts, pushing them toward MSSPs. Hiring leaders with enterprise experience can significantly strengthen security posture.
- Limited Protection by Current Tools: While some SMBs procure enterprise solutions like CrowdStrike or Proofpoint, often at discounted rates through MSPs or VARs, they frequently receive scaled-down versions geared toward basic compliance. Lacking robust threat detection and response, these products leave smaller providers exposed to sophisticated attacks. Additionally, the current tools also overlook one of the most persistent vulnerabilities—human error. As one SMB CIO shared, “Our biggest threat is the person between the keyboard and the chair – we need to stop them from giving away the keys to the kingdom”. Without robust staff training and behavior-focused solutions, even advanced tools leave gaps in defense.
- Cyber Insurance Challenges: As ransomware attacks surge, SMBs turn to insurance, facing rising premiums and rigid checklists that rarely match needs. Some leverage third-party audits before renewal to lower costs, yet unclear SMB benchmarks complicate policy negotiations. Overall, many SMBs find insurer mandates address compliance over critical vulnerabilities, fueling dissatisfaction.
- Supply Chain and Third-Party Risks: Most SMBs depend on multiple vendors, from IT services to device manufacturers, significantly expanding their attack surface. Nearly half of healthcare ransomware incidents stem from third-party breaches. Outdated systems and weak vendor oversight amplify these risks, creating cascading threats when a single partner is compromised.
Existing Solutions
Cybersecurity startup funding has surged from less than $1 billion in 2009 to over $9.5 billion in 2024, with the U.S. leading as the largest and most mature market for cyber innovation (~740 active cybersecurity startups and growth stage companies). The cybersecurity market has become increasingly competitive, with segments like endpoint security and data privacy reaching saturation. For new entrants, standing out with a unique value proposition in these crowded categories is an ongoing challenge:
Despite the highly saturated cybersecurity market, SMBs typically have fewer resources and must adopt a different approach to building their cyber tech stack than larger enterprises, which can work directly with major vendors. Most SMBs adopt one of the following models:
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How does cyber insurance fit into this?
Cyber insurance is increasingly seen as a critical component of a healthcare cybersecurity strategy. However, adoption rates remain low – 70% of healthcare organizations still lack cyber insurance, a significantly higher percentage than other industries. Despite escalating cyber threats, many SMBs treat insurance as a stop-gap measure rather than incorporating it into a proactive security framework. This caution isn’t unfounded; while current offerings can be helpful, they come with significant drawbacks:
The Good:
- Financial Protection Against Cyber Incidents: Cyber insurance policies provide coverage for various cyber-related risks, including data breaches, ransomware attacks, and business interruptions
- Risk Reduction Through Audits: Some medium sized SMBs have started conducting cybersecurity audits before renewing their policies. This allows them to identify and fix vulnerabilities, often securing lower insurance premiums
- Encouraging Better Security Postures: Insurance companies assess an SMB’s cybersecurity infrastructure before issuing policies. As a result, SMBs with stronger security measures can negotiate lower premiums
The Bad:
- Soaring Premiums, Shrinking Coverage: Insurance rates for healthcare SMBs have surged (up 46% for large hospitals, 50% for mid-size organizations), forcing many to scale back or drop coverage. Even as costs rise, policy limits have declined, leaving providers paying more for less protection.
- Misaligned Requirements: Insurers often rely on rigid checklists that don’t reflect real-world SMB constraints. By mandating security measures that may not be critical for a given environment, these policies fail to account for outdated devices and lean IT teams— common in smaller facilities.
- High Risk of Claim Denials: When SMBs can’t meet insurer demands—due to legacy medical equipment, limited cybersecurity budgets, or staffing shortages—claims are frequently denied. Many small providers pay steep premiums, yet remain unprotected when breaches occur.
Opportunities for Innovation
AI is rapidly transforming healthcare cybersecurity, but its impact is a double-edged sword. On one hand, attackers are leveraging AI to launch more sophisticated cyber threats – using automated phishing, deepfake social engineering, and AI-enhanced malware to breach hospital networks faster than ever before. On the other, healthcare organizations are exploring AI-driven threat detection, automated response, and risk assessment to improve security without large IT teams.
Many health systems have already begun implementing AI-driven cybersecurity measures with promising results. For example, MedSecure Health Systems in Chicago successfully leveraged machine learning algorithms to detect anomalies, prevent data breaches, and improve response times. Similarly, HealthNet Providers in New York strengthened their security infrastructure with AI-powered threat detection tools, enabling real-time alerts on suspicious activities and successfully blocking multiple attempted attacks.
SMBs could benefit significantly from AI-driven cybersecurity, but they require solutions that are affordable, easy to deploy, and require minimal ongoing management. In our conversations with SMB cybersecurity leaders, they emphasized the need for affordable, turnkey AI solutions that not only develop an action plan, but also help them execute against it. We believe the near-term opportunity lies in creating solutions for SMBs that meet this criteria while expanding the capabilities and efficiency of their small, over-burdened teams. Our estimates indicate the provider-focused healthcare SMB market represents a $23B opportunity, signaling a massive, underserved market.
Some key areas where AI-driven solutions could add value for SMBs include:
- Cut through Alert Fatigue to Improve Decision Making: SMBs use multiple cybersecurity tools generating hundreds of daily alerts, many of which are false positives. Small IT teams lack the time or expertise to analyze every alert, often leading to missed threats. Agentic AI assistants can automate the triage process—analyzing, ranking, and summarizing alerts in real time—enabling human teams to quickly identify the most critical information
- Automate Threat Detection and Incident Response: Many SMBs rely on MSSPs/MSPs for cybersecurity, yet most of these outsourced vendors only identify risks and provide security roadmaps. This leaves execution to the SMB, which often lacks the manpower to implement recommendations. Here, agentic AI assistants can act as virtual security analysts, providing continuous monitoring support and detecting breaches. Once an attempted breach is detected, generative AI copilots can help lean IT teams translate threat reports into action plans, passing these plans back to agentic assistants to help with remediation (e.g., isolating affected devices, blocking suspicious IPs). Over time, predictive models can train on this data and enable IT teams to be proactive vs. reactive in their responses.
- Strengthen IoMT Security: SMBs often rely on legacy medical devices that can't be easily patched, leaving them vulnerable to sophisticated attacks. Manual network segmentation for isolation is time-consuming and inadequate. First, predictive AI models can proactively detect device behavior anomalies, quickly identifying potential compromises. Further, agentic AI can dynamically adjust network segmentation in real-time, automatically isolating compromised devices to rapidly contain threats. Finally, generative AI further enhances security by simulating advanced attack scenarios targeting IoMT devices, enabling SMBs to effectively test defenses and refine protocols without needing specialized expertise.
Risks
Despite the vast need for cybersecurity innovation among healthcare SMBs, several critical challenges could slow adoption and limit impact. Founders who address these risks head-on will be best positioned to deliver lasting market value.
Risk Factor #1: Implementation Hurdles
Most SMBs already juggle an array of IT systems—EHR platforms, practice management software, billing solutions, and more. Adding new cybersecurity tools often means more to deal with. With limited resources, SMBs may avoid or delay deployments that feel disruptive, even if the underlying technology is compelling.
Key Question: Can new solutions demonstrate seamless integration and rapid time-to-value without overtaxing small IT teams?
Risk Factor #2: Cost and ROI Pressures
SMBs recognize the high cost of breaches, but face tight margins and unpredictable reimbursement. Many view cybersecurity as a cost center rather than a revenue driver. Vendors must show a clear and quantifiable ROI—particularly given that premiums for cyber insurance continue to rise, adding further financial strain.
Key Question: How can founders create affordable, turnkey offerings that prove their worth quickly enough for budget-constrained SMBs to justify the spend?
Risk Factor #3: Overreliance on MSPs and Fragmented Security Stacks
Without robust internal security teams, SMBs often outsource via MSPs, VARs, or piecemeal enterprise solutions. This fragmentation can leave critical gaps. If a cutting-edge AI threat detection tool doesn’t play well with a legacy endpoint solution—or if an MSP lacks the capacity to implement key features—SMBs end up underprotected.
Key Question: How do new entrants effectively partner with and/or reimagine the MSPs or VARs on the market?
Conclusion
Healthcare SMBs face an onslaught of cyber threats—yet they remain under-resourced and underserved by traditional vendors. From limited IT staffing to rising insurance premiums, these organizations feel pressure but lack easy pathways to strengthen their defenses.
Despite these hurdles, the opportunity for innovation is immense. By crafting cost-effective, AI-powered tools that minimize human oversight, founders can help smaller providers leapfrog outdated security paradigms and realize enterprise-grade protection without enterprise-level budgets.
We see a pivotal moment for entrepreneurs who can marry healthcare domain expertise with cutting-edge cybersecurity technologies. If you’re a founder committed to reshaping how SMBs secure their systems – and ultimately protect their patients – let’s connect.
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