The resilience of Israeli high-tech technology continues to break barriers and shock the world. Israel has been able to raise money and meet sales quotas while keeping some of its employees on reserve duty. While these are certainly significant victories, they do not alone define Israel’s apparent resilience.
Israel’s true resilience lies in its people’s ability to continue innovating and building disruptive technologies and developing new categories of leaders. While certain technology areas such as cyber and AI continue to thrive in The Startup Nation, one relatively small sector is experiencing a resurgence nationally and globally. That is the civil defense technology sector.
1 View Gallery
Tomer Landesman.
(Yoram Reshef)
Defense sector: the basis for Israel’s rise to power
Since its founding, Israel has had to fight for its survival and the protection of its people. Israel’s defense sector was born out of necessity, especially after France, Israel’s main arms supplier, imposed an arms embargo just before the outbreak of the Six-Day War. To counter this, Israel has increased its defense R&D investments to approximately $700 million a year (according to a Washington DC federal study) and has chosen to become a major producer of defense systems. This strategic move was aimed at establishing technological military superiority over the enemy.
As a result, three powerful defense organizations emerged as major players: Rafael (founded in 1948), Elbit (founded in 1966), and Elta (founded in 1967). These companies played an important role in developing a highly skilled technical workforce.
Fast forward to today, these three companies collectively achieved annual revenues of $3.8 billion, $1.6 billion, and $1.4 billion, respectively, in 2023 and account for a large portion of Israel’s defense exports. According to the Stockholm International Peace Research Institute (SIPRI), Israel is the world’s ninth largest arms exporter.
The rise of civil defense technology
Given Israel’s prominent position in the global defense market, one might expect that there would be a natural progression toward the emergence of large-scale private civil defense technology startups. However, this growth has only recently begun to take shape.
The recent 10.7 war has brought to the fore new challenges for Israel, both on the battlefield and in adjacent civilian sectors such as civil security, public security, and crisis management.
Worldwide, great powers compete for superiority in resources and technology, fueling a global arms race. This competition is evident in areas such as the chip industry and aerospace technology. This has influenced the government to encourage entrepreneurs to redouble their efforts in the defense technology sector, while at the same time solving the challenges facing the sector.
There are many challenges involved in navigating the long gap between when a technology is first developed and when the funding is available to produce and acquire that technology. Can governments effectively adopt new technologies? How and how quickly? If you already have an existing legacy solution in place, how much will the cost and time of switching solutions compare to the added value of a new solution?
Responses vary depending on whether the client is a local government, a national government, or a government agency such as the Department of Defense. In the latter case, the Department of Defense typically obtains technology and equipment through long-term civilian contracts or by issuing grants to fund research and development.
One of the initiatives designed to address the hiring gap in government is an innovation ecosystem that includes grants, investment programs, incentives, and deregulation legislation that allows private companies to support the Department of the Air Force. The US AFWERX initiative creates a pathway. problem solving. The other is a new $1 billion grant from the European Defense Fund (EDF) to strengthen the EU’s defense technology and industrial base.
Until now, innovation in this area has relied on industry giants like Lockheed Martin, Northrop Grumman, and Raytheon, which have traditionally been difficult to keep up with due to the nature of the companies. Now, new venture capital-backed incumbents are replacing traditional players such as Hadrian (aerospace), Skydio (drones), and Anduril (national security), a leading figure in the field. I am rising to the challenge. Many world-renowned generalist VCs are focusing on this sector, including A16z, New Enterprise Associates, Alumni Ventures, and General Catalyst. The four of them alone have completed more than 300 deals in this field over the past five years.
Shift in funding opens doors of opportunity
The main source of funding is shifting from government agencies to private funds supported by VCs and CVCs. According to Pitchbook, over the past five years, U.S. VC funding for defense technology has increased approximately 150% from $12.6 billion to $31.5 billion, but total U.S. VC funding in recent years has increased by 15% has only increased.
But what sparked VC’s interest in this space?
First, historically, the timeframe for securing government contracts has typically been longer than the 18- to 24-month cycle for venture-backed startups to raise capital. This has posed significant challenges for young startups that are unable to scale at the desired pace sought by VCs. The emergence of dual-use, which generates revenue from both the commercial and government sectors, is showing impressive growth and attracting the attention of venture capital investors looking for innovative opportunities. For example, companies like Palantir initially focused on government contracts but later diversified into commercial applications. Palantir’s success exemplifies the potential synergies between these two sectors and shows how juggling these two conditions can lead to significant opportunities for growth and expansion. .
Second, venture capitalists are also seeking to tap into unexplored territory, particularly the last remaining multitrillion-dollar markets that are fragmented and largely unaffected by recent technological advances. Defense technology is one of them.
Third, there has been a notable shift in investor awareness and readiness for defense technology investments. Previously, there were perceived concerns about such investments. However, recent geopolitical events, particularly the aftermath of the Ukraine conflict, have changed the perception of defense technology from a taboo to a legitimate area of investment. Defense budget allocations are currently increasing, and limited partners (LPs) are increasingly comfortable funding venture capital firms involved in defense technology for non-offensive uses.
Finally, the emergence of a number of recently founded defense technology companies that have surpassed the $100 million revenue milestone is serving as a north star for venture capitalists, increasing their confidence in investing in this space. Masu.
Where does the money go within the sector?
According to Pitchbook, from 2016 to 2022, information security took the top spot, capturing about 25% of total VC investment in defense technology. However, funding for new areas has increased significantly over the past few years, and three key areas include quantum, autonomous systems, manufacturing, and aerospace.
Outside of the cyber realm, Israel sees two major clusters of A+ round defense technology startups.
Drones/UAVs: D-fend, Highlander, XTend, indoor robotics, InfiniDome, Percepto, EdgyBees.
Aerospace & Aviation & Mapping: Tomorrow.io , NSLComm, Ramonspace, 4m Analytics, Exodigo, Asterra, Astroscale.
Overall, the civil defense technology sector is one of the few sectors that has quickly emerged from rising geopolitical tensions and global polarization. This sector has the most momentum in modern times, impacting Israeli startups as well as more established companies.
Israeli founders at the conceptual stage should take another look at recent opportunities in this field. Start-ups should explore the possibility of becoming dual-use companies while waiting for the right time to sell their solutions to the defense complex. Incumbent companies in the sector should be able to take advantage of new contracts and budget increases from the likes of the Department of Defense and the European Defense Agency.
Founders should also consider recent developments in AI, such as data analytics, to identify patterns, correlations, anomalies, trends, and provide recommendations.
These developments will result in increased regulations regarding AI bias, data privacy, and security.
The time has come for Israel’s private high-tech sector to further strengthen its existing talent and expertise in the defense sector and play a more prominent role in the global private civil defense sector.
Tomer Landesman is an investor at Pitango Growth
