Opinion
Defense investment funds are a welcome start - but the road ahead is long
"Israel must move from a policy of intermittent encouragement to one of true partnerships with the DefenseTech ecosystem, offering startup companies access to tenders, regulatory certainty, and industrial backing," writes Itamar Lev-Eldar, a Partner at ERM Law firm.
The approval rendered last week by the Finance Committee for a NIS 200 million State guarantee for the establishment of dedicated DefenseTech investment funds marks a significant step forward., The government finally acknowledges that defense innovation cannot rely solely on Israel’s major defense corporations, and that startup companies can, and should, participate in Israel’s defense exports, thereby strengthening both the country’s security and its technological edge. Unfortunately, this initiative is only a partial solution, addressing only the top layer of a much deeper issue.
DefenseTech is among the most complex and challenging sectors for investors. It requires deep R&D capabilities, patience, and the ability to navigate stringent regulation and lengthy government procurement processes. For years, private capital has largely steered clear of the field, particularly due to uncertainty, bureaucratic hurdles, and reputational risks. Now, as nations worldwide ramp up defense spending, in response to growing geopolitical tensions and the wars in Ukraine and Gaza, it is increasingly evident that private investment must become a part of the solution.
Nevertheless, for private capital to truly flow into the sector, there must first be a solid infrastructure that provides investors with certainty. A government-backed fund that deploys capital without regulatory reform, streamlined procedures, or genuine access to defense tenders will end up sitting on idle funds, undermining its IRR and could deter future investors. Startup companies cannot afford to wait two years for export licenses or operate in a system where defense tenders are effectively locked out for smaller players. Without a profound structural change in how the system operates, the new funds risk becoming a little more than a splash of cold water in a bureaucratic desert.
Simultaneously with State-backed initiatives, several new private funds are emerging in Israel, seeking to ride the global wave of DefenseTech investment. Some are established by veteran venture capitalists who have surrounded themselves with former senior military officers; others operate under a private equity model targeting more mature companies; and others focus on early-stage startups.
Names like Aurelius, Givon, Protego, and Kinetica have already raised hundreds of millions of dollars from both foreign and domestic investors, some reportedly from countries that are signatories to the Abraham Accords.
Still, the portion of capital entering the sector remains modest compared to cybersecurity or AI, and funds continue to grapple with the anti-Israel sentiment in certain markets, leading to higher fundraising costs.
For years, Israel’s three defense giants have enjoyed undeniable advantages: They have been long-standing suppliers to the Ministry of Defense, they benefit from deep relationships with decision-makers, and they possess extensive production infrastructure, including the legal and regulatory expertise to navigate complex tenders with relative ease. Opposite them stand dozens of small companies with trailblazing ideas in diverse fields, but without significant financial backing, procurement background, or lobbying strength. This gap is not merely one of scale, but of access. When a startup is required to demonstrate a proven 10-year track record to qualify for a tender, it is effectively excluded from the market altogether.
Hence, a comprehensive shift in mindset is urgently required, far beyond the flow of capital. The State must generate a streamlined, startup-oriented pathway that enables young DefenseTech firms to conduct trials, demonstrate operational capabilities, and secure small procurement contracts, without enduring a drawn-out bureaucratic process or waiting for an entire budget cycle to conclude. Concurrently, Israel should establish a permanent framework for collaboration between major defense industries and smaller firms, enabling emerging players to participate as subcontractors or co-developers of new technologies. This model already works worldwide: in the U.S. and the U.K.,startup companies serve as technological incubators for large-scale defense projects. In Israel, however, this interface still falls short.
Israeli companies face further barriers, including high participation costs at international defense exhibitions, increasing political sensitivities, as well as outright boycotts, such as France's recent decision to ban Israeli participation at the Eurosatory Arms Exhibition. A country that declares its intention to build a thriving DefenseTech industry must also provide its companies with the necessary tools to succeed despite such challenges.
It is also worth mentioning that tens of thousands of reservists returning from the front lines have witnessed firsthand the battlefield's needs, gaps, and technological shortcomings. Many of them are engineers, entrepreneurs, and developers now seeking to translate that experience and insight into ventures aimed at enhancing Israel's defense and security systems. This represents yet another extraordinary opportunity for innovation and accelerated development within the Israeli defense ecosystem.
For this to happen, the State must move from a policy of intermittent encouragement to one of true partnerships with the DefenseTech ecosystem, offering startup companies access to tenders, regulatory certainty, and industrial backing. The government funds are a welcome start, but to create a genuine DefenseTech industry, Israel needs less bureaucracy and more confidence. Otherwise, we risk missing yet another opportunity, while Israeli innovation thrives elsewhere.
Itamar Lev-Eldar is a Partner in the Corporate, Mergers & Acquisitions, and Banking & Finance Departments at ERM Law firm.
