Tomer Landesman.

Guardians of innovation: The rise of Israel’s civilian defense-tech

“It's time for the Israeli private high-tech sector to double down on its already existing talent and expertise in the defense sector, and assume a more prominent role in the global private civil defense sector,” writes Tomer Landesman, Investor at Pitango Growth

The resilience of Israeli high-tech continues to break barriers and shock the world. Israel has succeeded to fundraise and meet sales quotas all while having a part of its workforce serving in military reserves. While these are indeed major wins, they do not alone define Israel’s manifested resilience.
Israel’s true resilience exists in the people’s ability to continue innovating and building disruptive technologies, growing new category leaders. While certain tech verticals such as Cyber and AI continue to flourish in The Startup Nation, one relatively small sector has reached its renaissance both domestically and globally — the civilian defense tech sector.
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Tomer Landesman
Tomer Landesman
Tomer Landesman.
(Yoram Reshef)
The defense sector: A cornerstone to Israel becoming the startup nation
Since its inception, Israel has had to fight for its existence, and the protection of its people. The Israeli defense sector emerged out of necessity, especially after France, its main arms supplier, imposed an arms embargo just before the outbreak of the Six-Day War. To counter this, Israel increased defense R&D investments to approximately $700 million annually (according to Washing D.C. Federal Research) and opted to become a major producer of defense systems. This strategic move aimed to establish a technological military edge over its adversaries.
Consequently, three formidable defense entities—Rafael (founded in 1948), Elbit (established in 1966), and Elta (founded in 1967)—emerged as major players. These companies played a crucial role in cultivating 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, constituting a big chunk of Israel’s defense exports. According to Stockholm International Peace Research Institute (SIPRI) today, Israel is the world's 9th largest arms exporter.
The rise of civilian defense tech
One might anticipate that given Israel's prominent position in the global defense market, there would be a natural progression towards the emergence of extensive private civilian defense technology startups. However, this growth has only started to materialize recently.
The recent October 7th war surfaced new challenges for Israel, both on the battlefield and in adjacent civil sectors such as private security, public safety, and crisis management.
Globally, power nations competing for resources and technological superiority are fueling the global arms race. This race is eminent in sectors such as the chip industry or aerospace technology. This influenced governments to incentivize entrepreneurs to double down on the defense tech sector while also trying to solve challenges the sector has been experiencing.
Crossing the long gap between when a technology is first developed to the time when funds are available to produce and acquire it, presents many challenges. Can governments incorporate new technology effectively? How so and how quickly? If existing legacy solutions are already deployed, how costly and time-consuming is to switch solutions vs the added value of the new solution?
The response depends on whether the client is a municipality, a nation, or a government agency like the Pentagon. In the case of the latter, the Pentagon typically obtains technologies or equipment through private long term contracts or by issuing grants to fund R&D.
One initiative designed to solve the gap in adoption at government agencies is the US AFWERX initiative, an innovation ecosystem that includes grants, investment programs, accelerators, and de-regulation acts, creating simple pathways for private companies to help the Department of the Air Force solve problems. Another is the new billion dollar grants by the European Defence Fund (EDF) to increase the EU's defense technological and industrial base.
In the past, innovation in the sector relied on industry giants such as Lokheed Martin, Northrop Grumman and Raytheon, traditionally struggling to keep pace due to their corporate nature. Today, VC-backed new incumbents have risen to challenge these legacy players, including the likes of Hadrian (aerospace), Skydio (drones) and Anduril (national security), the poster child of the sector. Many global, well-known generalist VCs have doubled down on the sector including A16z, New Enterprise Associates, Alumni Ventures and General Catalyst. The four of them alone have made over 300 deals in the sector over the past five years.
Funding shifts open the gates of opportunities
The primary source of funding is shifting from government agencies to private funding fueled by VCs and CVCs. According to Pitchbook, in the past 5 years, US VC funding for defense tech has increased by ~150% from $12.6B to $31.5B, while the total US VC funding in these years increased by only 15%.
But what evoked VCs' interest in the field?
First, in the past, the timeframe for securing government contracts was typically longer than the 18 to 24 months cycle for venture-backed startups to raise funding. This posed significant challenges for young startups unable to scale at the desired pace VCs are looking for. The emergence of dual usage, generating revenue from both commercial and government sectors, have shown remarkable growth, capturing the interest of venture capital investors seeking innovative opportunities. Take, for example, companies such as Palantir, which originally concentrated on government contracts but later diversified into commercial applications. Palantir's success exemplifies the potential synergy between these two sectors, illustrating how adept navigation of this dual landscape can lead to significant opportunities for growth and expansion.
Second, venture capitalists are also seeking to explore uncharted territories, particularly in the last remaining trillion-dollar markets that are fragmented and have been less impacted by recent technological advancements — defense tech being one of them.
Third, there has been a marked shift in the perception and readiness of investors towards defense tech investment. Previously, there was apprehension due to the perceived optics of such investments. However, recent geopolitical events, particularly the aftermath of the Ukraine conflict, have shifted the perception of defense tech from a taboo to a legitimate investment vertical. Presently, defense budget allocations are rising, and limited partners (LPs) are increasingly comfortable funding venture capital firms involved in defense technology with non-offensive applications.
Lastly, the emergence of numerous recently established defense tech companies surpassing the $100 million revenue milestone has served as a north star for venture capitalists, bolstering their confidence in investing within the sector.
Where does the funding go within the sector?
According to Pitchbook, Between 2016 to 2022, information security reigned supreme, gaining about 25% of all total VC investments in defense tech. However, over the past few years new domains have seen a significant growth in funding, three major domains including: Quantum, autonomous systems, manufacturing and aerospace.
In Israel, outside the realm of cyber, we are seeing 2 major clusters of A+ round defense tech startups:
Drones/UAV: D-fend, High-lander, XTend, Indoor robotics , InfiniDome, Percepto, EdgyBees.
Aerospace & Aviation & mapping: , NSLComm, Ramonspace, 4m analytics, Exodigo, Asterra, Astroscale.
Overall, the civilian defense tech vertical has been one of the only sectors to emerge swiftly from the escalating geopolitical tensions and global polarization. This sector is experiencing its highest momentum in the modern era, impacting Israeli startups as well as more established companies.
Israeli founders in the ideation stage should take a second look at recent opportunities in this space. Startups should explore the possibility to become dual usage companies, while waiting for their time to sell their solutions to the defense complex. Existing companies in the space should be able to tap into new contracts and increased budgets from the likes of the DoD and EDA (European Defence Agency).
Founders also need to account for recent developments in AI, for example in data analysis, to identify patterns, correlations, anomalies, trends and provide recommendations.
These developments will be followed by increased regulation related to AI bias, data privacy and security.
It's time for the Israeli private high-tech sector to double down on its already existing talent and expertise in the defense sector, and assume a more prominent role in the global private civil defense sector.
Tomer Landesman is an Investor at Pitango Growth